S-1 1 d768467ds1.htm FORM S-1 FORM S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on September 30, 2014

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

PENNTEX MIDSTREAM PARTNERS, LP

(Exact Name of Registrant as Specified in Its Charter)

Delaware   4922   47-1669563
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification Number)

 

11931 Wickchester Ln., Suite 300

Houston, TX 77043

(832) 456-4000

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

 

Stephen M. Moore

11931 Wickchester Ln., Suite 300

Houston, TX 77043

(832) 456-4000

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

Copies to:

Ryan J. Maierson

Debbie P. Yee
Latham & Watkins LLP
811 Main Street, Suite 3700
Houston, Texas 77002
(713) 546-5400

  Douglas E. McWilliams
Alan Beck
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2500
Houston, Texas 77002
(713) 758-3613

 

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, please 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.

Large accelerated filer ¨

   Accelerated filer ¨

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

   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(3)

Common units representing limited partner interests

   $150,000,000    $19,320

 

 

 

(1)   Includes 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) under the Securities Act of 1933, as amended.
(3)   To be paid in connection with the initial filing of the registration statement.

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.

 

 


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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 becomes effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 2014

 

PRELIMINARY PROSPECTUS

 

PennTex Midstream Partners, LP

 

LOGO

 

Common Units

Representing Limited Partner Interests

 

 

 

This is the initial public offering of              common units representing limited partner interests of PennTex Midstream Partners, LP. No public market currently exists for our common units.

 

We intend to apply to list our common units on the New York Stock Exchange under the symbol “PTXP.”

 

We anticipate that the initial public offering price will be between $         and $         per common unit.

 

 

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 20 of this prospectus. These risks include the following:

 

   

Because we have a limited operating history and have not generated any revenues or operating cash flows, you may have difficulty evaluating our ability to pay cash distributions to our unitholders and our ability to successfully implement our business strategy.

 

   

We are currently constructing our initial assets and, if we experience any construction delays or cost increases or are unable to complete the construction of our initial assets, our business, financial condition, results of operations and ability to make cash distributions to our unitholders could be adversely affected.

 

   

We may not generate sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

Because all of our initial revenue and a substantial majority of our revenue over the long term is expected to be derived from Memorial Resource’s natural gas production, any development that materially and adversely affects Memorial Resource’s operations, financial condition or market reputation could have a material and adverse impact on us.

 

   

Because of the natural decline in production from existing wells, our success depends, in part, on Memorial Resource’s ability to replace declining production and our ability to secure new sources of natural gas from Memorial Resource or other third parties.

 

   

PennTex Midstream Partners, LLC, our general partner, and its affiliates have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

   

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.

 

   

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

 

   

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, which could cause you to lose all or part of your investment.

 

   

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, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

 

 

     Per Common Unit      Total  

Offering price to the public

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds to us (before expenses)(1)

   $         $     

 

(1)   Excludes an aggregate structuring fee of $         million payable to Citigroup Global Markets Inc. and Barclays Capital Inc.

 

Our parent, PennTex Midstream Partners, LLC, has granted the underwriters the option to purchase              additional common units on the same terms and conditions set forth above if the underwriters sell more than              common units in this offering.

 

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

 

The underwriters expect to deliver the common units on or about                     , 2014.

 

 

 

Citigroup   Barclays   RBC Capital Markets   Tudor, Pickering, Holt & Co.

 

 

 

Prospectus dated                     , 2014


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

SUMMARY

     1   

Overview

     1   

Our Relationship with Memorial Resource

     3   

Our Relationships with NGP and PennTex Development

     5   

Business Strategies

     7   

Competitive Strengths

     8   

Our Management

     9   

Our Formation Transactions

     10   

Organizational Structure After the Formation Transactions

     10   

Emerging Growth Company Status

     12   

Risk Factors

     12   

Partnership Information

     13   

The Offering

     14   

Summary Historical and Pro Forma Financial Data

     18   

RISK FACTORS

     20   

Risks Related to Our Business

     20   

Risks Inherent in an Investment in Us

     34   

Tax Risks

     43   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     48   

USE OF PROCEEDS

     49   

CAPITALIZATION

     50   

DILUTION

     51   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     52   

General

     52   

Our Ability to Grow may be Dependent on Our Ability to Access External Financing Sources

     54   

Our Minimum Quarterly Distribution

     54   

Estimated Cash Available for Distribution through March 31, 2016

     56   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     66   

Distributions of Available Cash

     66   

Operating Surplus and Capital Surplus

     67   

Subordinated Units and Subordination Period

     70   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     71   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     71   

General Partner Interest and Incentive Distribution Rights

     72   

Percentage Allocations of Available Cash from Operating Surplus

     73   

General Partner’s Right to Reset Incentive Distribution Levels

     73   

Distributions from Capital Surplus

     76   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     76   

Distributions of Cash Upon Liquidation

     77   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

     80   

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

     82   

Overview

     82   

How We Will Evaluate Our Operations

     82   

 

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Index to Financial Statements

Factors and Trends Impacting Our Business

     84   

Factors Impacting the Comparability of Our Financial Results

     86   

Results of Operations

     87   

Liquidity and Capital Resources

     87   

Off-Balance Sheet Arrangements

     90   

Quantitative and Qualitative Disclosures About Market Risk

     91   

Critical Accounting Policies and Estimates

     91   

INDUSTRY

     94   

General

     94   

Natural Gas Industry Overview

     94   

Natural Gas Midstream Services

     95   

Contractual Arrangements

     96   

Market Fundamentals

     98   

Natural Gas Consumption

     98   

Overview of Ark-La-Tex Basin

     101   

BUSINESS

     103   

Overview

     103   

Our Relationship with Memorial Resource

     104   

Our Relationships with NGP and PennTex Development

     107   

Business Strategies

     109   

Competitive Strengths

     110   

Our Assets

     111   

Title to Properties

     112   

Competition

     113   

Regulation of Operations

     113   

Regulation of Environmental and Occupational Safety and Health Matters

     116   

Employees

     120   

Legal Proceedings

     120   

MANAGEMENT

     121   

Management of PennTex Midstream Partners, LP

     121   

Executive Officers and Directors of Our General Partner

     122   

Committees of the Board of Directors

     124   

EXECUTIVE COMPENSATION

     125   

Compensation of our Directors

     125   

Our Long-Term Incentive Plan

     125   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     129   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     130   

Distributions and Payments to Our General Partner and Its Affiliates and MRD WHR LA

     130   

Agreements with Affiliates in Connection with the Transactions

     131   

Procedures for Review, Approval and Ratification of Transactions with Related Persons

     133   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     134   

Conflicts of Interest

     134   

Duties

     138   

DESCRIPTION OF THE COMMON UNITS

     141   

The Units

     141   

 

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Transfer Agent and Registrar

     141   

Transfer of Common Units

     141   

OUR PARTNERSHIP AGREEMENT

     143   

Organization and Duration

     143   

Purpose

     143   

Capital Contributions

     143   

Voting Rights

     143   

Limited Liability

     144   

Issuance of Additional Securities

     145   

Amendment of Our Partnership Agreement

     146   

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

     148   

Termination and Dissolution

     149   

Liquidation and Distribution of Proceeds

     149   

Withdrawal or Removal of Our General Partner

     149   

Transfer of General Partner Interest

     150   

Transfer of Ownership Interests in Our General Partner

     150   

Transfer of Incentive Distribution Rights

     150   

Change of Management Provisions

     150   

Limited Call Right

     151   

Redemption of Ineligible Holders

     151   

Meetings; Voting

     152   

Status as Limited Partner

     152   

Indemnification

     153   

Reimbursement of Expenses

     153   

Books and Reports

     153   

Right to Inspect Our Books and Records

     154   

Registration Rights

     154   

Exclusive Forum

     154   

UNITS ELIGIBLE FOR FUTURE SALE

     155   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     156   

Partnership Status

     157   

Limited Partner Status

     158   

Tax Consequences of Unit Ownership

     158   

Tax Treatment of Operations

     164   

Disposition of Common Units

     165   

Uniformity of Units

     168   

Tax-Exempt Organizations and Other Investors

     168   

Administrative Matters

     169   

Recent Legislative Developments

     172   

State, Local, Foreign and Other Tax Considerations

     172   

INVESTMENT IN PENNTEX MIDSTREAM PARTNERS, LP BY EMPLOYEE BENEFIT PLANS

     174   

General Fiduciary Matters

     174   

Prohibited Transaction Issues

     174   

Plan Asset Issues

     175   

UNDERWRITING

     176   

Relationships

     178   

Notice to Prospective Investors in Australia

     178   

 

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Notice to Prospective Investors in the European Economic Area

     179   

Notice to Prospective Investors in the United Kingdom

     179   

Notice to Prospective Investors in France

     180   

Notice to Prospective Investors in Hong Kong

     180   

Notice to Prospective Investors in Japan

     180   

Notice to Prospective Investors in Singapore

     181   

Notice to Prospective Investors in Switzerland

     181   

VALIDITY OF OUR COMMON UNITS

     182   

EXPERTS

     182   

WHERE YOU CAN FIND MORE INFORMATION

     182   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX  A—Form of First Amended and Restated Agreement of
Limited Partnership of PennTex Midstream Partners, LP

     A-1   

APPENDIX B—Glossary of Terms

     B-1   

 

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You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell common units and seeking offers to buy common units only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common units. Our business, financial condition, results of operations and prospects may have changed since that date.

 

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

 

Industry, Market and Other Data

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications and other published independent sources, as well as on our good faith estimates. Although we believe the third-party sources are reliable as of their respective dates, neither we nor the underwriters have independently verified the accuracy or completeness of this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

 

The operational and financial information of Memorial Resource Development Corp., including information relating to its production, drilling and capital spending, are derived from Memorial Resource Development Corp.’s (i) prospectus filed with the SEC on June 16, 2014, (ii) Current Report on Form 8-K filed with the SEC on August 6, 2014 and (iii) Quarterly Report on Form 10-Q filed with the SEC on August 8, 2014. Although we believe the operational and financial information of Memorial Resource Development Corp. included in this prospectus is reliable, neither we nor the underwriters have independently verified the accuracy or completeness of such information.

 

Basis of Presentation

 

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

 

Certain Terms Used in this Prospectus

 

Unless the context otherwise requires, all references in this prospectus to:

 

   

“PennTex Midstream Partners, LP,” the “partnership,” “we,” “our,” “us” or like terms (i) for periods prior to the closing of this offering, are to PennTex JV, which is our accounting predecessor, and (ii) for periods from and after the closing of this offering, are to PennTex Midstream Partners, LP, a Delaware limited partnership, and its subsidiaries after giving effect to the formation transactions described under “Summary—Our Formation Transactions” on page 9 of this prospectus;

 

   

“PennTex GP” or our “general partner” are to PennTex Midstream GP, LLC, a Delaware limited liability company and our general partner;

 

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Index to Financial Statements
   

“NGP” are to Natural Gas Partners, a family of private equity investment funds organized to make direct equity investments in the energy industry, including the funds invested in PennTex Development;

 

   

“PennTex Development” or our “parent” are to PennTex Midstream Partners, LLC, a Delaware limited liability company owned by NGP and certain members of our management team, and its subsidiaries;

 

   

“PennTex JV” are to PennTex North Louisiana, LLC, a Delaware limited liability company and joint venture in which PennTex Development indirectly owns a 62.5% membership interest and certain affiliates of NGP indirectly own the remaining 37.5% membership interest;

 

   

“PennTex Permian” are to PennTex Permian, LLC, a Delaware limited liability company and subsidiary of our parent;

 

   

“Memorial Resource” are to Memorial Resource Development Corp. (NASDAQ: MRD), a Delaware corporation, and its wholly owned subsidiaries, including WildHorse Resources;

 

   

“MRD WHR LA” are to MRD WHR LA Midstream LLC, a Delaware limited liability company and affiliate of NGP that will own a     % limited partner interest in us and 7.5% of our incentive distribution rights following the completion of this offering and the related formation transactions; and

 

   

“WildHorse Resources” are to WildHorse Resources, LLC, a Delaware limited liability company that owns and operates Memorial Resource’s interest in the Terryville Complex.

 

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Index to Financial Statements

SUMMARY

 

This summary provides a brief overview of information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and related notes contained herein, before investing in our common units. The information presented in this prospectus assumes (1) an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and (2) unless otherwise indicated, that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” beginning on page 20 of this prospectus for more information about important risks that you should consider carefully before investing in our common units. We include a glossary of some of the terms used in this prospectus in Appendix B.

 

Overview

 

We are a growth-oriented limited partnership focused on owning, operating, acquiring and developing midstream energy infrastructure assets, with an initial focus in northern Louisiana. Our parent, PennTex Development, was formed by NGP and members of our management team to develop a multi-basin midstream growth platform, initially focused on organic growth projects in partnership with oil and natural gas producers affiliated with NGP. NGP’s large portfolio of oil and gas investments provides our parent with a source of potential development and partnership opportunities. We intend to leverage our relationships with NGP and our parent with a view to becoming a leading midstream energy company serving attractive oil and natural gas basins in North America.

 

Our initial assets will be supported by 15-year, fee-based commercial agreements, containing minimum volume commitments and firm capacity reservations, with Memorial Resource (NASDAQ: MRD), an NGP-affiliated independent natural gas and oil company focused on the development of liquids-rich natural gas opportunities in multiple zones in the overpressured Cotton Valley formation in northern Louisiana. Our initial assets, which are shown on the map below, will consist of the following:

 

   

Lincoln Parish Plant: a 200 MMcf/d cryogenic natural gas processing plant located in Lincoln Parish, Louisiana;

 

   

PennTex Gathering Pipeline: a 30.5-mile rich natural gas gathering system, consisting of 27.5 miles of 12” pipeline and three miles of 24” pipeline that will provide producers access to the Lincoln Parish Plant and to the Minden Plant owned and operated by DCP Midstream Partners, L.P., or DCP Midstream, with available capacity of at least 400 MMcf/d to the Lincoln Parish Plant and 50 MMcf/d to the Minden Plant;

 

   

PennTex Gas Pipeline: a one-mile, 24” residue natural gas header with 400 MMcf/d of capacity that will provide market access for residue natural gas from the Lincoln Parish Plant for delivery to multiple intrastate and interstate pipelines, including pipelines that provide access to the Perryville Hub and other markets in the Gulf Coast region; and

 

   

PennTex NGL Pipeline: a 12-mile NGL pipeline with a total capacity of over 36,000 barrels per day, which will connect the Lincoln Parish Plant to the Black Lake Pipeline owned and operated by DCP Midstream, and will provide a Mont Belvieu-based market for NGLs produced from the Lincoln Parish Plant.

 

 

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Index to Financial Statements

LOGO

 

We expect that the 12” pipeline comprising part of the PennTex Gathering Pipeline will be in service on December 1, 2014 and that the Lincoln Parish Plant, the remaining portion of the PennTex Gathering Pipeline, the PennTex Gas Pipeline and the PennTex NGL Pipeline will be in service on March 1, 2015.

 

The Cotton Valley formation is a prolific natural gas play originally developed in the 1930s that is characterized by thick, multi-zone natural gas and oil reservoirs with well-known geologic characteristics and long-lived, predictable production profiles. The Cotton Valley formation has been undergoing rapid redevelopment by producers using advanced horizontal drilling and completion techniques that have led to the development of approximately 575 horizontal wells in the formation since 2005. The Terryville Complex in the Cotton Valley formation in particular provides multiple zones of highly productive, liquids-rich geology, which we believe offers Memorial Resource and other producers attractive economic opportunities in a variety of commodity price environments.

 

We believe that our parent’s relationship with Memorial Resource will provide us with significant opportunity for growth as Memorial Resource’s robust drilling program in northern Louisiana continues and its production increases. In addition to the growth we anticipate as a result of Memorial Resource’s development drilling, we believe our strategically located assets will provide us with a platform to provide midstream services to other producers in northern Louisiana, as the horizontal development of the Cotton Valley formation advances and producers seek infrastructure to process their natural gas production and move their products to market. We will also continually evaluate opportunities to expand our services to surrounding areas, including East Texas and southern Arkansas, and to improve long-term natural gas and NGL handling and transportation to high-value end markets.

 

In connection with the closing of this offering, we will enter into an omnibus agreement with our parent and PennTex JV, a joint venture with operations in northern Louisiana in which our parent indirectly owns a 62.5% membership interest and certain affiliates of NGP indirectly own the remaining 37.5% membership interest. Pursuant to the omnibus agreement, PennTex JV will grant us a right of first offer with respect to any midstream assets currently owned, acquired or developed in the future within the Area of Mutual Interest described below to the extent PennTex JV elects to sell these assets. The right of first offer will include the 200 MMcf/d cryogenic natural gas processing plant and related infrastructure currently being developed by PennTex JV in the Terryville Complex, which is expected to be placed into service in late 2015. We refer to this plant as the Mt. Olive Plant.

 

 

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Under the omnibus agreement, we will also have a right of first offer with respect to all or a portion of our parent’s 98.5% interest in PennTex Permian, which owns and operates a gathering and processing system in Reeves County, Texas, to the extent our parent elects to sell all or a portion of that interest. The PennTex Permian system serves producers in the Delaware sub-basin of the Permian Basin and currently consists of a 60 MMcf/d cryogenic natural gas processing plant and approximately 50 miles of low- and intermediate-pressure gathering pipelines and associated compression assets. The PennTex Permian system is supported by a long-term acreage dedication from Centennial Resources Development, LLC, an affiliate of NGP, covering approximately 40,000 gross acres in the core of the southern Delaware Basin. Neither PennTex JV nor our parent is obligated to sell any assets, and we are under no obligation to purchase any additional assets from them pursuant to our rights of first offer. In addition, we cannot predict when or if PennTex JV and our parent will sell the assets or interests subject to our rights of first offer and whether we will elect to exercise such rights upon any sale by PennTex JV or our parent. Any purchase that does occur will be on an arm’s-length basis and will be subject to approval by our conflicts committee.

 

Our Relationship with Memorial Resource

 

Memorial Resource

 

Memorial Resource is a NGP-affiliated company engaged in the exploitation, development and acquisition of natural gas, NGL and oil properties. A majority of Memorial Resource’s developed acreage is in the Terryville Complex of northern Louisiana, where Memorial Resource targets overpressured, liquids-rich natural gas opportunities in multiple zones in the Cotton Valley formation utilizing multi-well pads. Memorial Resource commenced a horizontal drilling program in 2011 and ultimately shifted its operational focus to full-scale horizontal redevelopment in 2013. Memorial Resource currently operates six drilling rigs in the Terryville Complex and has increased its net daily production in the area by approximately 163% from 54.3 MMcfe/d for the year ended December 31, 2012 to 143.0 MMcfe/d for the three months ended March 31, 2014. As of June 30, 2014, the average 30-day production rate of Memorial Resource’s eight most recently completed wells in the Terryville Complex was 22.6 MMcfe/d per well.

 

As of December 31, 2013, Memorial Resource had leased 130,746 gross (96,733 net) acres in the Terryville Complex, encompassing 1,431 gross (994 net) identified horizontal drilling locations that represent an inventory of approximately 36 years based on Memorial Resource’s expected 2014 drilling program. During the 2014 fiscal year, Memorial Resource expects to spend $304 million of capital expenditures in the Terryville Complex, which represents approximately 87% of Memorial Resource’s total capital budget for 2014. During the quarter ended June 30, 2014, Memorial Resource brought online eight horizontal wells and, as of August 5, 2014, Memorial Resource had 32 horizontal wells producing in the Terryville Complex. In August 2014, Memorial Resource announced plans to drill 43 gross (37 net) horizontal wells during 2014 in the Terryville Complex.

 

WildHorse Resources, LLC, a wholly owned subsidiary of Memorial Resource that owns and operates Memorial Resource’s interest in the Terryville Complex, has entered into an area of mutual interest and exclusivity agreement, or the AMI and Exclusivity Agreement, with PennTex JV and its members, pursuant to which PennTex JV has the exclusive right to build all of the midstream infrastructure for WildHorse Resources within the geographic area shown below and to provide midstream services to support WildHorse Resources’ current and future production on its operated acreage within such area (other than production subject to existing third-party commitments). We refer to the geographic area covered by the AMI and Exclusivity Agreement as the Area of Mutual Interest and have depicted the Area of Mutual Interest in the map below. As a result of our right of first offer, we will have the opportunity to purchase any assets constructed by PennTex JV pursuant to the AMI and Exclusivity Agreement that it intends to sell.

 

 

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Index to Financial Statements

LOGO

 

Our Contractual Arrangements with Memorial Resource

 

Our long-term contractual arrangements with Memorial Resource will contain minimum volume commitments and firm capacity reservations that will provide us with stable cash flows. In addition, as reflected in the table below, we believe that the expected near-term growth of Memorial Resource’s production in the Terryville Complex will result in volumes to us substantially in excess of the minimum volume commitments and firm capacity reservations. Memorial Resource’s average net working interest in the Terryville Complex is approximately 74%; however, the volumes that we will gather, process and transport pursuant to our long-term commercial agreements with Memorial Resource will be derived from Memorial Resource’s gross operated acreage.

 

Asset

  Annualized
Minimum Volume
Commitment and
Reservation Fees

(in millions)
    Total Available
Processing or
Transportation
Capacity
  MMBtu/d
Equivalent(1)
  Minimum and Firm
Contracted
Capacity
  Expected
Throughput
Volumes(3)

Lincoln Parish Plant

  $ 18.3 (2)    200 MMcf/d   230,000 MMBtu/d   115,000 MMBtu/d(2)   224,250 MMBtu/d

PennTex Gathering Pipeline

  $ 5.3      Varies(4)   Varies(4)   50,000 MMBtu/d   50,000 MMBtu/d

PennTex Gas Pipeline

  $ 1.3      400 MMcf/d   460,000 MMBtu/d   100,000 MMBtu/d   195,000 MMBtu/d

PennTex NGL Pipeline

  $ 2.7      36,000 barrels per day   N/A   6,000 barrels per day   9,631 barrels per day

 

(1)   We expect that the natural gas we process for Memorial Resource at the Lincoln Parish Plant will have an energy content of 1,150 Btu per cubic foot. As a result, the MMBtu/d equivalent for the processing capacity of the Lincoln Parish Plant and the transportation capacity of the PennTex Gas Pipeline is based on a conversion factor of 1,150 Btu per cubic foot.
(2)   Upon PennTex JV’s completion of the Mt. Olive Plant, which is currently under development, Memorial Resource’s minimum contracted capacity at the Lincoln Parish Plant will increase to an amount equal to the Lincoln Parish Plant’s full design capacity, less any firm gas committed to the plant by other producers at such time. Assuming that other producers have not committed firm gas to the Lincoln Parish Plant at different rates by that time, our annualized minimum volume commitment fee would be $36.6 million.

 

 

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(3)   Expected throughput volumes represent forecast throughput volumes during the twelve months ending March 31, 2016. Please read “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution through March 31, 2016” for a discussion of certain assumptions related to our volume expectations. Our forecast throughput volumes assume that all of our volumes during the twelve months ending March 31, 2016 will be attributable to our commercial agreements with Memorial Resource. If Memorial Resource were to reduce the number of drilling rigs it deploys, shut-in existing wells or have less success in its drilling efforts in northern Louisiana than expected, the volumes processed by us and gathered and transported through our pipelines could be less than expected. Please read “Risk Factors—Risks Related to Our Business—Because all of our initial revenue and a substantial majority of our revenue over the long term is expected to be derived from Memorial Resource’s natural gas production, any development that materially and adversely affects Memorial Resource’s operations, financial condition or market reputation could have a material and adverse impact on us.”
(4)   The PennTex Gathering Pipeline’s capacity varies depending on receipt and delivery points; however, the pipeline will have available capacity of at least 400 MMcf/d to the Lincoln Parish Plant and 50 MMcf/d to the Minden Plant.

 

Our Relationships with NGP and PennTex Development

 

We view our relationships with NGP and PennTex Development as significant competitive strengths. We believe these relationships will provide us with potential acquisition and organic growth opportunities, as well as access to personnel with extensive technical expertise and industry relationships.

 

NGP

 

Founded in 1988, NGP is a family of private equity investment funds, with cumulative committed capital of approximately $10.5 billion since inception, organized to make investments in the natural resources sector. NGP is part of the investment platform of NGP Energy Capital Management, a premier investment franchise in the natural resources industry, which together with its affiliates has managed approximately $13 billion in cumulative committed capital since inception. The employees of NGP are experienced energy professionals with substantial expertise in investing in the oil and natural gas business. In connection with NGP’s business, these employees review a large number of potential acquisitions and are involved in decisions relating to the acquisition and disposition of oil and natural gas assets by the various portfolio companies in which NGP owns interests. We believe that our relationship with NGP and its experience investing in oil and natural gas companies, provides us with a number of benefits, including increased exposure to acquisition opportunities and access to a significant group of transactional and financial professionals who have experience in assisting the companies in which NGP has invested to meet their financial and strategic growth objectives.

 

Upon the closing of this offering and the consummation of the formation transactions described under “—Our Formation Transactions,” affiliates of NGP, through interests in PennTex Development and MRD WHR LA, will own substantially all of our general partner and our incentive distribution rights, as well as a             % limited partner interest in us. We believe that NGP will be motivated to promote and support the successful execution of our business strategies, including through our potential acquisition of additional midstream assets from NGP and its affiliates over time and the facilitation of accretive acquisitions from third parties. In addition, we believe NGP and its affiliates will be motivated to jointly pursue acquisition opportunities with us whereby we would acquire or agree to develop and manage midstream assets that may be part of an acquisition being pursued by NGP-controlled oil and gas producers. NGP does not have a legal obligation to offer to us any acquisition opportunities or jointly pursue opportunities with us, may decide not to offer us any such opportunities and is not restricted from competing with us. We do not expect NGP or any of its directors to directly receive any of the net proceeds from this offering, or any other payment, compensation or equity interests in us in connection with this offering. However, NGP may indirectly receive a portion of the net proceeds from this offering as a result of its ownership interest in PennTex Development.

 

PennTex Development

 

Our parent, PennTex Development, was formed in January 2014 by NGP and members of our management team to pursue midstream growth opportunities and develop midstream energy assets. PennTex Development

 

 

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intends to acquire, construct and develop midstream operations for, or in partnership with, leading oil and natural gas producers, including both affiliates of NGP and unaffiliated third parties.

 

Following the completion of this offering, our parent will continue to own and manage a substantial portfolio of midstream assets and have business relationships that we believe will provide us with significant future acquisition opportunities. Such assets include the following:

 

   

PennTex JV.    Our parent indirectly owns a 62.5% membership interest in PennTex JV, which has granted us a right of first offer with respect to any midstream assets currently owned, acquired or developed in the future within the Area of Mutual Interest to the extent PennTex JV elects to sell these assets, including:

 

   

Mt. Olive Plant.    PennTex JV expects to enter into a 15-year gas processing agreement with Memorial Resource pursuant to which PennTex JV will construct the Mt. Olive Plant (a 200 MMcf/d cryogenic natural gas processing plant) and related pipeline infrastructure to serve Memorial Resource’s growing production in the Terryville Complex. We expect that the gas processing agreement will include a minimum volume commitment and will have fixed fees for firm and interruptible volumes. PennTex JV expects to complete the construction of the Mt. Olive Plant in October 2015.

 

   

Other Assets Developed within the Area of Mutual Interest.    Subject to certain exceptions, PennTex JV has the exclusive right to build all of the midstream infrastructure for and provide certain midstream services to WildHorse Resources within the Area of Mutual Interest under the AMI and Exclusivity Agreement.

 

   

PennTex Permian.    Our parent owns a 98.5% membership interest in PennTex Permian, which it acquired in February 2014. PennTex Permian operates a gathering and processing system in the Delaware sub-basin of the Permian Basin in Reeves County, Texas that consists of a 60 MMcf/d cryogenic natural gas processing plant and approximately 50 miles of low- and intermediate-pressure gathering pipelines and associated compression assets. PennTex Permian began operations in March 2014 and has secured a long-term acreage dedication from Centennial Resource Development, LLC, an affiliate of NGP, covering approximately 40,000 gross acres in the core of the southern Delaware Basin.

 

In addition, PennTex Development’s executive management team has significant midstream energy experience across public and private companies engaged in developing, acquiring and managing midstream operations. We share a management team with our parent and, as a result, will have access to strong commercial relationships throughout the energy industry and a broad operational, commercial, technical, risk management and administrative infrastructure.

 

Upon the closing of this offering and the consummation of the formation transactions described under “— Our Formation Transactions,” our parent will own our general partner, a     % limited partner interest in us (or a     % limited partner interest if the underwriters exercise in full their option to purchase additional common units) and, through its ownership of our general partner, 92.5% of our incentive distribution rights. Additionally, we will enter into an omnibus agreement with PennTex JV and our parent, pursuant to which we will have a right of first offer with respect to any midstream assets that PennTex JV currently owns, acquires or develops in the future within the Area of Mutual Interest (including the Mt. Olive Plant) and a right of first offer with respect to our parent’s equity interest in PennTex Permian, in each case, to the extent PennTex JV or our parent elects to sell such assets or equity interest. Although PennTex JV and our parent are not obligated to sell any assets and offer them to us, we believe that our parent will be incentivized to grow our business as a result of its economic interest in us. However, we cannot predict when or if PennTex JV and our parent will sell the assets or interests subject to our rights of first offer and whether we will elect to exercise such rights upon any sale by PennTex JV or our parent.

 

 

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Business Strategies

 

Our principal business objective is to increase the quarterly cash distributions that we pay to our unitholders over time while maintaining the ongoing stability of our business. We expect to achieve this objective by pursuing the following business strategies:

 

   

Maximizing the utilization of our assets by supporting Memorial Resource’s growth and infrastructure needs.    Our assets will be supported by a minimum volume commitment of 115,000 MMBtu/d from Memorial Resource under our processing agreement, as well as firm capacity reservations on each of our pipelines under our gathering and transportation agreements, providing us with stable cash flows. In addition, we believe that the expected near-term growth of Memorial Resource’s production in the Terryville Complex will result in volumes to us substantially in excess of the minimum volume commitments and firm capacity reservations. Additionally, upon PennTex JV’s completion of the Mt. Olive Plant, Memorial Resource’s minimum volume commitment under our processing agreement will increase to an amount equal to the Lincoln Parish Plant’s full design capacity, less any firm gas committed to the plant by other producers at such time.

 

   

Growing our business by pursuing accretive acquisitions.    We intend to pursue opportunities to grow our business through accretive acquisitions from PennTex JV, our parent, NGP and other third parties.

 

   

Acquisitions from PennTex JV.    Following the closing of this offering, PennTex JV will continue to develop midstream assets, including the Mt. Olive Plant and related pipeline infrastructure in northern Louisiana. To the extent Memorial Resource requires the development of additional midstream assets to service its production within the Area of Mutual Interest in the future, PennTex JV has the exclusive right to contract with Memorial Resource for such projects pursuant to the AMI and Exclusivity Agreement. Under the omnibus agreement, if PennTex JV elects to sell any midstream assets that it currently owns, acquires or develops in the future within the Area of Mutual Interest (including the Mt. Olive Plant), we will have a right of first offer with respect to such assets.

 

   

Acquisitions from our parent.    Following the closing of this offering, our parent will continue to own controlling interests in PennTex JV and PennTex Permian, which owns a gas gathering system and related assets in the Permian Basin. Pursuant to the terms of the omnibus agreement, if our parent elects to sell all or a portion of its equity interest in PennTex Permian, we will have a right of first offer with respect to any such interest. Further, our parent expects to leverage its relationship with NGP to develop other midstream assets with oil and natural gas producers affiliated with NGP. In addition, we believe that our parent will be incentivized to grow our business as a result of its economic interest in us, including its ownership of our general partner, a     % limited partner interest in us (or a     % limited partner interest if the underwriters exercise in full their option to purchase additional common units) and, through its ownership of our general partner, 92.5% of our incentive distribution rights.

 

   

Acquisitions facilitated through our relationship with NGP.    NGP and its affiliates have a long history of pursuing and consummating oil and natural gas property acquisitions and development in North America. Through our relationship with NGP and its affiliates, we have access to NGP’s significant pool of management talent and industry relationships, which we believe provides us with a competitive advantage in pursuing potential acquisition opportunities. For example, we may jointly pursue an acquisition where we would acquire or agree to develop and manage the midstream portion of an acquisition being pursued by an oil and gas producer controlled by NGP. We believe this arrangement gives us access to third-party acquisition opportunities that we would not otherwise be in a position to pursue. In addition, we may acquire additional midstream assets directly from NGP and its affiliates.

 

   

Acquisitions from third parties.    Our management team has significant experience in mergers and acquisitions and will selectively review opportunities to acquire assets from third parties.

 

 

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Attracting third-party customers in northern Louisiana.    While we will devote substantially all of our resources in the near term to meeting Memorial Resource’s needs in northern Louisiana, we also market our services to, and pursue strategic relationships with, other third-party producers. We believe that our early, significant footprint of efficient natural gas processing capacity and market connectivity for natural gas and NGLs in northern Louisiana will provide us with a competitive advantage that will allow us to attract third-party natural gas and NGL volumes in the future and lead to growth in our operations and cash available for distribution.

 

   

Maintaining and growing stable cash flows supported by long-term, fee-based contracts.    Where possible, we will seek to enter into multi-year, fee-based contracts, similar to those we will be party to with Memorial Resource, which include minimum volume commitments and firm capacity reservations in order to promote cash flow visibility and limit our direct exposure to commodity price volatility.

 

We cannot assure you, however, that we will be able to execute our business strategies described above. For further discussion of the risks that we face, please read “Risk Factors.”

 

Competitive Strengths

 

We believe we are well-positioned to successfully execute our business strategies because of the following competitive strengths:

 

   

Relationship with Memorial Resource, which has a multi-year, low-risk drilling inventory.    As of December 31, 2013, Memorial Resource had leased 130,746 gross (96,733 net) acres in the Terryville Complex, encompassing 1,431 gross (994 net) identified horizontal drilling locations that represent an inventory of approximately 36 years based on Memorial Resource’s expected 2014 drilling program. During the 2014 fiscal year, Memorial Resource expects to spend $304 million of capital expenditures in the Terryville Complex, which represents approximately 87% of Memorial Resource’s total capital budget for 2014. We believe Memorial Resource’s substantial acreage position and reported drilling locations in northern Louisiana will support significant long-term demand for our midstream services in a variety of commodity price environments and will enable Memorial Resource to deliver natural gas to us in excess of the minimum volume commitments and firm capacity reservations under our commercial agreements. Further, we believe that our parent’s relationship with Memorial Resource, coupled with our right of first offer with respect to any midstream assets owned, acquired or developed by PennTex JV in the future within the Area of Mutual Interest that it elects to divest, will provide us with significant opportunity for growth as Memorial Resource’s robust drilling program continues and its production increases.

 

   

Long-term, fixed fee contracts with significant minimum volume commitments and firm capacity reservations support stable cash flows.    Our long-term processing agreement with Memorial Resource is supported by an initial minimum volume commitment that represents 50% of the Lincoln Parish Plant’s capacity. In addition, our long-term gathering and transportation agreements with Memorial Resource are supported by firm capacity reservations. We expect to generate approximately 77% of our revenues for the twelve months ending March 31, 2016 from minimum volume commitments and firm capacity reservation charges under these agreements. We believe that the minimum volume commitment in our processing agreement, which will increase upon PennTex JV’s completion of the Mt. Olive Plant, the firm capacity reservations in our gathering and transportation agreements and the fee-based nature of all of our initial commercial agreements will enhance the stability of our cash flows by limiting our direct commodity price and volume exposure.

 

   

Strategic partnership with NGP and PennTex Development.    We believe that our relationships with NGP, with its long track record of supporting and building successful oil and natural gas companies, and PennTex Development provide us with a number of benefits, including increased exposure to acquisition

 

 

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opportunities, access to NGP’s extensive network of industry relationships and an executive team with significant industry, management and acquisition expertise. Upon the completion of this offering, affiliates of NGP, through interests in PennTex Development and MRD WHR LA, will own substantially all of our general partner and our incentive distribution rights, as well as a         % limited partner interest in us. As a result, we believe that NGP and our parent will be motivated to promote and support the successful execution of our business plan and to pursue projects that directly or indirectly enhance the value of our assets.

 

   

Experienced and incentivized management team.    Our senior management team has significant industry experience and has successfully built, grown and managed large successful midstream organizations, including public and private companies. We believe our management’s experience and expertise across the midstream spectrum provides a distinct competitive advantage. Through our management’s interest in our parent, which will own our general partner, a         % limited partner interest in us and 92.5% of our incentive distribution rights, our management team is highly incentivized to grow our distributions and the value of our business.

 

   

Flexible financial position and capital structure.    At the closing of this offering, we expect to have no outstanding indebtedness and available borrowing capacity of $         million under a new $         million revolving credit facility. We believe that our borrowing capacity and our expected ability to effectively access debt and equity capital markets provide us with the financial flexibility necessary to execute our business strategy. We expect to have sufficient cash on hand at the closing of this offering to fully fund our anticipated capital expenditures through the completion of our initial assets, which will be $83.6 million.

 

We cannot assure you, however, that we will be able to utilize our competitive strengths to successfully execute our business strategies described above. For further discussion of the risks that we face, please read “Risk Factors.”

 

Our Management

 

We are managed and operated by the board of directors and executive officers of PennTex Midstream GP, LLC, our general partner. PennTex Development owns all of the ownership interests in our general partner and is entitled to appoint the entire board of directors of 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 operations. All of the initial officers and a majority of the initial directors of our general partner are also officers of PennTex Development. For information about the executive officers and directors of our general partner, please read “Management.”

 

Under the NYSE listing requirements, the board of directors of our general partner is required to have at least three independent directors meeting the NYSE’s independence standards within twelve months of the date of this prospectus. At the closing of this offering, the board of directors of our general partner will be comprised of              directors, including              directors meeting the NYSE’s independence standards. Please read “Conflicts of Interest and Fiduciary Duties.”

 

In order to maintain operational flexibility, certain of our operations will be conducted through, and certain of our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates. We sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

 

 

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Our Formation Transactions

 

At or prior to the closing of this offering, each of the following transactions will occur:

 

   

PennTex JV will form a new wholly owned subsidiary, PennTex North Louisiana Operating, LLC, and contribute to it all of the interests in, and commercial agreements related to, our initial assets;

 

   

PennTex JV will contribute to us its interest in PennTex North Louisiana Operating, LLC, in exchange for (i) 7.5% of the incentive distribution rights, (ii)         common units and         subordinated units, representing a     % limited partner interest in us, and (iii) the right to receive $         million in proceeds from this offering, and we will contribute this interest to our wholly owned subsidiary, PennTex Midstream Operating, LLC;

 

   

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

 

   

PennTex JV will make a distribution to its members, consisting of (i)         common units and              subordinated units, representing a         % limited partner interest in us, 7.5% of our incentive distribution rights and $         million in cash to MRD WHR LA and (ii)         common units and             subordinated units, representing a         % limited partner interest in us, and $         million in cash to PennTex NLA Holdings, LLC, or PennTex NLA, a wholly owned subsidiary of PennTex Development;

 

   

PennTex NLA will make a distribution to its sole member, PennTex Development, consisting of              common units and         subordinated units, representing a     % limited partner interest in us, and $         million in cash;

 

   

we will enter into a new $         million revolving credit facility, which will remain undrawn at the closing of this offering; and

 

   

we will enter into an omnibus agreement with our general partner, PennTex Development and PennTex JV.

 

We refer to the above transactions collectively as the “formation transactions.”

 

Organizational Structure After the Formation Transactions

 

After giving effect to the formation transactions described above, assuming the underwriters’ option to purchase additional common units from our parent is not exercised, our units will be held as follows:

 

Public common units

         

Common units held by PennTex Development

         

Common units held by MRD WHR LA

         

Subordinated units held by PennTex Development

         

Subordinated units held by MRD WHR LA

         

General partner interest

     *   
  

 

 

 

Total

     100.0
  

 

 

 

 

*   General partner interest is non-economic.

 

 

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The following simplified diagram depicts our organizational structure after giving effect to the formation transactions described above.

 

LOGO

 

(1)  

Natural Gas Partners VIII, L.P. and Natural Gas Partners IX, L.P. collectively indirectly own a controlling interest in MRD WHR LA.

 

 

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Emerging Growth Company Status

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we are an “emerging growth company,” unlike other public companies, we will not be required to:

 

   

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;

 

   

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;

 

   

comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise;

 

   

provide certain disclosure regarding executive compensation required of larger public companies; or

 

   

obtain unitholder approval of any golden parachute payments not previously approved.

 

We will cease to be an “emerging growth company” upon the earliest of:

 

   

the last day of the fiscal year in which we have $1.0 billion or more in annual revenues;

 

   

the date on which we become a large accelerated filer;

 

   

the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering.

 

In addition, Section 107 of the JOBS Act 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 of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards, but we intend to irrevocably opt out of the extended transition period.

 

Risk Factors

 

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Below is a summary of certain key risk factors that you should consider in evaluating an investment in our common units. However, this list is not exhaustive, and you should read the full discussion of these risks and the other risks described in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

 

Risks Related to Our Business

 

   

Because we have a limited operating history and have not generated any revenues or operating cash flows, you may have difficulty evaluating our ability to pay cash distributions to our unitholders and our ability to successfully implement our business strategy.

 

   

We are currently constructing our initial assets and, if we experience any construction delays or cost increases or are unable to complete the construction of our initial assets, our business, financial condition, results of operations and ability to make cash distributions to our unitholders could be adversely affected.

 

   

We may not generate sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.

 

 

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Because all of our initial revenue and a substantial majority of our revenue over the long term is expected to be derived from Memorial Resource’s natural gas production, any development that materially and adversely affects Memorial Resource’s operations, financial condition or market reputation could have a material and adverse impact on us.

 

   

Because of the natural decline in production from existing wells, our success depends, in part, on Memorial Resource’s ability to replace declining production and our ability to secure new sources of natural gas from Memorial Resource or other third parties.

 

Risks Inherent in an Investment in Us

 

   

Our parent, our general partner and their respective affiliates have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

   

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.

 

   

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

 

   

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, which could cause you to lose all or part of your investment.

 

Tax Risks

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or the IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then the amount of cash available for distribution to our unitholders would be substantially reduced.

 

   

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

 

Partnership Information

 

Our principal executive offices are located at 11931 Wickchester Ln., Suite 300, Houston, Texas 77043, and our telephone number is (832) 456-4000. Our website is located at www.                     .com. We expect to make available our periodic reports and other information filed with or furnished to 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.

 

 

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The Offering

 

Common units offered by us to the public

             common units.

 

Option to purchase additional common units

Our parent has granted the underwriters a 30-day option to purchase up to an aggregate of              additional common units to the extent the underwriters sell more than              common units in this offering.

 

Units outstanding after this offering

             common units and              subordinated units, for a total of              limited partner units.

 

Use of proceeds

We expect to receive net proceeds of approximately $         million from this offering (based on an assumed initial offering price of $         per common unit, the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts, structuring fee and offering expenses payable by us, and intend to use such net proceeds as follows:

 

   

$             million to fund a portion of the quarterly distributions that we expect to make to our unitholders with respect to the fourth quarter of 2014 and the first quarter of 2015;

 

   

$             million to fully fund capital expenditures that we expect to incur from November 2014 through the completion of our initial assets;

 

   

$             million to make a cash distribution to PennTex JV in satisfaction of PennTex JV’s right to a reimbursement of capital expenditures it incurred with respect to the assets to be contributed to us; and

 

   

for general partnership purposes.

 

Please read “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of common units by our parent pursuant to the underwriters’ option to purchase additional common units.

 

Cash distributions

Within 45 days after the end of each quarter, beginning with the quarter ending                     , 2014, we expect to make a minimum quarterly distribution of $         per common unit and subordinated unit ($         per common unit and subordinated unit on an annualized basis) to unitholders of record on the applicable record date to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. 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.”

 

 

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  Our partnership agreement generally provides that we will distribute cash each quarter during the subordination period in the following manner:

 

   

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $        ; and

 

   

third, to the holders of common units and subordinated units pro rata until each has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $         per common unit and subordinated unit in any quarter, our unitholders and the holders of our incentive distribution rights will receive distributions according to the following percentage allocations:

 

     Marginal Percentage
Interest in
Distributions
 

Total Quarterly Distribution

Target Amount

   Unitholders     Holders of
Incentive
Distribution
Rights
 
above $             up to $                  85     15
above $             up to $                  75     25
above $                  50     50

 

  We refer to the additional increasing distributions to the holders of our incentive distribution rights as “incentive distributions.” Our general partner and MRD WHR LA will initially own 92.5% and 7.5% of our incentive distribution rights, respectively. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner Interest and Incentive Distribution Rights.”

 

  We believe, based on our financial forecast and related assumptions included in “Provisions of Our Partnership Agreement Relating to Cash Distributions,” that we will have sufficient available cash to pay the minimum quarterly distribution of $         on all of our common units and subordinated units for the twelve months ending March 31, 2016. However, we do not have a legal or contractual obligation to pay quarterly distributions at the minimum quarterly distribution rate or at any other rate and there is no guarantee that we will pay distributions to our unitholders in any quarter. Because not all of our initial assets will be in service prior to March 1, 2015, we expect to fund a portion of the distributions we expect to make to our unitholders in respect of the fourth quarter of 2014 and the first quarter of 2015 with net proceeds from this offering. Please read “Use of Proceeds.” Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

 

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Index to Financial Statements

Subordinated units

PennTex Development and MRD WHR LA will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that, for any quarter during the subordination period, holders of the subordinated units will not be entitled to receive any distribution from operating surplus until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly 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 (1) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit for each of three consecutive, non-overlapping four-quarter periods ending on or after                     , 2017 or (2) $         (150% of the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit and the related distribution on the incentive distribution rights, for any four-quarter period beginning with the quarter ending                     , 2015, in each case provided there are no outstanding arrearages on our common units.

 

  When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units will thereafter no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except for cause by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, PennTex Development will own an aggregate of     % of our outstanding units (or     % of our outstanding units, if the underwriters exercise their option to purchase additional common units in full) and     % of our subordinated units. This will give PennTex Development the ability to prevent the removal of our general partner. In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. This will provide PennTex Development the ability to

 

 

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prevent the removal of our general partner during the subordination period. Please read “Our Partnership Agreement—Withdrawal or Removal of Our General Partner.”

 

Limited call right

If at any time our general partner and its affiliates (including PennTex Development) own more than 80% 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 equal to the greater of (1) the highest cash price paid by either our general partner or any of its affiliates for any limited partner interests of the class purchased within the 90 days preceding the date on which our general partner first mails notice of its election to purchase those limited partner interests and (2) the current market price calculated in accordance with our partnership agreement as of the date three business days before the date the notice is mailed. Please read “Our Partnership Agreement—Limited Call Right.”

 

Registration rights

Our partnership agreement grants certain registration rights to our general partner and its affiliates. Please read “Our Partnership Agreement—Registration Rights.”

 

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 less than     % 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 approximately $         per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” for the basis of this estimate.

 

Material federal income tax consequences

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

 

Directed unit program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to     % of the common units being offered by this prospectus for sale to employees, executive officers and directors and director nominees of our general partner and certain of 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.”

 

Exchange listing

We intend to apply to list our common units on the New York Stock Exchange, or the NYSE, under the symbol “PTXP.”

 

 

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Index to Financial Statements

Summary Historical and Pro Forma Financial Data

 

We are a newly formed entity with no prior operating history. Accordingly, the historical financial statements reflect the historical financial data of PennTex JV, our accounting predecessor, which was formed on March 17, 2014, as of the date and for the period indicated. The summary historical financial data as of June 30, 2014 and for the period from March 17, 2014 (Inception) to June 30, 2014 are derived from the audited financial statements of PennTex JV appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical financial statements and unaudited pro forma balance sheet and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The following table also presents the summary pro forma balance sheet data of PennTex Midstream Partners, LP as of June 30, 2014, which are derived from the unaudited pro forma balance sheet of PennTex Midstream Partners, LP included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related formation transactions occurred as of June 30, 2014. These transactions include, and the pro forma balance sheet gives effect to, the following:

 

   

the contribution by PennTex JV of all of the interests in, and commercial agreements related to, our initial assets to PennTex North Louisiana Operating, LLC;

 

   

the contribution by PennTex JV of all of the interests in PennTex North Louisiana Operating, LLC to us in exchange for (i) 7.5% of our incentive distribution rights, (ii)              common units and              subordinated units and (iii) the right to receive $         million in proceeds from this offering;

 

   

the consummation of this offering, including our issuance of              common units to the public and 92.5% of our incentive distribution rights to our general partner, and the application of the net proceeds of this offering as described in “Use of Proceeds”;

 

   

the distribution by PennTex JV of (i)              common units,              subordinated units, 7.5% of our incentive distribution rights and $         million in cash to MRD WHR LA and (ii)              common units,              subordinated units and $         million in cash to PennTex NLA;

 

   

the distribution by PennTex NLA of              common units,              subordinated units and $         million in cash to PennTex Development; and

 

   

our entry into a new $         million revolving credit facility.

 

The pro forma combined balance sheet does not give effect to the estimated $1.75 million in incremental annual general and administrative expenses that we expect to incur as a result of being a publicly traded partnership. Additionally, it does not give effect to the $2 million annual fee that we will pay to our general partner for the provision of certain services under the omnibus agreement that we will enter into with our general partner, PennTex Development and PennTex JV at the closing of the offering.

 

 

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Index to Financial Statements
     Predecessor
Historical
    PennTex Midstream
Partners, LP
Pro Forma
 
     Period From
March 17, 2014
(Inception)

to June 30, 2014
    June 30,
2014
 
           (unaudited)  
     (in thousands)  

Statement of Operations Data:

    

Costs and Expenses:

    

General and administrative expense

   $ 1,384     
  

 

 

   

Total costs and expenses

     1,384     
  

 

 

   

Net (loss)

   $ (1,384  
  

 

 

   

Balance Sheet Data (at period end):

    

Cash and cash equivalents

   $ 18      $     

Property, plant and equipment

     36,259        36,259   

Total assets

     37,844     

Long-term debt

              

Total members’/partners’ equity

     33,435     

Cash Flow Data:

    

Net cash provided by (used in):

    

Operating activities

   $ (62  

Investing activities

     (34,739  

Financing activities

     34,819     

Capital Expenditures:

    

Expansion capital expenditures

   $ 34,739     

 

 

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Index to Financial Statements

RISK FACTORS

 

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus, including the matters addressed under “Cautionary Statement Regarding Forward-Looking Statements,” in evaluating an investment in our common units.

 

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

 

Risks Related to Our Business

 

Because we have a limited operating history and have not generated any revenues or operating cash flows, you may have difficulty evaluating our ability to pay cash distributions to our unitholders and our ability to successfully implement our business strategy.

 

Because of our limited operating history, the operating performance of our initial assets and our business strategy are not yet proven. We do not present any historical financial statements with respect to periods prior to March 17, 2014, and neither we nor our predecessor has generated any revenues or operating cash flows. Further, our predecessor’s historical financial statements for the period from March 17, 2014 to June 30, 2014 present a period of limited operations, which does not provide a meaningful basis to evaluate our operations or our ability to achieve our business strategy. As a result, it may be difficult for you to evaluate our business and results of operations to date and to assess our future prospects.

 

In addition, we may encounter risks and difficulties experienced by companies whose performance is dependent upon newly constructed assets, such as our initial assets failing to function as expected, higher than expected operating costs, equipment breakdown or failures and operational errors. We may be less successful in achieving a consistent operating level capable of generating cash flows from our operations sufficient to make cash distributions to our unitholders, as compared to a company whose major assets have had longer operating histories. In addition, we may be less equipped to identify and address operating risks and hazards in the conduct of our business than those companies whose major assets have had longer operating histories.

 

We are currently constructing our initial assets and, if we experience any construction delays or cost increases or are unable to complete the construction of our initial assets, our business, financial condition, results of operations and ability to make cash distributions to our unitholders could be adversely affected.

 

We are a newly formed limited partnership and are currently constructing our initial assets. We expect to continue to incur losses and experience negative operating cash flow through 2014 and to incur significant capital expenditures until completion of our initial assets. In addition, the construction of these assets involves numerous regulatory, environmental, political and legal uncertainties, which may cause delays in, or increase the costs associated with, the completion of these assets. Accordingly, we may not be able to complete the construction of the initial assets on schedule, at the budgeted cost or at all, and any delays beyond the expected construction periods or increased costs above those expected to be incurred for our initial assets would prolong, and could increase the level of, our operating losses and negative operating cash flows.

 

In addition, the following factors, among others, could prevent us from commencing operations upon the completion of our initial assets:

 

   

shortages of materials or delays in delivery of materials;

 

   

cost overruns and difficulty in obtaining sufficient debt or equity financing to pay for such additional costs;

 

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Index to Financial Statements
   

failure to obtain all necessary governmental and third-party permits, licenses and approvals for the construction and operation of the assets;

 

   

weather conditions, such as hurricanes, and other catastrophes, such as explosions, fires, floods and accidents;

 

   

difficulties in attracting a sufficient skilled and unskilled workforce, increases in the level of labor costs and the existence of any labor disputes; and

 

   

local and general economic and infrastructure conditions.

 

Further, if our Lincoln Parish Plant is not operational by November 1, 2015, subject to certain conditions, Memorial Resource may terminate our processing agreement. For a discussion of such conditions and other information relating to our processing agreement with Memorial Resource, please read “Business—Our Contractual Arrangements with Memorial Resource—Natural Gas Processing.” Thus, if we are unable to complete or are substantially delayed in completing the construction of our initial assets, our business, financial condition, results of operations and ability to make cash distributions to our unitholders could be adversely affected.

 

We may not generate sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to pay the minimum quarterly distribution to our unitholders.

 

In order to make our minimum quarterly distribution of $         per common unit and subordinated unit per quarter, or $         per unit per year, we will require available cash of approximately $         million per quarter, or approximately $         million per year, based on the common units and subordinated units outstanding immediately after completion of this offering. We may not generate sufficient cash flow each quarter to support the payment of the minimum quarterly distribution or to increase our quarterly distributions in the future. We intend to retain a portion of the proceeds from this offering to fund a portion of the quarterly distributions that we expect to make to our unitholders with respect to the fourth quarter of 2014 and the first quarter of 2015.

 

The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the level of firm transportation sold and volume of natural gas we process;

 

   

the rates we charge any third parties for our services;

 

   

market prices of natural gas, NGLs and oil and their effect on Memorial Resource’s drilling schedule and production;

 

   

Memorial Resource’s ability to fund its drilling program;

 

   

adverse weather conditions;

 

   

the level of our operating, maintenance and general and administrative costs;

 

   

regional, domestic and foreign supply and perceptions of supply of natural gas; the level of demand and perceptions of demand in our end-user markets, and actual and anticipated future prices of natural gas and other commodities (and the volatility thereof), which may impact our ability to renew and replace our gathering, processing and transportation agreements;

 

   

the relationship between natural gas and NGL prices and resulting effect on processing margins;

 

   

the realized pricing impacts on revenues and expenses that are directly related to commodity prices;

 

   

the level of competition from other midstream energy companies in our geographic markets;

 

   

the creditworthiness of our customers;

 

   

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

 

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Index to Financial Statements
   

timely in-service dates of our initial assets;

 

   

outages at our Lincoln Parish Plant;

 

   

leaks or accidental releases of hazardous materials into the environment, whether as a result of human error or otherwise;

 

   

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

 

   

prevailing economic conditions.

 

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

 

   

the level and timing of capital expenditures we make;

 

   

our debt service requirements and other liabilities;

 

   

our ability to borrow under our debt agreements to pay distributions;

 

   

fluctuations in our working capital needs;

 

   

restrictions on distributions contained in any of our debt agreements;

 

   

the cost of acquisitions, if any;

 

   

fees and expenses of our general partner and its affiliates we are required to reimburse;

 

   

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

 

   

other business risks affecting our cash levels.

 

Because all of our initial revenue and a substantial majority of our revenue over the long term is expected to be derived from Memorial Resource’s natural gas production, any development that materially and adversely affects Memorial Resource’s operations, financial condition or market reputation could have a material and adverse impact on us.

 

Upon completion of the construction of our initial assets, all of our initial revenue and a substantial majority of our revenue over the long term are expected to be derived from Memorial Resource’s natural gas production. As a result, we are substantially dependent on Memorial Resource and any event, whether in our area of operations or otherwise, that adversely affects Memorial Resource’s production, drilling and completion schedule, financial condition, leverage, market reputation, liquidity, results of operations or cash flows may adversely affect our revenues and cash available for distribution. Accordingly, we are indirectly subject to the business risks of Memorial Resource, including, among others:

 

   

a reduction in or slowing of Memorial Resource’s development program, which would directly and adversely impact demand for our midstream services;

 

   

the volatility of natural gas, NGLs and oil prices, which could have a negative effect on the value of Memorial Resource’s properties, its drilling programs or its ability to finance its operations;

 

   

the availability of capital to Memorial Resource on an economic basis to fund its exploration and development activities;

 

   

Memorial Resource’s ability to replace reserves;

 

   

Memorial Resource’s drilling and operating risks, including potential environmental liabilities;

 

   

transportation capacity constraints and interruptions;

 

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Index to Financial Statements
   

adverse effects on Memorial Resource of governmental and environmental regulation; and

 

   

losses to Memorial Resource from pending or future litigation.

 

Further, we are subject to the risk of non-payment or non-performance by Memorial Resource. We cannot predict the extent to which Memorial Resource’s business would be impacted if conditions in the energy industry were to deteriorate, nor can we estimate the impact such conditions would have on Memorial Resource’s ability to execute its drilling and development program. Any material non-payment or non-performance by Memorial Resource would reduce our ability to make distributions to our unitholders.

 

The assumptions underlying the forecast of cash available for distribution, as set forth in “Our Cash Distribution Policy and Restrictions on Distributions,” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecast.

 

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast results of operations, Adjusted EBITDA, distributable cash flow and cash available for distribution for the twelve months ending March 31, 2016. Our ability to pay the full minimum quarterly distribution during the twelve months ending March 31, 2016 is based on a number of assumptions that may not prove to be correct and that are discussed in “Our Cash Distribution Policy and Restrictions on Distributions.” Management has prepared the financial forecast and has not received an opinion or report on it from our or any other independent auditor. The assumptions and estimates underlying the forecast are substantially driven by Memorial Resource’s anticipated drilling and completion schedule and, although we consider our assumptions as to Memorial Resource’s ability to maintain that schedule reasonable as of the date of this prospectus, those estimates and Memorial Resource’s ability to achieve anticipated drilling and production targets are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the forecast. If we do not achieve the forecast results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially.

 

Because of the natural decline in production from existing wells, our success depends, in part, on Memorial Resource’s ability to replace declining production and our ability to secure new sources of natural gas from Memorial Resource or other third parties.

 

The natural gas volumes that will support our assets depend on the level of Memorial Resource’s production from natural gas wells located in the areas in which we operate. This production may be less than expected and will naturally decline over time. To the extent Memorial Resource reduces its activity or otherwise ceases to drill and complete wells, revenues for our midstream services will be directly and adversely affected. In addition, natural gas volumes from completed wells will naturally decline and our cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on our assets, we must obtain new sources of natural gas from Memorial Resource or other third parties. The primary factors affecting our ability to obtain additional sources of natural gas include (i) the success of Memorial Resource’s drilling activity in our area of operations, (ii) Memorial Resource’s acquisition of additional acreage and (iii) our ability to obtain dedications of acreage from third parties.

 

We have no control over Memorial Resource’s or other producers’ levels of development and completion activity in our area of operation, the lateral lengths of wells drilled, the amount of reserves associated with wells drilled within the area or the rate at which production from a well declines. We have no control over Memorial Resource or other producers or their development plan decisions, which are affected by, among other things:

 

   

the availability and cost of capital;

 

   

prevailing and projected natural gas, NGLs and oil prices;

 

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Index to Financial Statements
   

demand for natural gas, NGLs and oil;

 

   

levels of reserves;

 

   

geologic considerations;

 

   

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

 

   

the costs of producing the gas and the availability and costs of drilling rigs and other equipment.

 

Fluctuations in energy prices can also greatly affect the development of reserves. Memorial Resource could elect to reduce its drilling and completion activity if commodity prices decrease. Declines in commodity prices could have a negative impact on Memorial Resource’s development and production activity, and, if sustained, could lead to a material decrease in such activity. Sustained reductions in development or production activity in northern Louisiana could lead to reduced utilization of our services.

 

Due to these and other factors, even if reserves are known to exist in areas served by our assets, producers may choose not to develop those reserves. If reductions in development activity result in our inability to maintain the current levels of throughput on our systems, those reductions could reduce our revenue and cash flow and adversely affect our ability to make cash distributions to our unitholders.

 

We do not intend to obtain independent evaluations of oil, natural gas or NGL reserves to be gathered, processed or transported by our assets; therefore, in the future, volumes on our systems could be less than we anticipate.

 

We do not intend to obtain independent evaluations of oil, natural gas or NGL reserves expected to be gathered, processed or transported by our assets. Accordingly, we may not have independent estimates of total reserves underlying the areas in which we operate or the anticipated life of such reserves. If the total reserves or estimated life of the reserves we expect to service are less than we anticipate and we are unable to secure additional sources of oil, natural gas or NGLs, we could experience a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

 

We may not be able to attract third-party volumes, which could limit our ability to grow and prolong our dependence on Memorial Resource.

 

Part of our long-term growth strategy includes diversifying our customer base by identifying opportunities to offer services to third parties. Upon completion of the construction of our initial assets, we will earn all of our revenues from Memorial Resource. Our ability to increase assets’ throughput and any related revenue from third parties is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when requested by third parties. To the extent our assets lack available capacity for third-party volumes, we may not be able to compete effectively with third-party systems for additional natural gas production and completions in our area of operation. In addition, some of our natural gas and NGL marketing competitors for third-party volumes have greater financial resources and access to larger supplies of natural gas than those available to us, which could allow those competitors to price their services more aggressively than we do.

 

Our efforts to attract new unaffiliated customers may be adversely affected by (i) our relationship with Memorial Resource and the fact that a substantial majority of the capacity of our assets will be necessary to service Memorial Resource’s production and development and completion schedule and (ii) our desire to provide services pursuant to fee-based contracts. As a result, we may not have the capacity to provide services to third parties and/or potential third-party customers may prefer to obtain services pursuant to other forms of contractual arrangements under which we would be required to assume direct commodity exposure.

 

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Index to Financial Statements

We will be required to make substantial capital expenditures to increase our asset base. If we are unable to obtain needed capital or financing on satisfactory terms, our ability to make cash distributions may be diminished or our financial leverage could increase.

 

In order to increase our asset base, we will need to make expansion capital expenditures. If we do not make sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and, as a result, we will be unable to raise the level of our future cash distributions. To fund our expansion capital expenditures, we will be required to use cash from our operations or incur borrowings. Alternatively, we may sell additional common units or other securities to fund our capital expenditures. Such uses of cash from our operations will reduce our cash available for distribution. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining the necessary funds, the terms of such financings could limit our ability to pay distributions to our unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the prevailing distribution rate. Following the completion of this offering, neither our parent nor any of its affiliates will be committed to providing any direct or indirect support to fund our growth.

 

Our operations will initially be focused in the Terryville Complex in northern Louisiana, making us vulnerable to risks associated with operating in one major geographic area.

 

Initially, we will rely exclusively on revenues generated from our assets that we are constructing in the Terryville Complex in northern Louisiana. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, market limitations, water shortages or other drought related conditions or interruption of the processing or transportation of natural gas, NGLs or oil.

 

If we are unable to make acquisitions on economically acceptable terms from our parent, affiliates of NGP, PennTex JV or third parties, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our cash generated from operations on a per unit basis.

 

Our ability to grow depends, in part, on our ability to make acquisitions that increase our cash generated from operations 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, including our parent, affiliates of NGP and PennTex JV. Other than the obligations of our parent and PennTex JV under the omnibus agreement to allow us to make an offer with respect to certain assets that they elect to sell, we have no contractual arrangement with our parent, affiliates of NGP or PennTex JV that would require it to provide us with an opportunity to offer to acquire midstream assets that it may sell. Accordingly, while we note elsewhere in this prospectus that we believe our parent, affiliates of NGP and PennTex JV will be incentivized pursuant to their economic relationship with us to offer us opportunities to purchase midstream assets, there can be no assurance that any such offer will be made or that we will reach agreement on the terms with respect to any acquisition opportunities. Furthermore, many factors could impair our access to future midstream assets, including a change in control of our parent or our general partner’s transfer of its incentive distribution rights to a third party. A material decrease in divestitures of midstream energy assets from our parent, affiliates of NGP, PennTex JV or otherwise would limit our opportunities for future acquisitions and could have a material adverse effect on our business, results of operations, financial condition and ability to make quarterly cash distributions to our unitholders.

 

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Index to Financial Statements

We may be unable to make accretive acquisitions from our parent, affiliates of NGP, PennTex JV or third parties for a number of reasons, including:

 

   

our parent, affiliates of NGP or PennTex JV may elect not to sell or contribute additional assets to us or to offer acquisition opportunities to us;

 

   

we may be unable to identify attractive third-party acquisition opportunities;

 

   

we may be unable to negotiate acceptable purchase contracts with our parent, affiliates of NGP, PennTex JV or third parties;

 

   

we may be unable to obtain financing for these acquisitions on economically acceptable terms;

 

   

we may be outbid by competitors; or

 

   

we may be unable to obtain necessary governmental or third-party consents.

 

If we are unable to make accretive acquisitions, our future growth and ability to maintain and increase distributions will be limited.

 

Our merger and acquisition activities may not be successful or may result in completed acquisitions that do not perform as anticipated.

 

From time to time, we may make acquisitions of businesses and assets. Such acquisitions involve substantial risks, including the following:

 

   

acquired businesses or assets may not produce revenues, earnings or cash flow at anticipated levels;

 

   

acquired businesses or assets could have environmental, permitting or other problems for which contractual protections prove inadequate;

 

   

we may assume liabilities that were not disclosed to us, that exceed our estimates, or for which our rights to indemnification from the seller are limited;

 

   

we may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical or financial problems; and

 

   

acquisitions, or the pursuit of acquisitions, could disrupt our ongoing businesses, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures.

 

We are unable to control the construction of the Mt. Olive Plant, and any delays or increased costs associated with the construction of the Mt. Olive Plant may delay PennTex JV’s ability or willingness to sell this asset.

 

Pursuant to the omnibus agreement, PennTex JV will grant us a right of first offer with respect to any midstream assets currently owned, acquired or developed in the future within the Area of Mutual Interest that PennTex JV elects to sell. This right of first offer extends to the Mt. Olive Plant, which we expect will be completed in October 2015. We are unable to control the completion of the Mt. Olive Plant, and therefore we cannot predict the likelihood or potential impact of delays in, or increased costs associated with, the completion of the Mt. Olive Plant, including delays or cost increases resulting from risks similar to those we face in the construction of our initial assets. Any such delays or costs, however, may delay a potential sale of the Mt. Olive Plant by PennTex JV, or alter the terms on which such sale would occur, which may delay or impair our opportunity to purchase this asset pursuant to our right of first offer.

 

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Index to Financial Statements

Our construction or purchase of new midstream assets may not result in increases in our cash available for distribution and may be subject to financing, regulatory, environmental, political, legal and economic risks, which could adversely affect our cash flows, results of operations and financial condition and, as a result, our ability to distribute cash to our unitholders.

 

The construction of any additions or modifications to our assets in the future and the construction or purchase of any new assets involves numerous regulatory, environmental, political and legal uncertainties beyond our control and may require the expenditure of significant amounts of capital. Financing may not be available on economically acceptable terms or at all. If we undertake these projects, we may not be able to complete them on schedule, at the budgeted cost or at all. Moreover, our revenues and cash available for distribution may not increase immediately upon the expenditure of funds on a particular project. For instance, if we build a processing facility, the construction may occur over an extended period of time, and we may not receive any material increases in revenues until the project is completed. Moreover, we may construct facilities to capture anticipated future production growth in an area in which such growth does not materialize. As a result, any new assets that we construct or purchase may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition. In addition, the construction of additions to our assets in the future may require us to obtain new rights-of-way prior to constructing. We may be unable to timely obtain such rights-of-way or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to expand or renew existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases, our cash flows could be adversely affected.

 

We rely in part on estimates from producers regarding of the timing and volume of their anticipated natural gas production. Production estimates are subject to numerous uncertainties, all of which are beyond our control. These estimates may prove to be inaccurate, and new facilities that we construct may not attract sufficient volumes to achieve our expected cash flow and investment return.

 

Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.

 

We expect to enter into a revolving credit facility in connection with the closing of this offering. Our revolving credit facility is expected to limit our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

redeem or repurchase units or make distributions under certain circumstances;

 

   

make certain investments and acquisitions;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

   

merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of assets.

 

Our revolving credit facility also is expected to contain covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet any such ratios and tests.

 

The provisions of our revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt,

 

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together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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 flow required to make interest payments on our debt;

 

   

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

 

   

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

 

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

A shortage of equipment and skilled labor in the Terryville Complex could reduce equipment availability and labor productivity and increase labor and equipment costs, which could have a material adverse effect on our business and results of operations.

 

Our services require special equipment and laborers skilled in multiple disciplines, such as equipment operators, mechanics and engineers, among others. If we experience shortages of necessary equipment or skilled labor in the future, our labor and equipment costs and overall productivity could be materially and adversely affected. If our equipment or labor prices increase or if we experience materially increased health and benefit costs for employees, our results of operations could be materially and adversely affected.

 

If third-party pipelines or other midstream facilities interconnected to our assets become partially or fully unavailable, our operating margin, cash flow and ability to make cash distributions to our unitholders could be adversely affected.

 

Our assets will connect to other pipelines or facilities owned and operated by unaffiliated third parties. The continuing operation of third-party pipelines, compressor stations and other midstream facilities is not within our control. These pipelines, plants and other midstream facilities may become unavailable because of testing, turnarounds, line repair, maintenance, reduced operating pressure, lack of operating capacity, regulatory requirements and curtailments of receipt or deliveries due to insufficient capacity or because of damage from severe weather conditions or other operational issues. 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 occurs or if any of these pipelines or other midstream facilities become unable to receive or transport natural gas, our operating margin, cash flow and ability to make cash distributions to our unitholders could be adversely affected.

 

In addition, the PennTex Gathering Pipeline will connect to a new 10.7-mile pipeline to be constructed, owned and operated by DCP Midstream. We expect DCP Midstream to complete the construction of this pipeline

 

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by December 1, 2014; however, any delay in the completion of this pipeline would also delay the in-service date of the 12” pipeline segment of the PennTex Gathering Pipeline, which could adversely impact our business, cash flow and ability to make cash distributions to our unitholders.

 

Our exposure to commodity price risk may change over time.

 

We initially expect to generate all of our revenues pursuant to fee-based contracts under which we are paid based on the volumes that we process and transport, rather than the underlying value of the commodity, in order to minimize our exposure to commodity price risk. However, our efforts to negotiate and enter into similar fee-based contracts with new customers in the future may not be successful. In addition, we may acquire or develop additional midstream assets in a manner that increases our exposure to commodity price risk. Future exposure to the volatility of natural gas, NGL and oil prices could have a material adverse effect on our business, results of operations and financial condition and, as a result, our ability to make cash distributions to our unitholders.

 

Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. The occurrence of a significant accident or other event that is not fully insured could curtail our operations and have a material adverse effect on our ability to distribute cash and, accordingly, the market price for our common units.

 

Our operations are subject to all of the hazards inherent in the gathering, processing and transporting of natural gas, including:

 

   

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

 

   

damage from construction, farm and utility equipment as well as other subsurface activity (for example, mine subsidence);

 

   

leaks of natural gas, NGLs or oil or losses of natural gas, NGLs or oil as a result of the malfunction of equipment or facilities;

 

   

fires, ruptures and explosions;

 

   

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

 

   

hazards experienced by other operators that may affect our operations by instigating increased regulations and oversight.

 

Any of these risks could adversely affect our ability to conduct operations or result in substantial loss to us as a result of claims for:

 

   

injury or loss of life;

 

   

damage to and destruction of property, natural resources and equipment;

 

   

pollution and other environmental damage;

 

   

regulatory investigations and penalties;

 

   

suspension of our operations; and

 

   

repair and remediation costs.

 

We may elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition and results of operations.

 

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We do not own any of the land on which our pipelines and facilities are being constructed, which could result in disruptions to our operations.

 

We do not own any of the land on which our pipelines and facilities are being constructed, and we are, therefore, subject to the possibility of more onerous terms or increased costs to retain necessary land use if we do not have valid rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to you.

 

The loss of key personnel could adversely affect our ability to operate.

 

We depend on the services of a relatively small group of our general partner’s senior management and technical personnel. We do not maintain, nor do we have any current plan to obtain, any insurance against the loss of any of these individuals. The loss of the services of our general partner’s senior management or technical personnel, including Thomas F. Karam, Chairman and Chief Executive Officer, Robert O. Bond, Chief Operating Officer, and Steven R. Jones, Chief Financial Officer, could have a material adverse effect on our business, financial condition and results of operations.

 

We do not have any officers or employees and rely solely on officers and employees of our general partner and its affiliates.

 

We are managed and operated by the board of directors of our general partner. Affiliates of our general partner conduct businesses and activities of their own in which we have no economic interest. As a result, there could be material competition for the time and effort of the officers and employees who provide services to our general partner and its affiliates. If our general partner and the officers and employees of our general partner and its affiliates do not devote sufficient attention to the management and operation of our business, our financial results may suffer, and our ability to make distributions to our unitholders may be reduced.

 

The amount of cash we will have available for distribution to our unitholders depends primarily on our cash flow and not solely on profitability, which may prevent us from making distributions, even during periods in which we record net income.

 

You should be aware that the amount of cash we will 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 a net loss for financial accounting purposes, and conversely, we might fail to make cash distributions during periods when we record net income for financial accounting purposes.

 

A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of such assets, which may cause our revenues to decline and our operating expenses to increase.

 

We expect our transportation operations will be exempt from regulation by the Federal Energy Regulatory Commission, or FERC, under the Natural Gas Act of 1938, or NGA. Section 1(b) of the NGA, exempts natural gas gathering facilities from regulation by FERC under the NGA. Although the FERC has not made any formal determinations with respect to any of our facilities, which we believe to be gathering facilities, we believe that our natural gas pipelines meet the traditional tests FERC has used to establish whether a pipeline is a gathering pipeline not subject to FERC jurisdiction. The distinction between FERC-regulated transmission services and federally unregulated gathering services, however, has been the subject of substantial litigation, and the FERC determines whether facilities are gathering facilities on a case-by-case basis, so the classification and regulation of our gathering facilities may be subject to change based on future determinations by FERC, the courts, or

 

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Congress. If the FERC were to consider the status of an individual facility and determine that the facility or services provided by it are not exempt from FERC regulation under the NGA, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by the FERC under the NGA or the Natural Gas Policy Act of 1978, or NGPA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, adversely affect our results of operations and cash flows. If any of our facilities were found to have provided services or otherwise operated in violation of the NGA or NGPA, this could result in the imposition of civil penalties, as well as a requirement to disgorge charges for such services in excess of the rate established by the FERC.

 

Other FERC regulations may indirectly impact our business and the market for products derived from our business. FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on open access transportation, market manipulation, ratemaking, gas quality, capacity release and market center promotion, may indirectly affect the intrastate natural gas market. Should we fail to comply with any applicable FERC administered statutes, rules, regulations and orders, we could be subject to substantial penalties and fines, which could have a material adverse effect on our results of operations and cash flows. FERC has civil penalty authority under the NGA and NGPA to impose penalties for current violations of up to $1,000,000 per day per violation for violations occurring after August 8, 2005.

 

State regulation of natural gas gathering facilities and intrastate transportation pipelines generally includes various safety, environmental and, in some circumstances, nondiscriminatory take and common purchaser requirements, as well as complaint-based rate regulation. Other state regulations may not directly apply to our business, but may nonetheless affect the availability of natural gas.

 

For more information regarding federal and state regulation of our operations, please read “Business—Regulation of Operations.”

 

Our PennTex NGL Pipeline will be regulated by the FERC, which may adversely affect our revenue and results of operations.

 

We expect that our PennTex NGL Pipeline will be regulated by the FERC under the Interstate Commerce Act, or the ICA, and the Energy Policy Act of 1992, or EPAct 1992, and the rules and regulations promulgated under those laws. FERC regulates the rates and terms and conditions of service, including access rights, for interstate shipments on common carrier petroleum pipelines. As result of FERC regulation, we may not be able to choose our customers or recover some of our costs of service allocable to such interstate transportation service, which may adversely affect our revenue and result of operations.

 

Increased regulation of hydraulic fracturing could result in reductions or delays in natural gas, NGLs and oil production by our customers, which could reduce the throughput on our assets, which could adversely impact our revenues.

 

Memorial Resource regularly uses hydraulic fracturing as part of its operations in northern Louisiana. Hydraulic fracturing is a well stimulation process that utilizes large volumes of water and sand (or other proppant) combined with fracturing chemical additives that are pumped at high pressure to crack open previously impenetrable rock to release hydrocarbons. Hydraulic fracturing is typically regulated by state oil and gas commissions and similar agencies. Some states, including Louisiana, have adopted, and other states are considering adopting, regulations that could impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations. In addition, various studies are currently underway by the U.S. Environmental Protection Agency, or the EPA, and other federal agencies concerning the potential environmental impacts of hydraulic fracturing activities. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation. We cannot predict whether any such legislation will ever be enacted and if so, what its provisions would be. If additional levels of

 

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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 liquids and natural gas that move through our assets, which in turn could materially adversely affect our revenues and results of operations.

 

We and our customers may incur significant liability under, or costs and expenditures to comply with, environmental and worker health and safety regulations, which are complex and subject to frequent change.

 

Upon the commencement of our operations, we will be subject to various stringent federal, state, provincial and local laws and regulations relating to the discharge of materials into, and protection of, the environment. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly response actions. These laws and regulations may impose numerous obligations that are applicable to our and our customers’ operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our or our customers’ operations, the imposition of specific standards addressing worker protection and the imposition of substantial liabilities and remedial obligations for pollution or contamination resulting from our and our customers’ operations. Failure to comply with these laws, regulations and permits may result in joint and several, strict liability and 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. Private parties, including the owners of the properties through which our pipelines pass and facilities where wastes resulting from our operations 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. We may not be able to recover all or any of these costs from insurance. In addition, we may experience a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt our operations and limit our growth and revenues, which in turn could affect our profitability. There is no assurance that changes in or additions to public policy regarding the protection of the environment will not have a significant impact on our operations and profitability.

 

Our operations also pose risks of environmental liability due to leakage, migration, releases or spills from our operations to surface or subsurface soils, surface water or groundwater. Certain environmental laws impose strict as well as joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons, or solid wastes have been stored or released. We may be required to remediate contaminated properties operated by prior owners or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the crude oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. Please read “Business—Regulation of Environmental and Occupational Safety and Health Matters” for more information.

 

Climate change laws and regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the natural gas that we process and transport while potential physical effects of climate change could disrupt our customers’ production and cause us to incur significant costs in preparing for or responding to those effects.

 

In response to findings that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment, the EPA has adopted regulations under existing provisions of the federal Clean Air Act that, among other things, establish Prevention of Significant Deterioration, or PSD, construction and Title V operating permit reviews for certain large stationary sources that

 

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are potential major sources of GHG emissions. Facilities required to obtain PSD permits for their GHG emissions also will be required to meet “best available control technology” standards that will be established by the states or, in some cases, by the EPA on a case by-case basis. These EPA rulemakings could adversely affect our operations and restrict or delay our ability to obtain air permits for new or modified sources. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified onshore and offshore oil and gas production sources in the U.S. on an annual basis. We expect to monitor GHG emissions from our operations in accordance with the GHG emissions reporting rule. While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. If Congress undertakes comprehensive tax reform in the coming year, it is possible that such reform may include a carbon tax, which could impose additional direct costs on operations and reduce demand for refined products. Furthermore, the Obama administration announced its Climate Action Plan in 2013, which, among other things, directs federal agencies to develop a strategy for the reduction of methane emissions, including emissions from the oil and gas industry. As part of the Climate Action Plan, the Obama Administration also announced that it intends to adopt additional regulations to reduce emissions of GHGs and to encourage greater use of low carbon technologies in the coming years. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. Substantial limitations on GHG emissions could also adversely affect demand for the natural gas that we process and transport. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our exploration and production operations.

 

We may incur significant costs and liabilities as a result of pipeline integrity management program testing and any related pipeline repair or preventative or remedial measures.

 

The United States Department of Transportation, or DOT, has adopted regulations requiring pipeline operators to develop integrity management programs for transportation pipelines located where a leak or rupture could do the most harm in “high consequence areas.” The regulations require operators to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

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

 

   

improve data collection, integration and analysis;

 

   

repair and remediate the pipeline as necessary; and

 

   

implement preventive and mitigating actions.

 

The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, or the 2011 Pipeline Safety Act, among other things, increases the maximum civil penalty for pipeline safety violations and directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas. Effective October 25, 2013, the Pipelines and Hazardous Materials Safety Administration, or PHMSA, adopted new rules increasing the maximum administrative civil penalties for violations of the pipeline safety laws and regulations that occur after January 3, 2012 to $200,000 per violation per day, with a maximum

 

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of $2,000,000 for a related series of violations. Should our operations fail to comply with DOT or comparable state regulations, we could be subject to substantial penalties and fines.

 

PHMSA has also published advanced notices of proposed rulemaking to solicit comments on the need for changes to its safety regulations, including whether to extend the integrity management requirements to additional types of facilities, such as gathering pipelines and related facilities. Additionally, PHMSA recently issued an advisory bulletin providing guidance on the verification of records related to pipeline maximum allowable operating pressure and maximum operating pressure, which could result in additional requirements for the pressure testing of pipelines or the reduction of maximum operating pressures. The adoption of these and other laws or regulations that apply more comprehensive or stringent safety standards could require us to install new or modified safety controls, pursue new capital projects, or conduct maintenance programs on an accelerated basis, all of which could require us to incur increased operational costs that could be significant. While we cannot predict the outcome of legislative or regulatory initiatives, such legislative and regulatory changes could have a material effect on our cash flow. Please read “Business—Regulation of Operations—Pipeline Safety Regulation” for more information.

 

Terrorist attacks or cyber-attacks could have a material adverse effect on our business, financial condition or results of operations.

 

Terrorist attacks or cyber-attacks may significantly affect the energy industry, including our operations and those of our customers, as well as general economic conditions, consumer confidence and spending and market liquidity. Strategic targets, such as energy-related assets, may be at greater risk of future attacks than other targets in the United States. We do not maintain specialized insurance for possible liability resulting from such attacks on our assets that may shut down all or part of our business. Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.

 

Risks Inherent in an Investment in Us

 

Our parent, our general partner and their respective affiliates have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.

 

Following this offering, our parent will own and control our general partner and will appoint all of the officers and directors of our general partner. All of our initial officers and certain of our initial directors will also be officers or directors of our parent. Although our general partner has a 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, our parent. Further, our directors and officers who are also directors and officers of our parent have a fiduciary duty to manage our parent in a manner that is beneficial to our parent. Conflicts of interest will arise between our parent and our general partner, on the one hand, and us and our common unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of our parent over our interests and the interests of our unitholders. These conflicts include the following situations, among others:

 

   

actions taken by our general partner may affect the amount of cash available to pay distributions to unitholders or accelerate the right to convert subordinated units;

 

   

the directors and officers of our parent have a fiduciary duty to make decisions in the best interests of the owners of our parent, which may be contrary to our interests;

 

   

our general partner is allowed to take into account the interests of parties other than us, such as our parent, in exercising certain rights under our partnership agreement;

 

   

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

 

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our general partner may cause us to borrow funds in order to permit the payment of cash distributions,

 

   

our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

   

our general partner determines the amount and timing of any capital expenditure 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. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Operating Surplus and Capital Surplus—Capital Expenditures” for a discussion on when a capital expenditure constitutes a maintenance capital expenditure or an expansion capital expenditure. This determination can affect the amount of cash from operating surplus that is distributed to our unitholders which, in turn, may affect the ability of the subordinated units owned by our parent and MRD WHR LA to convert. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions from Capital Surplus”;

 

   

our partnership agreement limits the liability of, and replaces the 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;

 

   

common unitholders have no right to enforce obligations of our general partner and its affiliates under agreements with us;

 

   

contracts between us, on the one hand, and our general partner and its affiliates, on the other, are not and will not be the result of arm’s-length negotiations;

 

   

our partnership agreement permits us to distribute 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, which may be used to fund distributions on our subordinated units or the incentive distribution rights;

 

   

our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

 

   

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 its affiliates 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 common units if it and its affiliates own more than 80% of the common units;

 

   

our general partner controls the enforcement of obligations that it and its affiliates owe to us;

 

   

we may not choose to retain separate counsel for ourselves or for the holders of common units;

 

   

our general partner’s affiliates may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us; and

 

   

our parent, as the holder of a majority of our incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of incentive distribution levels without the approval of our unitholders, which may result in lower distributions to our common unitholders in certain situations.

 

Please read “Conflicts of Interest and Fiduciary Duties.”

 

Ongoing cost reimbursements due to our general partner and its affiliates for services provided, which will be determined by our general partner, will be substantial and will reduce the amount of cash available for distribution to our unitholders.

 

Prior to making distributions on our common units, we will reimburse our general partner and its affiliates for all direct and indirect expenses they incur and payments they make on our behalf. These expenses will include all costs incurred by our general partner and its affiliates in managing and operating us, including costs for rendering administrative staff and support services to us and reimbursements paid by our general partner to

 

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our parent for customary management and general administrative services. These reimbursable expenses include our general and administrative expenses, which we estimate will be $3.8 million for the twelve months ending March 31, 2016. These general and administrative expenses include expenses of approximately $1.75 million annually as a result of 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 NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer liability insurance expenses and director compensation.

 

There is no limit on the amount of expenses for which our general partner and its affiliates may be reimbursed under the omnibus agreement. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us in good faith. In addition, under Delaware partnership law, our general partner has unlimited liability for our obligations, such as our debts and environmental liabilities, except for our contractual obligations that are expressly made without recourse to our general partner. To the extent our general partner incurs obligations on our behalf, we are obligated to reimburse or indemnify it. If we are unable or unwilling to reimburse or indemnify our general partner, our general partner may take actions to cause us to make payments of these obligations and liabilities. Any such payments could reduce the amount of cash available for distribution to our unitholders.

 

We expect to distribute a significant portion of our cash available for distribution to our partners, which could limit our ability to grow and make acquisitions.

 

We plan to distribute to our partners most of our cash available for distribution, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their 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 on our ability to issue additional units, including units ranking senior to the common units. In addition, the incurrence of commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce our cash available for distribution to our unitholders.

 

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards.

 

Our partnership agreement contains provisions that eliminate and replace 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 it has no 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 business opportunities among us and its other affiliates;

 

   

whether to exercise its limited call right;

 

   

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

 

   

whether to exercise its registration rights;

 

   

whether to elect to reset target distribution levels; and

 

   

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

 

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By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Duties.”

 

Our partnership agreement will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our unitholders, which would limit our unitholders’ ability to choose the judicial forum for disputes with us or our general partner’s directors, officers or other employees.

 

Our partnership agreement will provide that, with certain limited exceptions, the Court of Chancery of the State of Delaware will be the exclusive forum for any claims, suits, actions or proceedings (1) arising out of or relating in any way to our partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of our partnership agreement or the duties, obligations or liabilities among limited partners or of limited partners to us, or the rights or powers of, or restrictions on, the limited partners or us), (2) brought in a derivative manner on our behalf, (3) asserting a claim of breach of a duty owed by any director, officer or other employee of us or our general partner, or owed by our general partner, to us or the limited partners, (4) asserting a claim arising pursuant to any provision of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, or (5) asserting a claim against us governed by the internal affairs doctrine. By purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware (or such other court) in connection with any such claims, suits, actions or proceedings. This provision may have the effect of discouraging lawsuits against us and our general partner’s directors and officers. For additional information about the exclusive forum provision of our partnership agreement, please read “Our Partnership Agreement—Exclusive Forum.”

 

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which our common units will trade.

 

Compared to the holders of common stock in a corporation, unitholders have limited voting rights and, therefore, limited ability to influence management’s decisions regarding our business. 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, including the independent directors, is chosen entirely by our parent, as a result of it owning our general partner, and not by our unitholders. Please read “Management—Management of PennTex Midstream Partners, LP” and “Certain Relationships and Related Transactions.” Unlike publicly traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of stockholders of corporations. 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 general partner intends to limit its liability regarding our obligations.

 

Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. 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 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 available for distribution to our unitholders.

 

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As the holder of a majority of our incentive distribution rights, our general partner 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 our general partner’s board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.

 

Our general partner has the right, as the holder of a majority of our incentive distribution rights, 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 (50%) for the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election by our general partner, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

 

If our general partner elects to reset the target distribution levels, the holders of our incentive distribution rights will be entitled to receive a number of common units equal to the number of common units that would have entitled such holders to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to such holders in respect of their incentive distribution rights in the quarter prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. This risk could be elevated if our parent transfers its incentive distribution rights to a third party. A reset election may also cause our common unitholders to experience a reduction in the amount of cash distributions that our common unitholders would have otherwise received had we not issued new common units to the holders of our incentive distribution rights in connection with resetting the target distribution levels. Any holder of our incentive distribution rights (including our general partner) may transfer all or a portion of its incentive distribution rights in the future, and the holder or holders of a majority of our incentive distribution rights will be entitled to exercise the right to reset the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

 

The incentive distribution rights held by our general partner and MRD WHR LA may be transferred to a third party without unitholder consent.

 

Any holder of our incentive distribution rights (including our general partner) may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner (and its owner, our parent) 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.

 

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

 

If interest rates rise, the interest rates on our revolving credit facility, 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 the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related 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 and our ability to issue additional equity, to incur debt to expand or for other purposes, or to make cash distributions at our intended levels.

 

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

 

Unitholders’ voting rights are restricted by the partnership agreement provision providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates (including our parent), 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.

 

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 our unitholders. Furthermore, our partnership agreement does not restrict the ability of the owners of our general partner from transferring all or a portion of their respective ownership interest in our general partner to a third party. The new owners of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices and thereby exert significant control over the decisions made by the board of directors and officers. This effectively permits a “change of control” without the vote or consent of the unitholders.

 

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

 

The assumed initial public offering price of $         per unit exceeds our pro forma net tangible book value of $         per unit. Based on the assumed initial public offering price of $         per unit (the midpoint of the price range set forth on the cover page of this prospectus), you will incur immediate and substantial dilution of $         per common unit after giving effect to the offering of common units and the application of the related net proceeds. Dilution results primarily because the assets being 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, including units that are senior to the common units, without your approval, which would dilute your existing ownership interests.

 

Our partnership agreement does not limit the number of additional limited partner interests that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

each unitholder’s proportionate ownership interest in us will decrease;

 

   

the amount of cash available for distribution 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.

 

There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.

 

In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of units of senior rank may, among other adverse effects: (i) reduce or eliminate the amount of cash available for distribution to our common unitholders; (ii) diminish the relative voting strength of the total common units outstanding as a class or (iii) subordinate the claims of the common unitholders to our assets in the event of our liquidation.

 

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Our parent and MRD WHR LA may sell common units in the public markets or otherwise, which sales could have an adverse impact on the trading price of the common units.

 

Upon the completion of this offering, our parent will own              common units and              subordinated units and MRD WHR LA will own              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. The sale of these units in public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop. Please read “Units Eligible for Future Sale.”

 

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

 

If at any time our general partner and its affiliates (including our parent) own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (i) the highest cash price paid by either our general partner or any of its affiliates for any common units purchased within the 90 days preceding the date on which our general partner first mails notice of its election to purchase those common units and (ii) the current market price calculated in accordance with our partnership agreement as of the date three business days before the date the notice is mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. Upon consummation of this offering, and assuming the underwriters do not exercise their option to purchase additional common units, our general partner and its affiliates will own an aggregate of     % of our common units (or     % if the underwriters exercise in full their option to purchase additional common units) and     % of our subordinated units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), our general partner and its affiliates will own     % of our common units. For additional information about the limited call right, please read “Our 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 will initially own assets and conduct business in Louisiana. You could be liable for any and all of our obligations as if you were a general partner if:

 

   

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

 

   

your right to act with other unitholders to remove or replace the 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 “Our Partnership Agreement—Limited Liability.”

 

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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 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 the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the substituted limited partner at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

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, which could cause you to lose all or part of your investment.

 

Prior to this offering, there has been no public market for the common units. After this offering, there will be only              publicly traded common units (assuming no exercise of the underwriters’ option to purchase additional common units). In addition, our parent, an affiliate of our general partner, will own              common units and              subordinated units, representing an aggregate approximately     % limited partner interest in us, and MRD WHR LA will own              common units and              subordinated units, representing an aggregate approximately     % 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, a 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;

 

   

events affecting Memorial Resource;

 

   

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 the consummation of this offering or changes in financial estimates by analysts;

 

   

future sales of our common units; and

 

   

other factors described in these “Risk Factors.”

 

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If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

 

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our units.

 

For as long as we are an “emerging growth company,” we will not be required to comply with certain disclosure requirements that apply to other public companies.

 

We are classified as an “emerging growth company” under the JOBS Act. 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, (1) 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, (2) comply with any new requirements adopted by 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, (3) provide certain disclosure regarding executive compensation required of larger public companies or (4) hold nonbinding advisory votes on executive compensation. We will remain an “emerging growth company” for up to five full fiscal years, although we will lose that status sooner if we have more than $1.0 billion of revenues in a fiscal year, become a large accelerated filer or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

To the extent that we rely on any of the exemptions available to “emerging growth companies”, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not “emerging growth companies.” If some investors find our common units to be less attractive as a result, there may be a less active trading market for our common units and our trading price may be more volatile.

 

The New York Stock Exchange does not require a publicly traded partnership like us to comply with certain of its corporate governance requirements.

 

We intend to apply to list our common units on the NYSE. Because we will be a publicly traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of PennTex Midstream Partners, LP.”

 

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 that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a publicly traded partnership.

 

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Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of 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 SEC reporting requirements.

 

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

 

We estimate that we will incur approximately $1.75 million of incremental costs per year associated with being a publicly traded partnership; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.

 

Tax Risks

 

In addition to reading the following risk factors, please read “Material U.S. 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 the IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then the amount of cash available for distribution to our unitholders would be substantially reduced.

 

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this.

 

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, the amount of cash available for distribution would be substantially reduced. In addition, 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 the cash available for distribution to you. Therefore, if we were treated as a corporation for federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

 

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

 

The 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 Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships, including the elimination of the qualifying income exception upon which we rely for our treatment as a partnership for federal income tax purposes. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “Material U.S. Federal Income Tax Consequences—Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.

 

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

 

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

 

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

 

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. 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 the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders because the costs will reduce the amount of cash available for distribution.

 

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

 

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units

 

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may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material U.S. 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 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 you. Latham & Watkins LLP 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 your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. 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 federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first business day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge 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 federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first business day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department has issued proposed regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge this method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Latham & Watkins LLP has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

 

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

 

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Latham & Watkins LLP 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 federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. 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 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. Immediately after this initial public offering our parent and MRD WHR LA will, between them, own             % of the total interest in our capital and profits. Therefore, a transfer by our parent and MRD WHR LA of all or a portion of their interests in us could result in a termination of us as a partnership for federal income tax purposes. 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

 

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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 federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material U.S. 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, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

 

In addition to federal income taxes, our unitholders 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 control 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 initially expect to conduct business in Louisiana, which imposes a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units. Please consult your tax advisor.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the information in this prospectus may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

 

   

delays in completing the construction of our initial assets;

 

   

Memorial Resource’s inability to meet its drilling and development plan;

 

   

our ability to successfully implement our business strategy;

 

   

realized natural gas, NGLs and oil prices;

 

   

competition and government regulations;

 

   

actions taken by third-party producers, operators, processors and transporters;

 

   

pending legal or environmental matters;

 

   

costs of conducting our midstream operations;

 

   

general economic conditions;

 

   

credit markets;

 

   

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

 

   

uncertainty regarding our future operating results; and

 

   

plans, objectives, expectations and intentions contained in this prospectus that are not historical.

 

We caution you that these forward-looking statements are subject to all of the risks and uncertainties incident to our midstream business, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, commodity price volatility, inflation, environmental risks, drilling and completion and other operating risks, regulatory changes, the uncertainty inherent in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks described under “Risk Factors” in this prospectus.

 

Should one or more of the risks or uncertainties described in this prospectus occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

 

All forward-looking statements, expressed or implied, included in this prospectus are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

 

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this prospectus.

 

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USE OF PROCEEDS

 

We intend to use the net proceeds of approximately $         million from this offering (based on an assumed initial offering price of $         per common unit, the midpoint of the price range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts, structuring fee and offering expenses payable by us, as follows:

 

   

$         million to fund a portion of the quarterly distributions that we expect to make to our unitholders with respect to the fourth quarter of 2014 and the first quarter of 2015;

 

   

$         million to fully fund capital expenditures that we expect to incur from November 2014 through the completion of our initial assets;

 

   

$         million to make a cash distribution to PennTex JV in satisfaction of PennTex JV’s right to a reimbursement of capital expenditures it incurred with respect to the assets to be contributed to us; and

 

   

for general partnership purposes.

 

Our parent has granted the underwriters a 30-day option to purchase up to an aggregate of              additional common units to the extent the underwriters sell more than              common units in this offering. We will not receive any proceeds from the sale of common units by our parent pursuant to any exercise of the underwriters’ option to purchase additional common units. If the underwriters exercise in full their option to purchase additional common units, the ownership interest of the public unitholders will increase to a     % limited partner interest in us.

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discounts and offering expenses payable by us, to increase or decrease, respectively, by approximately $         million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a $1.00 increase in the assumed public offering price to $         per common unit, would increase net proceeds to us from this offering by approximately $         million. Similarly, each decrease of 1.0 million common units offered by us, together with a $         decrease in the assumed initial offering price to $         per common unit, would decrease the net proceeds to us from this offering by approximately $         million. Any increase or decrease in the net proceeds would change the amount of our reimbursement of PennTex JV for its capital expenditures.

 

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CAPITALIZATION

 

The following table shows our cash and cash equivalents and capitalization as of June 30, 2014:

 

   

on an historical basis for PennTex JV, our accounting predecessor; and

 

   

on a pro forma basis to reflect the completion of our formation transactions, the issuance and sale of our common units in this offering and the application of the net proceeds from this offering as described under “Use of Proceeds.”

 

This table is derived from, and should be read together with, the audited historical financial statements of PennTex JV and our unaudited pro forma balance sheet and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Summary—Organizational Structure After the Formation Transactions,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This table assumes that the underwriters’ option to purchase additional common units is not exercised.

 

     As of June 30, 2014  
     Predecessor
Historical
     PennTex
Midstream
Partners, LP
Pro Forma
 
            (unaudited)  
     (in thousands)  

Cash and Cash Equivalents

   $ 18       $                
  

 

 

    

 

 

 

Long-term Debt:

     

Revolving credit facility(1)

               

Members’ Equity:

     

Predecessor members’ equity

     33,435           

Partners’ Equity:

     

Common units—public

          

Common units—MRD WHR LA

          

Common units—PennTex Development

          

Subordinated units—MRD WHR LA

          

Subordinated units—PennTex Development

          
  

 

 

    

 

 

 

Total members’/partners’ equity

     33,435      
  

 

 

    

 

 

 

Total capitalization

   $ 33,435       $                
  

 

 

    

 

 

 

 

(1)   In connection with the completion of this offering, we expect to enter into a revolving credit facility, which will remain undrawn at the closing of this offering. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Revolving Credit Facility.”

 

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DILUTION

 

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Assuming an initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover page of this prospectus), as of June 30, 2014, after giving effect to the offering of common units and the formation transactions described under “Summary—Our Formation Transactions,” our pro forma net tangible book value would have been approximately $         million, or $         per common unit. Purchasers of our 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

      $                

Pro forma net tangible book value per common unit before the offering(1)

   $                   

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

     
  

 

 

    

Less: Pro forma net tangible book value per common unit after the offering(2)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering(3)(4)

      $                
     

 

 

 

 

(1)   Determined by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units (             common units and              subordinated units) to be issued to PennTex JV for its contribution of assets and liabilities to us.
(2)   Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of units (             common units and              subordinated units) to be outstanding after the offering.
(3)   A $1.00 increase or decrease in the assumed initial public offering price of $         per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $         million, or approximately $         per common unit, and dilution per common unit to investors in this offering by approximately $         per common unit, after deducting the estimated underwriting discounts and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a $1.00 increase in the assumed initial offering price to $         per common unit, would result in a pro forma net tangible book value of approximately $         million, or $         per common unit, and dilution per common unit to investors in this offering would be $         per common unit. Similarly, each decrease of 1.0 million common units offered by us, together with a $1.00 decrease in the assumed initial public offering price to $         per common unit, would result in an pro forma net tangible book value of approximately $         million, or $         per common unit, and dilution per common unit to investors in this offering would be $         per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price, the number of common units offered by us and other terms of this offering determined at pricing.
(4)   Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any such exercise of the option.

 

The following table sets forth the number of units that we will issue and the total consideration contributed to us by PennTex JV and by the purchasers of our common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units     Total
Consideration
 
      Number    Percent     Amount      Percent  

PennTex JV(1)(2)(3)

               $                          

Purchasers in the offering

          
  

 

  

 

 

   

 

 

    

 

 

 

Total

        100   $           100
  

 

  

 

 

   

 

 

    

 

 

 

 

(1)   In connection with the transactions contemplated by this prospectus, we will issue to PennTex JV              common units and              subordinated units and PennTex JV expects to distribute              common units and              subordinated units to PennTex Development and              common units and              subordinated units to MRD WHR LA.
(2)   The contributed assets will be recorded at historical cost. The pro forma book value of the consideration provided by PennTex JV as of June 30, 2014 would have been approximately $         million.
(3)   Assumes the underwriters’ option to purchase additional common units is not exercised.

 

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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

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

 

For additional information regarding our historical results of operations, you should refer to the audited financial statements of PennTex JV, our accounting predecessor, as of June 30, 2014 and for the period from March 17, 2014 to June 30, 2014 and the related notes to those financial statements. For additional information regarding our pro forma financial information, you should refer to our pro forma balance sheet as of June 30, 2014 and the related notes thereto.

 

General

 

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 legal 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 (1) cash (including cash from changes in deferred revenue) on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (2) cash on hand resulting from (i) working capital borrowings made after the end of the quarter and (ii) certain cash distributions received after the end of the quarter from any equity interest in any person (other than a subsidiary of us). 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

 

Although our partnership agreement requires that we distribute all of our available cash quarterly, 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 legal obligation to do so. 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:

 

   

Our cash distribution policy will be subject to restrictions on cash distributions under our revolving credit facility and other debt agreements we may enter into in the future. Our revolving credit facility will contain covenants requiring us and our subsidiaries to maintain certain financial ratios and will contain certain restrictions on incurring indebtedness, making distributions, making investments and engaging in certain other partnership actions, including making cash distributions while a default or event of default has occurred and is continuing, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital

 

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Resources—Revolving Credit Facility” and “Risk Factors—Risks Related to Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.”

 

   

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.

 

   

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 “Our 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 owned by our general partner and its affiliates. At the closing of this offering, PennTex Development will own our general partner and will own an aggregate of approximately     % of our outstanding common units and     % of our subordinated units (assuming no exercise of the underwriters’ option to purchase additional common units).

 

   

Under Section 17-607 of 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 operating and maintenance or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. 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 our 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 on the common units 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 on the common units 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.”

 

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If we make distributions out of capital surplus, as opposed to operating surplus, any such distributions would constitute a return of capital and would result in a reduction in the minimum quarterly distribution and the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions From Capital Surplus.” We do not anticipate that we will make any distributions from capital surplus.

 

Our Ability to Grow may be Dependent on Our Ability to Access External Financing Sources

 

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 our cash reserves and external financing sources, including borrowings under our current and future credit facilities and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. We do not have any commitment from PennTex Development or NGP to provide any capital to us following this offering. 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 will 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. We anticipate that any future credit facilities and other debt agreements we may enter into in the future would restrict our ability to incur additional debt. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.” 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 current and future credit facilities 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 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 such distributions are made. We will adjust the amount of our first distribution for the period from the closing of this offering through                     , 2014, based on the actual length of the period.

 

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The amount of available cash needed to pay the minimum quarterly distribution on all of our common units and subordinated units to be outstanding immediately after this offering for one quarter and on an annualized basis (assuming no exercise of the underwriters’ option to purchase additional common units) is summarized in the table below:

 

          Minimum
Quarterly  Distributions
 
     Number of Units    One Quarter      Annualized  

Common units held by the public

      $                    $                

Common units held by PennTex Development

        

Common units held by MRD WHR LA

        

Subordinated units held by PennTex Development

        

Subordinated units held by MRD WHR LA

        
  

 

  

 

 

    

 

 

 

Total

      $                    $                
  

 

  

 

 

    

 

 

 

 

Our general partner and MRD WHR LA will initially hold 92.5% and 7.5% of our incentive distribution rights, respectively. The incentive distribution rights entitle the holders to increasing percentages, up to a maximum of 50%, 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 distributions on our common units at our minimum quarterly distribution rate or at any other rate 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 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, our 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

 

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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 is also subject to adjustment if the holders of a majority of our incentive distribution rights (initially our general partner will own 92.5% of our incentive distribution rights) elect to reset the target distribution levels related to the 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—General Partner’s Right to Reset Incentive Distribution Levels.”

 

In the section that follows, 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 March 31, 2016. In that section, we present a table captioned “PennTex Midstream Partners, LP Estimated Cash Available for Distribution,” in which we provide our estimated forecast of our ability to generate sufficient cash available for distribution to support the payment of the minimum quarterly distribution on all units for the twelve months ending March 31, 2016. We have not included a presentation of cash available for distribution for the year ended December 31, 2013 or for the twelve months ended June 30, 2014, as we have had a limited operating history and have not generated any revenues or operating cash flows on a historical basis and do not intend to do so until the contribution to us of our initial assets at the closing of this offering.

 

Estimated Cash Available for Distribution through March 31, 2016

 

We forecast that our estimated cash available for distribution for the twelve months ending March 31, 2016 will be approximately $36.4 million. This amount would exceed by approximately $         million the amount of available cash required to support the total annualized minimum quarterly distribution of $         million on all of our common units and subordinated units for the twelve months ending March 31, 2016. We expect our cash generated from operations for the quarters ending December 31, 2014 and March 31, 2015 to be $         million and $         million, respectively, less than the amount needed to pay the full minimum quarterly distribution on all of our common units and subordinated units. Accordingly, we intend to use cash on hand at the closing of this offering to fund distributions to our unitholders with respect to the fourth quarter of 2014 and the first quarter of 2015.

 

Our management has prepared the forecast of estimated cash available for distribution and related assumptions and considerations set forth below to substantiate our belief that we will have sufficient available cash to allow us to pay the total annualized minimum quarterly distribution on all of our outstanding common units and subordinated units for the twelve months ending March 31, 2016. This forecast is a forward-looking statement and should be read together with the unaudited pro forma balance sheet and the accompanying 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 guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, is substantially consistent with those guidelines and 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 have sufficient available cash to pay the total annualized minimum quarterly distribution on all of our outstanding common units and subordinated units for the twelve months ending March 31, 2016. However, this information is not factual 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 Ernst & Young LLP nor any other independent registered public accounting firms, have examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, neither Ernst & Young LLP nor any

 

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other independent registered public accounting firms, express an opinion or any other form of assurance with respect thereto. The reports of Ernst & Young LLP included in this prospectus do not extend to the prospective financial information and should not be read to do so.

 

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, if realized, could cause our actual results of operations to vary significantly from those that would enable us to have sufficient available cash to pay the total annualized minimum quarterly distribution on all of our outstanding common units and subordinated units for the twelve months ending March 31, 2016. Please read below under “—Assumptions and Considerations” for further information as to the assumptions we have made in preparing the financial forecast.

 

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 to reflect events or circumstances after the date of this prospectus. Therefore, the statement that we believe that we will have sufficient available cash to allow us to pay the total annualized minimum quarterly distribution on all of our outstanding common units and subordinated units for the twelve months ending March 31, 2016, 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.

 

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The table below presents our projection of operating results and estimated available cash for each quarter during the year ending December 31, 2015 and the first quarter of 2016.

 

PennTex Midstream Partners, LP

Estimated Cash Available for Distribution

 
    Quarter Ending     Twelve Months
Ending
 
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March  31,
2016
    March  31,
2016
 
    (in millions, except per unit data)  

Revenues:

           

Minimum volume commitment and firm capacity reservation revenues(1)

  $ 3.2      $ 6.9      $ 6.9      $ 11.5      $ 11.4      $ 36.8   

Revenues in excess of the minimum volume commitment and firm capacity revenues(1)

    1.4        4.2        5.3        0.5        0.6        10.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues(2)

  $ 4.6      $ 11.0      $ 12.2      $ 12.1      $ 12.0      $ 47.3   

Operating Costs and Expenses:

           

Costs of sales and transportation expense

                                         

Operations and maintenance expense

    0.5        0.9        1.1        1.2        1.2        4.4   

Depreciation and amortization expense

    0.7        1.5        1.5        1.5        1.5        6.0   

General and administrative expense(3)

    0.9        0.9        0.9        0.9        0.9        3.8   

Taxes, other than income taxes(4)

    0.3        0.3        0.3        0.3        0.3        1.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

  $ 2.4      $ 3.6      $ 3.8      $ 3.9      $ 3.9      $ 15.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

  $ 2.2      $ 7.4      $ 8.4      $ 8.1      $ 8.1      $ 32.0   

Other (Expense) Income:

           

Interest (expense) income, net(5)

    (0.2     (0.2     (0.2     (0.2     (0.2     (0.7

Income tax (expense)

                                         

Total other (expense) income

    (0.2     (0.2     (0.2     (0.2     (0.2     (0.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 2.0      $ 7.2      $ 8.2      $ 7.9      $ 7.9     $ 31.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

           

Depreciation and amortization expense

    0.7        1.5        1.5        1.5        1.5        6.0   

Deferred revenue(6)

                                         

Interest (expense) income, net(5)

    (0.2     (0.2     (0.2     (0.2     (0.2     (0.7

Income tax expense

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(7)

  $ 2.9      $ 8.9      $ 9.9      $ 9.6      $ 9.6      $ 38.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less:

           

Cash interest expense, net of interest income

    0.2        0.2        0.2        0.2        0.2        0.7   

Cash tax expense

                                         

Expansion capital expenditures(8)

    36.0        1.7                             1.7   

Maintenance capital expenditures(9)

    0.1        0.2        0.2        0.2        0.2        0.8   

Add:

           

Available cash to fund expansion capital expenditures

    36.0        1.7                             1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributable Cash Flow

  $ 2.6      $ 8.5      $ 9.5      $ 9.2      $ 9.2      $ 36.4   

Add:

           

Available cash to fund distributions(10)

                                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Available for Distribution

  $        $ 8.5      $ 9.5      $ 9.2      $ 9.2      $ 36.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Implied cash distribution at the minimum quarterly distribution rate:

  $        $        $        $        $        $     

Annualized minimum quarterly distribution per unit

           

Distributions to public common unitholders

           

Distributions to PennTex Development and MRD WHR LA:(11)

           

PennTex Development—common units

           

PennTex Development—subordinated units

           

MRD WHR LA—common units

           

MRD WHR LA—subordinated units

           

Distributions to LTIP participants(12)

           

Distributions to general partner(13)

           

Total distribution to our unitholders and general partner

           

Excess of cash available for distribution over total annualized minimum quarterly distribution

           

 

(1)   Prior to the expected completion date of the Mt. Olive Plant in October 2015, any volumes delivered by Memorial Resource in excess of the minimum volume commitment will be considered interruptible volumes and be charged an interruptible-service fixed fee that is higher than the fee charged for firm reserved gas. As a result, we expect revenues generated from our processing agreement to be marginally reduced after October 2015 when the minimum volume commitment is expected to increase. Please read “—Assumptions and Considerations—Volumes and Revenues.”

 

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(2)   Total revenues assumes that the 12” pipeline comprising part of the PennTex Gathering Pipeline will be in service on December 1, 2014 and that the Lincoln Parish Plant, the remaining portion of the PennTex Gathering Pipeline, the PennTex Gas Pipeline and the PennTex NGL Pipeline will be in service on March 1, 2015. Please read “—Assumptions and Considerations—Volumes and Revenues.”
(3)   Includes $2.0 million of reimbursable expenses to be paid to our parent pursuant to the omnibus agreement and $1.75 million of additional expenditures we expect to incur as a result of being a publicly traded partnership.
(4)   Taxes, other than income taxes includes property taxes.
(5)   Interest expense includes assumed commitment fees on, and the amortization of assumed origination fees incurred in connection with, our revolving credit facility.
(6)   Under our processing agreement with Memorial Resource, we will process on a firm basis all volumes delivered up to the minimum volume commitment at a firm-commitment fixed fee, while all volumes delivered above the minimum volume commitment will be processed on an interruptible basis and be charged an interruptible-service fixed fee. Further, Memorial Resource will pay us a deficiency payment based on the firm-commitment fixed fee with respect to a particular quarterly period if (i) the cumulative volumes processed through the end of such period plus any prior deficiency payments are less than (ii) the cumulative minimum volume commitment through the end of such period. Deficiency payments are recorded as deferred revenue since Memorial Resource may utilize these deficiency payments as a credit for fees owed to us only to the extent it has delivered the total minimum volume commitment under the agreement within the initial 15-year term of the agreement. Because we expect Memorial Resource to deliver volumes in excess of the minimum volume commitment during the forecast period, our forecast assumes that we will not receive any deficiency payments from Memorial Resource under our processing agreement. Please read “Business—Our Relationship with Memorial Resource—Our Contractual Arrangements with Memorial Resource—Natural Gas Processing.”
(7)   For additional information on how we define and utilize Adjusted EBITDA please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Will Evaluate Our Operations—Adjusted EBITDA and Distributable Cash Flow.”
(8)   Expansion capital expenditures are cash expenditures to construct or acquire new midstream infrastructure and those expenditures incurred in order to extend the useful lives of our assets, reduce costs, increase revenues or increase system throughput or capacity from current levels. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional processing facilities, transportation pipelines and related infrastructure, in each case to the extent such capital expenditures are expected to expand our operating capacity, throughput or revenue. Please read “—Assumptions and Considerations—Capital Expenditures.”
(9)   Maintenance capital expenditures are cash expenditures (including expenditures for the construction of new capital assets or the replacement or improvement of existing capital assets) made to maintain, over the long term, our operating capacity, throughput or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines and processing equipment, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. The board of directors of our general partner will review our maintenance capital expenditure policies on an annual basis as the scope and nature of our business changes in the future. Please read “—Assumptions and Considerations—Capital Expenditures.”
(10)   Because we expect to generate nominal revenue and operating expense prior to March 1, 2015, we expect to fund the majority of our distribution to our unitholders relating to the fourth quarter of 2014 and the first quarter of 2015 from the $         million of proceeds of this offering that we will retain to fund distributions prior to the time our assets are fully operational.
(11)   In connection with PennTex JV’s contribution to us of our initial assets, we will issue to PennTex JV (i) 7.5% of our incentive distribution rights, (ii)         common units and         subordinated units, representing a     % limited partner interest in us, and (iii) the right to receive $         million in proceeds from this offering. PennTex JV will make a distribution to its members, consisting of (i)         common units and         subordinated units, representing a         limited partner interest in us, 7.5% of our incentive distribution rights and $         million in cash to MRD WHR LA and (ii)         common units and              subordinated units, representing a     % limited partner interest in us and $         million in cash to PennTex NLA. PennTex NLA will distribute such interests and cash to PennTex Development.
(12)   Assumes that effective as of the closing of this offering, the board of directors of our general partner will grant              common units and restricted units to certain directors and executive officers pursuant to our long term incentive plan. Please read “Executive Compensation—Our Long-Term Incentive Plan.”
(13)   Our general partner will own a non-economic general partner interest in us and 92.5% of our incentive distribution rights.

 

Assumptions and Considerations

 

General

 

We believe our estimated cash available for distribution for the twelve months ending March 31, 2016 will be approximately $36.4 million. In estimating our cash available for distribution, we have assumed the Lincoln Parish Plant, the PennTex Gas Pipeline and the PennTex NGL Pipeline will commence commercial operations on March 1, 2015. We expect a portion of the PennTex Gathering Pipeline to be in commercial operations and earning revenue by December 1, 2014.

 

Our estimates of our revenue and operating expenses are highly dependent upon our expectations of the volumes that will be delivered to us by Memorial Resource. While we expect to diversify our customer exposure in

 

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northern Louisiana over time to include other third-party producers, we initially will focus on providing gathering, processing and transportation services for volumes derived from Memorial Resource’s northern Louisiana production, and our forecast does not assume that we gather, process or transport any other third-party volumes.

 

We expect to generate nominal revenue and operating expense prior to our assumed in-service date of March 1, 2015 for the majority of our assets. Accordingly, we expect to fund the majority of our distribution relating to the first quarter of 2015 from cash on hand at the closing of this offering.

 

Volumes and Revenues

 

Our expected processing throughput volumes are supported by a minimum volume commitment from Memorial Resource of 115,000 MMBtu/d, or approximately 50% of the capacity of the Lincoln Parish Plant. Upon PennTex JV’s completion of the Mt. Olive Plant, which we expect to occur on October 1, 2015, Memorial Resource’s minimum volume commitment at the Lincoln Parish Plant will increase to an amount equal to the Lincoln Parish Plant’s full design capacity of 230,000 MMBtu/d, less any firm gas committed to the Lincoln Parish Plant by other producers at such time. Similarly, our expected pipeline transportation volumes are supported by firm capacity reservations from Memorial Resource. We expect the throughput on the PennTex NGL Pipeline and PennTex Gas Pipeline to be higher than the firm capacity reservations, primarily because we expect the utilization of the Lincoln Parish Plant to exceed 50% of its processing capacity. Additionally, if the Lincoln Parish Plant operates in ethane recovery mode, the amount of available NGLs for transportation will increase.

 

We estimate that we will generate approximately $47.3 million in revenues for the twelve months ending March 31, 2016 based on the minimum volume commitment and firm capacity reservations under our commercial agreements with Memorial Resource, as well as forecast volumes in excess thereof. We expect approximately $36.8 million, or approximately 77%, of our total forecast revenues to be supported by the minimum volume commitment and firm capacity reservations, compared to approximately $10.6 million, or approximately 23%, of our total forecast revenues to be supported by forecast volumes in excess of such minimum volume commitment and firm capacity reservations. Because we expect Memorial Resource to deliver to the Lincoln Parish Plant volumes in excess of the minimum volume commitment during the twelve months ending March 31, 2016, our forecast assumes that we will not receive any deficiency payments from Memorial Resource under our processing agreement.

 

The charts below illustrate our expectations for our throughput volumes from Memorial Resource for March 2015, each of the second, third and fourth quarters of 2015 and the first quarter of 2016.

 

LOGO    LOGO

 

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LOGO    LOGO

 

(1)   Forecast volumes for the PennTex Gathering Pipeline for the full first quarter of 2015 are 50,000 MMBtu/d.

 

Our forecast revenues are based on fixed fees per MMBtu processed through the Lincoln Parish Plant and transported through each of the PennTex Gathering Pipeline and the PennTex Gas Pipeline. The fees for the PennTex NGL Pipeline are based on fixed fees per gallon of NGL throughput. The fixed fee charged for firm volumes under our processing agreement are lower than the fee charged for interruptible volumes. Under our gathering and transportation agreements, the fixed fees for firm reserved capacity are higher than the interruptible fees.

 

We expect that any substantial variances between actual revenues during the twelve months ending March 31, 2016 and forecast revenues will be primarily driven by differences between the actual date on which our initial assets commence operations and our current expectation and by differences between the actual and forecast volumes in excess of the minimum volume commitment and firm capacity reservations, respectively.

 

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The following table sets forth our estimated revenue for each of our initial assets for each quarter during the year ending December 31, 2015 and the first quarter of 2016. We do not have comparable data for a prior period for comparison purposes due to the fact that the majority of our assets are expected to commence operations on March 1, 2015.

 

    Quarter Ending     Twelve Months
Ending
 
    March 31,
2015
    June 30,
2015
    September 30,
2015
    December 31,
2015
    March 31,
2016
    March 31,
2016
 
    (in millions)  

Lincoln Parish Plant

           

Minimum volume commitment revenue(1)(2)

  $ 1.6      $ 4.6      $ 4.6      $ 9.2      $ 9.1      $ 27.5   

Revenue in excess of the minimum volume commitment(2)

    1.3        3.9        5.0                      8.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 2.9      $ 8.5      $ 9.6      $ 9.2      $ 9.1      $ 36.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PennTex Gathering Pipeline

           

Firm transportation revenue(3)

  $ 1.3      $ 1.3      $ 1.3      $ 1.3      $ 1.3      $ 5.3   

Revenue in excess of the firm capacity reservation

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 1.3      $ 1.3      $ 1.3      $ 1.3      $ 1.3      $ 5.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PennTex Gas Pipeline

           

Firm transportation revenue(4)

  $ 0.1      $ 0.3      $ 0.3      $ 0.3      $ 0.3      $ 1.3   

Revenue in excess of the firm capacity reservation

    0.0        0.1        0.2        0.2        0.2        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 0.2      $ 0.5      $ 0.5      $ 0.5      $ 0.5      $ 2.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PennTex NGL Pipeline

           

Firm transportation revenue(5)

  $ 0.2      $ 0.7      $ 0.7      $ 0.7      $ 0.7      $ 2.7   

Revenue in excess of the firm capacity reservation

    0.0        0.1        0.1        0.3        0.4        0.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 0.3      $ 0.7      $ 0.8      $ 1.0      $ 1.1      $ 3.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   Under our processing agreement, Memorial Resource has agreed to deliver a minimum volume of 115,000 MMBtu/d of gas to our Lincoln Parish Plant for a term of 15-years, or pay the fees due under the agreement for such minimum volumes. Upon PennTex JV’s completion of the Mt. Olive Plant, which we expect to occur in October 2015, Memorial Resource’s minimum volume commitment at the Lincoln Parish Plant will increase to an amount equal to the Lincoln Parish Plant’s full design capacity, less any firm gas committed to the plant by other producers at such time. Assuming that other producers have not committed firm gas to the Lincoln Parish Plant at different rates by that time, our annualized minimum volume commitment fee would be $36.6 million.
(2)   Prior to the expected completion date of the Mt. Olive Plant in October 2015, any volumes delivered by Memorial Resource in excess of the minimum volume commitment will be considered interruptible volumes and be charged an interruptible-service fixed fee that is higher than the fee charged for firm reserved gas. As a result, we expect revenues generated from our processing agreement to be marginally lower after October 2015 when the minimum volume commitment is expected to increase.
(3)   Memorial Resource has reserved firm capacity of 50,000 MMBtu/d on the PennTex Gathering Pipeline for a term of 15-years commencing upon commercial operations of the pipeline, which we anticipate on December 1, 2014.
(4)   Memorial Resource has reserved firm capacity of 100,000 MMBtu/d on the PennTex Gas Pipeline for a term of 15-years commencing upon commercial operations of the pipeline, which we anticipate on March 1, 2015.
(5)   Memorial Resource has reserved firm capacity of 6,000 Bbl/d on the PennTex NGL Pipeline for a term of 15-years commencing upon commercial operations of the pipeline, which we anticipate on March 1, 2015.

 

Volume Sensitivity Analysis

 

Memorial Resource will initially be our sole processing customer and the sole shipper of residue gas and NGLs on our pipelines. Additionally, an affiliate of DCP Midstream has contracted for interruptible capacity on

 

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the PennTex Gathering Pipeline; however, due to the interruptible nature of the service and our limited visibility on the anticipated volumes to be transported by this customer, we have not forecasted any volumes related to the contract. Therefore, all of our estimated volumes for the twelve months ending March 31, 2016 are attributable to our commercial arrangements with Memorial Resource. If Memorial Resource were to reduce the number of drilling rigs it deploys, the pace of its drilling and the volumes processed by the Lincoln Parish Plant and transported through our pipelines could decline, which would reduce the amount of cash available for distribution for the twelve months ending March 31, 2016 below our forecast. If Memorial Resource delivers only the minimum volumes under our processing agreement and the firm capacity volumes under our gathering and transportation agreements, our cash and borrowings needed to fund our minimum quarterly distribution for the twelve months ending March 31, 2016 (including net proceeds retained from this offering) would be $         million.

 

Commodity Price Assumptions and Sensitivity Analysis

 

Our contracts with Memorial Resource are fee-based and therefore have limited direct commodity price exposure. In addition, the compression at our Lincoln Parish Plant is powered by electricity, and the majority of the cost of the electric compression is reimbursed by Memorial Resource. However, natural gas and NGL prices will influence the returns that Memorial Resource realizes on its drilling and completion expenditures. If natural gas or NGL prices were to decline to a point that Memorial Resource would not earn a satisfactory return on its capital, it could choose to reduce the number of drilling rigs it employs in the region, which would directly impact the volumes available to us to process and transport, reducing our cash available for distribution.

 

Cost of Sales and Transportation Expense

 

We have not forecast any costs of goods sold during the twelve months ending March 31, 2016. Our customers bear 100% of any fuel (gas consumed by the processing facilities), lost and unaccounted for gas and shrinkage; however, through allocation procedures, we may incur insignificant costs associated with these items, such as costs related to imbalances with shippers and interconnecting pipelines.

 

Operations and Maintenance Expense

 

Our operations and maintenance expense includes salary and wage expense, utility costs, insurance premiums, taxes and other operating costs either incurred by us or our general partner under our omnibus agreement. We estimate that we will incur operations and maintenance expense, net of reimbursement, of approximately $4.4 million for the twelve months ending March 31, 2016. Our forecast is estimated for our existing and expected employees and third-party services for our initial assets, based on our management’s extensive experience in managing similar operations. In particular, Robert O. Bond, Chief Operating Officer of our general partner, previously served as Senior Vice President of Pipeline Operations for Southern Union Company and as President and Chief Operating Officer of Panhandle Energy and Cross Country Energy. In addition, L. Thomas Stone, Senior Vice President, Chief Operations and Engineering Officer of our general partner, previously served as Senior Vice President and Chief Operations and Maintenance Officer for Energy Transfer Partners and as Senior Vice President and Chief Operations and Maintenance Officer of Panhandle Energy. Messrs. Bond and Stone developed significant management experience and exercised oversight with respect to asset operation and maintenance in these roles.

 

For the three months ending March 31, 2015, we estimate that we will incur operations and maintenance expense, net of reimbursement, of approximately $0.5 million. This amount is based on our management’s estimates of a full quarter of expenses associated with operating the PennTex Gathering Pipeline, which we expect to commence commercial operations on December 1, 2014, and a partial quarter of expenses associated with operating the remainder of our initial assets, which we expect to commence commercial operations on March 1, 2015.

 

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Depreciation and Amortization Expense

 

We estimate depreciation and amortization expense for the twelve months ending March 31, 2016 of approximately $6.0 million. This estimate is based on projected property, plant, and equipment and intangibles balances of $172.3 million and $5.1 million, respectively, as of March 31, 2015 and projected March 31, 2016 balances of $174.8 million and $5.1 million, respectively. Estimated depreciation and amortization expense reflects management’s estimates, which are based on the projected in-service dates of our initial assets, estimated depreciable asset lives of 30 years and straight line depreciation methodologies.

 

For the three months ending March 31, 2015, we estimate that our general and administrative expenses will be approximately $0.9 million, which reflects a quarterly estimate of the general and administrative expenses forecasted above on an annual basis.

 

General and Administrative Expenses

 

We estimate that our general and administrative expenses will be approximately $3.8 million for the twelve months ending March 31, 2016, which consists of: (i) a fee of $2.0 million to be charged to us by our parent as reimbursement for certain services provided pursuant to the omnibus agreement and (ii) direct expenses incurred by our general partner on our behalf (including approximately $1.75 million in costs incurred as a result of becoming a publicly traded partnership), which we estimate will be $1.8 million for the twelve months ending March 31, 2016 based on an evaluation of other similar public partnerships in our industry.

 

Taxes, other than income taxes

 

We estimate that our taxes, other than income taxes will be approximately $1.2 million for the twelve months ending March 31, 2016. This estimate is based primarily on our expectation of the property taxes that will be assessed on our initial assets, which account for statutory tax abatements that we have filed with taxing authorities.

 

Capital Expenditures

 

Our estimated capital expenditures for the twelve months ending March 31, 2016 are based on the following assumptions:

 

   

Maintenance Capital Expenditures. We estimate that our maintenance capital expenditures will be approximately $0.8 million for the twelve months ending March 31, 2016, which is expected to primarily relate to general pipeline and plant management. While we anticipate variability in levels of maintenance capital expenditure going forward due to occasional, unpredictable expenditures, we believe the forecast $0.8 million appropriately reflects the fact that the majority of our assets will be newly constructed. We have adopted policies and procedures related to plant and pipeline integrity and maintenance that we believe are consistent with high industry standards. We do not expect it will be necessary to incur maintenance capital expenditures to maintain throughput volumes during the twelve months ending March 31, 2016.

 

   

Expansion Capital Expenditures. We have assumed expansion capital expenditures of approximately $36.0 million for the first quarter ending March 31, 2015 and approximately $1.7 million for the twelve months ending March 31, 2016. Our planned expansion capital expenditures relate primarily to completion of our initial assets. After the closing of this offering, we expect to fund expansion capital expenditures with a portion of net proceeds retained from this offering and, as such, have assumed that we will fund all of the forecast expansion capital expenditures with available cash.

 

While we do not currently anticipate, and our forecast does not reflect, any acquisitions during the twelve months ending March 31, 2016, our management will continue to evaluate potential growth opportunities through accretive acquisition from time to time, and we may elect to pursue such acquisitions during the forecast period. However, we cannot assure you that we will be able to identify attractive acquisition opportunities or, if identified, that we will be able to negotiate acceptable purchase agreements.

 

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Financing

 

At the closing of this offering, we will enter into a $             million revolving credit facility. We do not forecast any borrowings under our revolving credit facility for the twelve months ending March 31, 2016, and estimate that cash interest paid will be related to interest expense on our undrawn revolving credit facility.

 

Regulatory, Industry and Economic Factors

 

Our forecast for the twelve months ending March 31, 2016 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 relevant portions of the midstream energy industry, or any new interpretation of existing regulations, that will be materially adverse to our business.

 

   

There will not be any material adverse change in the midstream energy industry, commodity prices, capital or insurance markets or in 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.

 

   

There will not be a shortage of skilled labor.

 

While we believe that our assumptions supporting our estimated cash available for distribution for the twelve months ending March 31, 2016 are reasonable in light of our current beliefs concerning future events, the assumptions are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are not realized, the actual cash available for distribution that we generate could be substantially less than the amounts that we currently expect to generate and could, therefore, be insufficient to permit us to make the full minimum quarterly distribution on all of our units, in which event the market price of our common units could decline materially.

 

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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                     , 2014, 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                     , 2014, based on the actual length of the period.

 

Definition of Available Cash

 

Available cash generally means, for any quarter, all cash and cash equivalents (including cash from changes in deferred revenue) 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, but not limited to, reserves for our future capital expenditures, future acquisitions and anticipated future debt service requirements);

 

   

comply with applicable law, any of our or our subsidiaries’ 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 (i) working capital borrowings made subsequent to the end of such quarter and (ii) cash distributions received after the end of the quarter from any equity interest in any person (other than a subsidiary of us), which distributions are paid by such person in respect of operations conducted by such person during 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. 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 will be determined by our general

 

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partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Revolving Credit Facility” for a discussion of the restrictions that we expect to be included in our credit facility that may restrict our ability to make distributions.

 

General Partner Interest and Incentive Distribution Rights

 

Our general partner will own a non-economic partner interest in us.

 

Our incentive distribution rights represent the right to receive increasing percentages, up to a maximum of 50%, of the available cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The aggregate maximum distribution of 50% does not include any distributions that holders of our incentive distribution rights may receive on common or subordinated units that they own.

 

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), provided that cash receipts from the termination of any interest rate hedge contract or commodity hedge contract prior to its specified termination date will be included in operating surplus in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract; 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, 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; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to pay interest and related fees on debt incurred, or to pay distributions on equity issued, to finance the expansion capital expenditures referred to in the prior bullet; 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 twelve-month period with the proceeds of additional working capital borrowings.

 

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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-month period following the borrowing, they will be deemed repaid at the end of such period, thus 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 (1) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings, like those under our new credit facility and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (2) sales of equity securities and (3) 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 an interest rate hedge contract or a commodity hedge contract will be amortized over the life of such interest 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 described in “Use of Proceeds.”

 

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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 distribution. As described above, operating surplus, as defined in our partnership agreement, includes certain components, including a $         million cash basket, that represent non-operating sources of cash. 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 initial public offering. We do not anticipate that we will make any distributions from capital surplus.

 

Capital Expenditures

 

We distinguish between maintenance capital expenditures and expansion capital expenditures. Maintenance capital expenditures are cash expenditures (including expenditures for the construction of new capital assets or the replacement or improvement of existing capital assets) made to maintain, over the long term, our operating capacity, throughput or revenue. Maintenance capital expenditures do not include normal repairs and maintenance, which are expensed as incurred, or significant replacement capital expenditures, as described in detail in the next paragraph. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines and processing equipment, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. The board of directors of our general partner will review our maintenance capital expenditure policies on an annual basis as the scope and nature of our business changes in the future. Maintenance capital expenditures will reduce operating surplus.

 

Expansion capital expenditures are cash expenditures incurred to construct or acquire new midstream infrastructure and to extend the useful lives of our assets, reduce costs, increase revenues or increase system throughput or capacity from current levels. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional processing facilities, transportation pipelines and related infrastructure, in each case to the extent such capital expenditures are expected to expand our operating capacity, throughput or revenue. 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, 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. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction of a capital asset in respect of a period that (l) begins when we enter into a binding obligation to commence construction of a capital improvement and (2) ends on the earlier to occur of the date any such capital asset commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus.

 

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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 be paid 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.

 

Determination of 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                     , 2017, that each of the following tests are met:

 

   

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

 

   

the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated 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 the 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                      2015, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded $         (150% of the annualized minimum quarterly distribution), plus the related distributions on the incentive distribution rights, for the four-quarter period immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (1) $         (150% of the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units during that period on a fully diluted basis and (2) the corresponding distributions on the incentive distribution rights; and

 

   

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

 

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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 increase in working capital borrowings and 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 amounts attributable to the item described in the first bullet under the caption “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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, to the common unitholders, pro rata, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, to the common unitholders, pro rata, 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, to the subordinated unitholders, pro rata, 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 assumption 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, to all unitholders, pro rata, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

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

 

The preceding discussion is based on the assumption that 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 will own a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity interest in us and will be entitled to receive distributions on such interests.

 

Incentive distribution rights represent the right to receive an increasing percentage (15%, 25% and 50%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner and MRD WHR LA currently hold the incentive distribution rights, but may transfer these rights subject to restrictions in our partnership agreement.

 

The following discussion assumes that we do not issue any additional classes of equity securities.

 

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 the holders of our incentive distribution rights in the following manner:

 

   

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

 

   

second, 85% to all unitholders, pro rata, and 15% to the holders of our incentive distribution rights, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75% to all unitholders, pro rata, and 25% to the holders of our incentive distribution rights, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50% to all unitholders, pro rata, and 50% to the holders of our incentive distribution rights, pro rata.

 

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Percentage Allocations of Available Cash from Operating Surplus

 

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner and MRD WHR LA, as the initial holders 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 unitholders and our general partner and MRD WHR LA 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” until available cash we distribute reaches the next target distribution level, if any. The percentage interests shown for our unitholders and our general partner and MRD WHR LA 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 assume that there are no arrearages on common units.

 

     Total Quarterly Distribution
per Unit Target Amount
     Marginal Percentage Interest in
Distributions
 
        Unitholders     Incentive
Distribution
Rights(1)
 

Minimum Quarterly Distribution

   $                         100     0

First Target Distribution

   above $                    up to $                      100     0

Second Target Distribution

   above $                    up to $                      85     15

Third Target Distribution

   above $                    up to $                      75     25

Thereafter

   above $                         50     50

 

(1)   Upon the closing of this offering, our general partner and MRD WHR LA will own 92.5% and 7.5% of our incentive distribution rights, respectively.

 

General Partner’s Right to Reset Incentive Distribution Levels

 

Our general partner, as the holder of a majority of our incentive distribution rights, 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 holders of our incentive distribution rights would be set. If our general partner transfers all or a portion of its incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds a majority of the incentive distribution rights at the time that a reset election is made. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner 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 distributions 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 quarters. If our general partner 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 the 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 our general partner 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 our general partner 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 our general partner.

 

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In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by the holders of our incentive distribution rights of incentive distribution payments based on the target distributions prior to the reset, the holders of our incentive distribution rights 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 cash distribution related to the incentive distribution rights received by the holders of our incentive distribution rights for the quarter immediately preceding the reset event as compared to the cash distribution per common unit during that quarter.

 

The number of common units that the holders of our incentive distribution rights (including our general partner) 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 aggregate amount of cash distributions received by the holders of our incentive distribution rights in respect of their incentive distribution rights during the fiscal quarter ended immediately prior to the date of such reset election by (y) the aggregate amount of cash distributed per common unit during that quarter.

 

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, to all unitholders, pro rata, until each unitholder receives an amount equal to 115% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85% to all unitholders, pro rata, and 15% to the holders of our incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 125% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75% to all unitholders, pro rata, and 25% to the holders of our incentive distribution rights, pro rata, until each unitholder receives an amount per unit equal to 150% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50% to all unitholders, pro rata, and 50% to the holders of our incentive distribution rights, pro rata.

 

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and the holders of our incentive distribution rights (including our general partner) at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering and (2) 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
       
       Unitholders     Incentive
Distribution
Rights(1)
    Quarterly Distribution per Unit
Following Hypothetical Reset
 

Minimum Quarterly Distribution

     $               100     0           $       

First Target Distribution

     above $               up to $                 100     0   above $                   up to $          (2) 

Second Target Distribution

     above $               up to $          85     15   above $   (2)        up to $   (3) 

Third Target Distribution

     above $               up to $          75     25   above $   (3)        up to $   (4) 

Thereafter

     above $               50     50   above $   (4)   

 

(1)   Upon the closing of this offering, our general partner and MRD WHR LA will own 92.5% and 7.5% of our incentive distribution rights, respectively.
(2)   This amount is 115% of the hypothetical reset minimum quarterly distribution.

 

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(3)   This amount is 125% of the hypothetical reset minimum quarterly distribution.
(4)   This amount is 150% 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 and the holders of our 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 and the average distribution to each common unit would be $         per quarter for the two consecutive non-overlapping quarters prior to the reset.

 

    Quarterly Distribution per
Unit Prior to Reset
    Cash
Distribution
to Public
Common
Unitholders
Prior to
Reset
    Cash Distribution to the Holders of Our
Incentive Distribution Rights Prior to
Reset(1)
    Total
Distributions
 
      Common
Units
    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 $            $        $        $        $        $            
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $        $        $        $        $            
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   Upon the closing of this offering, our general partner and MRD WHR LA will own 92.5% and 7.5% of our incentive distribution rights, respectively.

 

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the holders of our incentive distribution rights, with respect to the quarter after the reset occurs. The table reflects that, as a result of the reset, there would be              additional common units outstanding and that the average distribution to each common unit would be $        . The number of common units issued as a result of the reset was calculated by dividing (x) the average of the amounts received by the holders of our incentive distribution rights for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $        , by (y) the average of the cash distributions made on each common unit per quarter for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $        .

 

    Quarterly Distribution per
Unit After Reset
    Cash
Distribution
to Public
Common
Unitholders
After Reset
    Cash Distribution to the Holders of Our
Incentive Distribution Rights and
Affiliates After Reset(1)
    Total
Distributions
 
      Common
Units
    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 $            $        $        $        $        $     
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $        $        $        $        $ 0   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   Upon the closing of this offering, our general partner and MRD WHR LA will own 92.5% and 7.5% of our incentive distribution rights, respectively.

 

So long as our general partner holds a majority of our incentive distribution rights, our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

 

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Distributions from Capital Surplus

 

How Distributions from Capital Surplus will be Made

 

We will make distributions of available cash from capital surplus, if any, in the following manner:

 

   

first, to all unitholders, pro rata, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price in this offering;

 

   

second, to all unitholders, pro rata, until we distribute for each common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the outstanding common units; and

 

   

thereafter, as if they were from operating surplus.

 

The preceding discussion is based on the assumption that we do not issue additional classes of equity securities.

 

Effect of a Distribution from Capital Surplus

 

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution after any of these distributions are made, the effects of distributions of capital surplus may make it easier for holders of our incentive distribution rights to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

 

Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, we will reduce the minimum quarterly distribution and the target distribution levels to zero. Then, after distributing an amount of capital surplus for each common unit equal to any unpaid arrearages of the minimum quarterly distributions on outstanding common units, we will then make all future distributions from operating surplus, with 50% being paid to the unitholders, pro rata, and 50% to the holders of our incentive distribution rights, pro rata.

 

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

 

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

the minimum quarterly distribution;

 

   

target distribution levels;

 

   

the unrecovered initial unit price; and

 

   

the arrearages per common unit in payment of the minimum quarterly distribution on the common units.

 

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level, and each subordinated unit would be split into two subordinated units. We will not make any adjustment by reason of the issuance of additional units for cash or property (including additional common units issued under any compensation or benefit plans).

 

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In addition, if legislation is enacted or if the official interpretation of existing law is modified by a governmental authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) and the denominator of which is the sum of available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) plus our general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference may be accounted for in subsequent quarters.

 

Distributions of Cash Upon Liquidation

 

General

 

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

 

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our general partner.

 

Manner of Adjustments for Gain

 

The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to our partners in the following manner:

 

   

first, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of:

 

  (1)   the unrecovered initial unit price;

 

  (2)   the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and

 

  (3)   any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

second, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of:

 

  (1)   the unrecovered initial unit price; and

 

  (2)   the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

third, to all unitholders, pro rata, until we allocate under this paragraph an amount per unit equal to:

 

  (1)   the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less

 

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  (2)   the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;

 

   

fourth, 85% to all unitholders, pro rata, and 15% to all holders of our incentive distribution rights, pro rata, until we allocate under this paragraph an amount per unit equal to:

 

  (1)   the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less

 

  (2)   the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85% to the unitholders, pro rata, and 15% to all holders of our incentive distribution rights, pro rata, for each quarter of our existence;

 

   

fifth, 75% to all unitholders, pro rata, and 25% to all holders of our incentive distribution rights, pro rata, until we allocate under this paragraph an amount per unit equal to:

 

  (1)   the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less

 

  (2)   the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75% to the unitholders, pro rata, and 25% to all holders of our incentive distribution rights, pro rata, for each quarter of our existence; and

 

   

thereafter, 50% to all unitholders, pro rata, and 50% to all holders of our incentive distribution rights, pro rata.

 

The percentages set forth above are based on the assumption that we do not issue additional classes of equity securities.

 

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the first bullet point above and all of the second bullet point above will no longer be applicable.

 

Manner of Adjustments for Losses

 

If our liquidation occurs before the end of the subordination period, after making allocations of loss to the unitholders in a manner intended to offset in reverse order the allocations of gains that have previously been allocated, we will generally allocate any loss to our unitholders in the following manner:

 

   

first, to the holders of subordinated units in proportion to the positive balances in their capital accounts until the capital accounts of the subordinated unitholders have been reduced to zero; and

 

   

second, to the holders of common units in proportion to the positive balances in their capital accounts until the capital accounts of the common unitholders have been reduced to zero.

 

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

 

Adjustments to Capital Accounts

 

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner that

 

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results, to the extent possible, in the partners’ capital account balances equaling the amount that they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

 

We are a newly formed entity with no prior operating history. Accordingly, the historical financial statements reflect the historical financial data of PennTex JV, our accounting predecessor, which was formed on March 17, 2014, as of the date and for the period indicated. The selected historical financial data as of June 30, 2014 and for the period from March 17, 2014 (Inception) to June 30, 2014 are derived from the audited financial statements of PennTex JV appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical financial statements and unaudited pro forma balance sheet and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The following table also presents the selected pro forma balance sheet data of PennTex Midstream Partners, LP as of June 30, 2014, which are derived from the unaudited pro forma balance sheet of PennTex Midstream Partners, LP included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related formation transactions occurred as of June 30, 2014. These transactions include, and the pro forma balance sheet gives effect to, the following:

 

   

the contribution by PennTex JV of all of the interests in, and commercial agreements related to, our initial assets to PennTex North Louisiana Operating, LLC;

 

   

the contribution by PennTex JV of all of the interests in PennTex North Louisiana Operating, LLC to us in exchange for (i) 7.5% of our incentive distribution rights, (ii)          common units and              subordinated units and (iii) the right to receive $         million in proceeds from this offering;

 

   

the consummation of this offering, including our issuance of          common units to the public and 92.5% of our incentive distribution rights to our general partner, and the application of the net proceeds of this offering as described in “Use of Proceeds”;

 

   

the distribution by PennTex JV of (i)          common units,              subordinated units, 7.5% of our incentive distribution rights and $         million in cash to MRD WHR LA and (ii)              common units,              subordinated units and $         million in cash to PennTex NLA;

 

   

the distribution by PennTex NLA of              common units,              subordinated units and $         million in cash to PennTex Development; and

 

   

our entry into a new $         million revolving credit facility.

 

The pro forma combined balance sheet does not give effect to the estimated $1.75 million in incremental annual general and administrative expenses that we expect to incur as a result of being a publicly traded partnership. Additionally, it does not give effect to the $2 million annual fee that we will pay to our general partner for the provision of certain services under the omnibus agreement that we will enter into with our general partner, PennTex Development and PennTex JV at the closing of the offering.

 

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     Predecessor
Historical
    PennTex Midstream
Partners, LP
Pro Forma
 
     Period From
March 17, 2014
(Inception)

to June 30, 2014
    June 30,
2014
 
           (unaudited)  
     (in thousands)  

Statement of Operations Data:

    

Costs and Expenses:

    

General and administrative expense

   $ 1,384     
  

 

 

   

Total operating costs and expenses

     1,384     
  

 

 

   

Net (loss)

   $ 1,384     
  

 

 

   

Balance Sheet Data (at period end):

    

Cash and cash equivalents

   $ 18      $     

Property, plant and equipment

     36,259        36,259   

Total assets

     37,844     

Long-term debt

              

Total members’/partners’ equity

     33,435     

Cash Flow Data:

    

Net cash provided by (used in):

    

Operating activities

   $ (62  

Investing activities

     (34,739  

Financing activities

     34,819     

Capital Expenditures:

    

Expansion capital expenditures

   $ 34,739     

 

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

 

The historical financial statements included in this prospectus reflect the results of operations of PennTex North Louisiana, LLC, which we refer to as our predecessor. Our predecessor was formed on March 17, 2014. In connection with this offering, our predecessor will contribute to us certain of its gathering, processing and transportation assets and related commercial agreements. The following discussion analyzes the financial condition and results of operations of our predecessor.

 

The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included elsewhere in this prospectus. For more detailed information regarding the basis of presentation for the following information, please read the notes to the historical financial statements included elsewhere in this prospectus. In addition, please read “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” for information regarding certain risks inherent in our business.

 

Overview

 

We are a growth-oriented limited partnership focused on owning, operating, acquiring and developing midstream energy infrastructure assets, with an initial focus in northern Louisiana. Our parent, PennTex Development, was formed by NGP and members of our management team to develop a multi-basin midstream growth platform, initially focused on organic growth projects in partnership with oil and natural gas producers affiliated with NGP. NGP’s large portfolio of oil and gas investments provides our parent with a source of potential development and partnership opportunities. We intend to leverage our relationships with NGP and our parent to with a view to becoming a leading midstream energy company serving attractive oil and natural gas basins in North America.

 

Our initial assets will consist of a natural gas processing plant, a rich natural gas gathering system, a natural gas header and an NGL pipeline located in northern Louisiana servicing growing natural gas production from the Cotton Valley formation. These assets are supported by 15-year, fee-based commercial agreements with Memorial Resource, an NGP-affiliated independent natural gas and oil partnership focused on the development of liquids-rich natural gas opportunities in multiple zones in the Cotton Valley formation. The processing contract contains a minimum volume commitment and our gathering and transportation contracts contain firm capacity reservations, which help provide long-term stability to our business.

 

We are a development stage entity with all of our initial assets currently under construction. We expect that the 12” pipeline comprising part of the PennTex Gathering Pipeline will be in service on December 1, 2014 and that the Lincoln Parish Plant, the remaining portion of the PennTex Gathering Pipeline, the PennTex Gas Pipeline and the PennTex NGL Pipeline will be in service on March 1, 2015.

 

How We Will Evaluate Our Operations

 

We expect that our management will use a variety of financial and operational metrics to analyze our performance. We view these metrics as important factors in evaluating our profitability and will review these measurements on at least a monthly basis for consistency and trend analysis. These metrics include (i) contract mix and volumes, (ii) operating costs and expenses and (iii) Adjusted EBITDA and distributable cash flow. We will manage our business and analyze our results of operations as a single business segment.

 

Contract Mix and Volumes

 

Our results will be driven primarily by the amount of capacity under minimum volume commitments or firm contracts, and the incremental natural gas or NGL volumes gathered, processed and transported under interruptible agreements and the fees assessed for such services. In order to limit our direct exposure to

 

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commodity price volatility, where possible, we will seek to enter into multi-year, fee-based firm contracts. If market conditions do not allow us to enter into fee-based contracts, we may enter into contracts that expose us to commodity price volatility.

 

The volume of natural gas that we gather, process or transport depends on the level of production from our customers in the areas serviced by our assets. Our assets are being constructed to serve the development of the Cotton Valley formation in northern Louisiana, where new drilling and production programs have begun. The amount of drilling and completion activity will impact our aggregate processing and transportation volumes since the production rate of natural gas wells decline over time. Producers’ willingness to engage in new drilling is determined by a number of factors, the most important of which are the prevailing and projected prices of natural gas and NGLs, the cost to drill and operate a well, the availability and cost of capital and environmental and government regulations. We generally expect the level of drilling to positively correlate with long-term trends in commodity prices. Similarly, production levels nationally and regionally tend to correlate positively with drilling activity.

 

Although our current contracts are supported by minimum volume commitments and firm capacity reservations, we must obtain new supplies of natural gas to increase or maintain the throughput volume on our systems. Our ability to maintain or increase existing throughput volumes and obtain new supplies of natural gas is impacted by, among other things, successful drilling activity within our areas of operation; the number of new pad sites within our areas of operation awaiting lateral connections; the operations of third parties’ gas gathering systems which connect and flow gas through interconnects with our system; our ability to compete for volumes from successful new wells in the areas in which we operate outside of our existing contracts and our ability to attract and to gather natural gas that has been released from producers’ commitments to our competitors.

 

Operating Costs and Expenses

 

The primary components of our operating costs and expenses that we will evaluate include operations and maintenance and general and administrative. Currently our assets are under construction and are not in service; therefore, we do not have operation and maintenance expenses. We have presented our financial statements in accordance with guidance applicable to development stage entities and have included allocations for certain corporate functions historically performed by PennTex Development; however, our general and administrative expenses reflected in our historical financial statements reflect costs during a period of construction and development in a privately held partnership. While we believe these costs are reasonable, we expect these costs will be different as we begin operation of the assets and as we become a publicly traded partnership.

 

Operations and Maintenance Expense

 

Operations and maintenance expense will be comprised primarily of utilities and power costs, employee, contract services and material and supply costs, whether directly incurred by us or incurred by our general partner and billed to us. A significant amount of power costs are related to our electric driven compression for which we will receive reimbursement from our customer. This reimbursement of electric compression costs will be reflected as a reduction to our operations and maintenance expense. Changes in operating conditions along with changes in regulation can impact maintenance requirements and affect the timing and amount of our costs and expenditures.

 

General and Administrative Expense

 

In our historical financial statements, general and administrative expense included various direct and indirect cost allocations from PennTex Development. In the future, we expect general and administrative expense to be comprised primarily of: (i) similar direct and indirect costs for which we will reimburse our general partner and its affiliates pursuant to the omnibus agreement and (ii) other expenses attributable to our status as a publicly traded partnership, such as expenses associated with annual and quarterly reporting; tax return and Schedule K-1

 

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preparation and distribution expenses; Sarbanes-Oxley compliance expenses; expenses associated with listing on the NYSE; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer liability insurance expenses and director compensation.

 

Adjusted EBITDA and Distributable Cash Flow

 

We define Adjusted EBITDA as net income, plus depreciation and amortization expense, changes in deferred revenue, interest (expense), income, net, and income tax expense. Although we have not generated positive distributable cash flow on a historical basis, after the closing of this offering we intend to use distributable cash flow, which we define as Adjusted EBITDA, less cash interest expense, net of interest income, cash tax expense, expansion capital expenditures and maintenance capital expenditures, plus available cash to fund expansion capital expenditures, to analyze our performance. Distributable cash flow will not reflect changes in working capital balances. Adjusted EBITDA and distributable cash flow are not presentations made in accordance with GAAP.

 

Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that our management and external users of our financial statements, such as investors, commercial banks, research analysts and others, may use to assess:

 

   

our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods;

 

   

th