10-Q 1 t82906_10q.htm FORM 10-Q

 

 

United States
Securities and Exchange Commission
Washington, D.C. 20549

 
 
Form 10-Q
 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended June 30, 2015
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ___________ to ___________

 

 
MDS ENERGY PUBLIC 2013-A LP
(Name of small business issuer in its charter)
 

 

Delaware
(State or other jurisdiction of
incorporation or organization)
  90-0852601
(I.R.S. Employer
Identification No.)
     
409 Butler Road
Suite A
   
Kittanning, PA
(Address of principal executive offices)
  16201
(zip code)
     
Issuer’s telephone number, including area code: (855) 807-0807
 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

         
Large accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company

 

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

 

As of June 30, 2015 this Partnership had 1,508.53 units of limited partnership interest outstanding.

 

 
 

 

MDS ENERGY PUBLIC 2013 – A LP
(A Delaware Limited Partnership)
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 

Implications of Being an Emerging Growth Company

           
        PAGE
           
    PART I. FINANCIAL INFORMATION      
           
Item 1:   Financial Statements (Unaudited)   1  
    Condensed Balance Sheets   1  
    Condensed Statements of Operations   2  
    Condensed Statements of Partners’ Equity   3  
    Condensed Statements of Cash Flow   4  
    Notes to Unaudited Condensed Financial Statements   5  
           
Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations   8  
           
Item 4:   Controls and Procedures   11  
           
    PART II. OTHER INFORMATION      
           
Item 1:   Legal Proceedings   12  
Item 2:   Unregistered Sales of Equity Securities and Use of Proceeds   12  
Item 3:   Defaults Upon Senior Securities   12  
Item 4.   Mine Safety Disclosures   12  
Item 5:   Other Information   12  
Item 6:   Exhibits   13  
           
SIGNATURES   14  
           
CERTIFICATIONS      

 

 
 

 

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY.

 

The Jumpstart Our Business Startups Act (the “JOBS Act”) became law in April 2012. The Partnership is an “emerging growth Company” as defined in the JOBS Act, and it is eligible for certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that usually apply to public companies.

 

These exemptions include, among others, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, any requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) which require mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor must provide additional information about the audit and the issuer’s financial statements, nor with new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Partnership has not yet decided whether to use any or all of the exemptions.

 

Additionally, under Section 107 of the JOBS Act, an “emerging growth company” is eligible for the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Act”) to comply with new or revised accounting standards. This means an “emerging growth company” can delay adopting certain accounting standards until those standards otherwise become applicable to private companies. However, the Partnership is electing to “opt out” of that extended transition period, and therefore will comply with new or revised accounting standards on the dates the standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that the Partnership’s decision to opt out of the extended transition period for compliance with new or revised accounting standards is irrevocable.

 

The Partnership could continue to be an “emerging growth company” until the earliest of:

 

(iv)the last day of the first fiscal year in which it has total annual gross revenue of $1 billion or more;

 

(ii)the last day of the fiscal year following the fifth anniversary of the date of the first sale of its units pursuant to its prospectus and Registration Statement with the SEC;

 

(iii)the date that it becomes a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”), which would occur if the market value of its units held by non-affiliates exceeds $700 million, measured as of the last business day of its most recently completed second fiscal quarter; or

 

(iv)the date on which it has, during the preceding three year period, issued more than $1 billion in non-convertible debt.

 

The Partnership anticipates that it will continue to be an emerging growth company until the termination of the five year period described in (ii), above.

 

 
 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements:

 

MDS ENERGY PUBLIC 2013-A LP
Condensed Balance Sheets

       
   June 30, 2015 (Unaudited)    December 31, 2014
Derived from Audited
Statements
 
Assets          
Current Assets          
Cash and Cash Equivalents  $22,934   $18,264 
Accounts Receivable and Due from Managing Partner   124,000    219,995 
Total Current Assets   146,934    238,259 
           
Oil and Gas properties, net   6,087,863    6,431,436 
           
Total Assets  $6,234,797   $6,669,695 
           
Liabilities and Partners’ Equity          
Accrued Expenses  $110,674   $104,527 
           
Asset Retirement Obligations   131,698    129,630 
           
Partners’ Equity   5,992,425    6,435,538 
           
Total Liabilities and Partners’ Equity  $6,234,797   $6,669,695 

 

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

 

1
 

 

MDS ENERGY PUBLIC 2013-A LP
Statements of Operations
(unaudited)

             
   For the Six Months Ended
June 30
   For the Three Months Ended
June 30
 
     2015      2014      2015      2014  
             
Gas Revenue  $396,089   $824,222   $189,400   $824,222 
                     
Expenses                    
Gathering Expense   87,614    66,771    49,672    66,771 
Well Maintenance   83,669    17,600    36,376    17,600 
DD&A Expense   345,641    419,109    178,355    419,109 
Impact Fee   77,414    40,333    26,041    40,333 
Professional Fees   50,000    -    25,000    - 
Total Expenses   644,338    543,813    315,444    543,813 
Operating (Loss) Income   (248,249)   280,409    (126,044)   280,409 
                     
Other Income (Expense)   -    121    -    36 
Net (Loss) Income  $(248,249)  $280,530   $(126,044)  $280,373 

 

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

 

2
 

 

MDS ENERGY PUBLIC 2013-A LP
Statements of Partners’ Equity
For the Six Months Ended June 30, 2015
(unaudited)

                
   Investor
Partners
   Managing
General
Partner 
   Total 
Balance at December 31, 2014  $7,529,923   $(1,094,385)  $6,435,538 
                
Distributions   (199,876)   5,012    (194,864)
                
Net Loss   (208,231)   (40,018)   (248,249)
                
Balance at June 30, 2015  $7,121,816   $(1,129,391)  $5,992,425 

 

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

 

3
 

 

MDS ENERGY PUBLIC 2013-A LP
Statements of Cash Flows
(unaudited)

       
   For the Six Months Ended
June 30
   2015    2014  
Cash flows from Operating activities          
           
Net (Loss) Income  $(248,249)  $280,530 
Adjustments to reconcile net (loss) income to cash provided by operating activities          
Depletion   343,573    417,595 
Accretion   2,068    1,514 
Total adjustments to net (loss) income to reconcile to net cash provided by operating activities   97,392    699,639 
Changes in assets and liabilities          
Accounts Receivable and Due from Managing General Partner   95,995    (612,531)
Accrued Expenses   6,147    297,767 
Net cash provided by operating activities   199,534    384,875 
           
Cash flows from investing activities          
Drilling Advances paid to the Managing General Partner   -    9,822,447 
Oil and Gas Properties   -    (9,822,447)
Net cash used for investing activities   -    - 
           
Cash flows from financing activities          
Collection of Subscription Receivable   -    1,048,263 
Distributions   (194,864)   (297,767)
Repayments to the Managing General Partner   -    (2,448,088)
Net cash used in financing activities   (194,864)   (1,697,592)
           
Net change in cash and cash equivalents   4,670    (1,312,717)
Cash and cash equivalents at beginning of period   18,264    1,312,723 
           
Cash and cash equivalents at end of period  $22,934   $6 

 

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

 

4
 

 

MDS ENERGY PUBLIC 2013-A LP

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

 

On May 3, 2012 (date of inception), MDS Energy Public 2013-A LP (Partnership), a Delaware limited partnership, was formed for the purpose of drilling developmental natural gas wells. The Partnership has a maximum 50-year term, although the Partnership intends to terminate when all of the wells invested in by the Partnership become uneconomical to continue to operate, which may be approximately 15 years or longer. The Partnership was formed by MDS Energy Development, LLC (MDS), a related party, as the Managing General Partner and M/D Gas, Inc. (M/D), a related party. In accordance with the terms of the limited partnership agreement, the MGP is authorized to manage all activities of the Partnership and initiates and completes substantially all transactions.

 

In our opinion, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Partnership’s financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The information presented in this Quarterly Report on Form 10-Q should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in its 2014 Form 10-K.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements- In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued their converged standard on revenue recognition that provides a single, comprehensive model that entities will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard outlines a five-step approach to apply the underlying principle: (a) identify the contract with the customer, (b) identify the separate performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to separate performance obligations and (e) recognize revenue when (or as) each performance obligation is satisfied. The revenue standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and can be adopted under the full retrospective method or simplified transition method. Early adoption is not permitted. We plan to adopt the revenue standard beginning January 1, 2017 and are currently evaluating the impact these changes will have on our condensed consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern, new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adopting is permitted. The adoption of this standard is not expected to have a material impact on the financial statements.

 

NOTE 3 - CONCENTRATION OF RISK

 

Accounts Receivable – This Partnership’s accounts receivable are from purchasers of natural gas production. The Partnership sells substantially all of its gas production to a customer who purchases from other Partnerships managed by the Partnership’s MGP. Inherent to the Partnership’s industry is the concentration of natural gas sales to a limited number of customers. This industry concentration has the potential to impact the Partnership’s overall exposure to credit risk in that its customers may be similarly affected by the changes in economic and financial condition, commodity prices and other conditions.

 

As of June 30, 2015 and December 31, 2014, the Partnership did not record an allowance for doubtful accounts. In making the estimate for receivables that are uncollectible, the MGP considers, among other things, subsequent collections, historical write-offs and overall creditworthiness of the Partnership’s customers. It is reasonably possible the estimate for uncollectable receivables will change periodically. Historically neither MDS nor any of the other Partnerships managed by the Partnership’s MGP, have experienced uncollectable accounts receivable. The Partnership sold 100% of the accounts receivable to a related party and did not incur any losses on accounts receivable for the six months ended June 30, 2015 or June 30, 2014.

 

5
 

 

NOTE 4 - PARTICIPATION IN COSTS AND REVENUES

 

For the quarter ended June 30, 2015, approximately $69,400 of gross revenue from the sale of natural gas had been received or was known with certainty, which is 46,700 MCF at an average price per MCF of $1.49. In addition approximately $128,000 of gross revenue from the sale of natural gas had been recorded as revenue as a result of the Partnership estimating revenue not yet received, which is 93,400 MCF at an average price per MCF of $1.37. These amounts are recorded as accounts receivable net of royalties approximating $14,000. The total estimate of expenses to be deducted from those amounts is approximately $73,000, which are typically transportation, well maintenance and lease operating expense.

 

As of June 30, 2014, approximately $630,000 of gross revenue from the sale of natural gas had been received or was known with certainty and not distributed, which is 157,100 MCF at an average price per MCF of $4.01. These amounts are recorded as accounts receivable net of the total expenses to be deducted from those amounts of approximately $175,000. In addition approximately $223,000 of gross revenue from the sale of natural gas had been recorded as revenue as a result of the Partnership estimating revenue not yet received, which is 58,603 MCF at an average price per MFC of $3.80. These amounts are recorded as accounts receivable net of total expenses estimated to be deducted from those amounts of approximately $65,000.

 

NOTE 5 - PARTNERS CAPITAL

 

The Partnership Agreement provides that MDS shall review the accounts of the Partnership at least monthly to determine whether cash distributions are appropriate and the amount to be distributed, if any.

 

The Partnership Agreement provides for the enhancement of investor cash distributions if the Partnership does not meet a performance standard defined in the agreement during the first 8 years of operations beginning the earlier of the first full year of operation after all wells begin production or 12 months after the final closing of the Partnership. In general, if the cumulative distributions to the investors is less than 10% of their subscriptions for years 1 through 5 and 7.5% of their subscriptions for years 6 through 8, MDS will subordinate up to 60% of its share, as MGP, of Partnership gross production revenues. As a result of the trend of lower revenue per MCF that the industry is currently experiencing, the MGP has subordinated 60% of it revenue interest beginning in August 2014 and continuing through June 2015. During the six months ended June 30, 2015 and for the year ended December 31, 2014, MGP subordinated $36,423 and $27,533, respectively, which was distributed to investors.

 

NOTE 6 - TRANSFERS AND PRESENTATIONS

 

There is no established public trading market for the Partnership’s units and the Partnership does not anticipate that a market for the Partnership’s units will develop. The Partnership’s units may be transferred only in accordance with the provisions of the Partnership Agreement which require:

 

the MGP may require an opinion of counsel that registration under applicable federal and state law is not required;

the transfer not result in materially adverse tax consequences to the Partnership; and

the transfer must not contravene any terms of the Partnership Agreement.

 

An assignee of a unit may become a substituted partner only upon meeting the following conditions:

 

the assignor gives the assignee the right;

the assignee pays to the Partnership all costs and expenses incurred in connection with the substitution; and

the assignee executes and delivers the instruments, which the MGP requires to effect the substitution and to confirm his or her agreement to be bound by the terms of the Partnership Agreement.

 

A substitute partner is entitled to all of the rights of full ownership of the assigned units, including the right to vote.

 

Investor Partners may request that the MGP repurchase their units at any time beginning with the fifth anniversary after December 31, 2013 provided that certain conditions are met. The repurchase price is set at the greater of the partner’s share of (i) predominantly 70% of the Partnership’s present worth of future net revenues from the proved reserves as determined under the last reserve report and is reduced by an amount equal to all of the Partnership’s debts or (ii) an amount equal to three times the total amount of distributions paid by the Partnership to the participant during the previous twelve months. The MGP is also permitted to adjust the purchase price under certain conditions for changes occurring after the date of the presentment request. Repurchase requests are fulfilled by the MGP on a first-come, first-served basis and may not exceed 5% of the total units outstanding. The MGP may suspend the presentment feature at any time if it determines that it does not have sufficient cash flow or it is unable to borrow funds on terms it deems reasonable.

 

6
 

 

NOTE 7 - PROPERTIES

 

The Partnership is engaged solely in gas activities, all of which are located in Pennsylvania. Costs capitalized for these activities are as follows: 

       
   June 30, 2015    December 31, 2014  
Leasehold Costs  $124,987   $124,987 
Asset Retirement Obligation Asset   124,764    124,764 
Development Costs   7,392,055    7,392,055 
Gas properties, successful efforts method   7,641,806    7,641,806 
Less: Accumulated Depreciation, Depletion and Amortization   1,553,943    1,210,370 
           
Gas Properties – net  $6,087,863   $6,431,436 

 

Fourteen wells are revenue producing as of June 30, 2015.

 

NOTE 8 - ASSET RETIREMENT OBLIGATION

 

Changes in carrying amount of asset retirement obligations associated with gas properties are as follows: 

    
December 31, 2014  $129,630 
Obligations assumed with development activities   - 
Accretion expense   2,068 
June 30, 2015  $131,698 

 

The above accretion expense is included in depreciation, depletion and amortization in the partnership statement of operations.

 

NOTE 9 - RELATED-PARTY ACTIVITIES

 

MDS, through entities under common ownership, performed drilling, and well services for the Partnership and is paid at competitive rates for these services. First Class Energy, an entity under common ownership performed much of the drilling services on behalf of the MGP. Gathering, transportation and gas marketing is provided by Snyder Brothers, Inc. The MGP also receives a fully accountable reimbursement for actual administrative costs. At June 30, 2015, $19,200 was due to the MGP for well maintenance fees related to the revenue producing wells and this amount is included in the accrued expenses on the balance sheet. At December 31, 2014 the Partnership had no material accrued expenses due to the MGP.

 

NOTE 10 - FAIR VALUE MEASUREMENT

 

This Partnership’s fair value measurements were estimated pursuant to a fair value hierarchy that requires this Partnership to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The carrying value of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.

 

The Managing General Partner utilizes fair value, on a non-recurring basis, to perform impairment testing on this Partnership’s crude oil and natural gas properties by comparing net capitalized costs, or carrying value, to estimated undiscounted future net cash flows. If net capitalized costs exceed undiscounted future net cash flows, the measurement of impairment is based on estimated fair value and is measured by the amount by which the net capitalized costs exceed their fair value.

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

Environmental

 

Due to the nature of the natural gas industry, the Partnership is exposed to environmental risks through the services provided to it by affiliated companies.

 

The affiliated companies have various policies and procedures to avoid environmental contamination and mitigate the risks from environmental contamination. The affiliated companies conduct periodic reviews to identify changes in their environmental risk profile. Liabilities are accrued when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. The MGP is not aware of any environmental claims existing as of June 30, 2015. However, there can be no assurance that current regulatory requirements will not change or unknown past noncompliance with environmental laws will not be discovered on the Partnership’s properties.

 

7
 

 

Legal

 

Neither the Partnership nor the MGP are party to any pending legal proceeding that the MGP believes would have a materially adverse effect on the Partnership’s business, financial condition, results of operations or liquidity.

  

ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)

 

The following discussion and analysis should be read together with the Partnership’s unaudited condensed balance sheets and related notes thereto set forth in this Quarterly Report on Form 10-Q. Please also refer to the Partnership’s prospectus dated May 2, 2013 for further details regarding the matters discussed below.

 

Forward-Looking Statements

 

When used in this Form 10-Q, the words “believes”, “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. These risks and uncertainties could cause actual results to differ materially from the results stated or implied in this document. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as a result of a variety of risks and uncertainties, including those described under “Cautionary Statements Regarding Forward Looking Statements” and “Risk Factors” of the prospectus dated May 2, 2013.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Partnership undertakes no obligation to publicly release the results of any revisions to forward-looking statements which the Partnership may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

 

Overview

 

Business of the Partnership, the Managing General Partner and Certain Relationships

 

The Partnership drilled development wells which means a well drilled within the proved area of a natural gas reservoir to the depth of a stratigraphic horizon known to be productive. Only vertical natural gas wells in the Marcellus Shale area in western Pennsylvania were drilled. The Partnership Agreement governs the rights and obligations of the partners. The investment return will depend solely on the operations and success or lack of success of the Partnership.

 

The Partnership has been formed as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. 1,508.53 units have been sold for an aggregate price of $15,001,000.

 

The MGP of the Partnership is MDS Energy Development, LLC (“MDS”), a Pennsylvania limited liability company. The MGP’s affiliates, MDS Energy, Ltd. and M/D Gas, Inc., have sponsored and serve as MGP of nine private drilling partnerships, in the aggregate.

 

First Class Energy, LLC provided the necessary services to drill the wells on behalf of the MGP, and also served as the Partnership’s general drilling contractor and operator (“driller/operator”) supervises the drilling, completing and operating (administrative, gathering, transportation, well services) of the wells drilled by the Partnership and paid at competitive rates for these services. The gas marketing is handled by an affiliated company, Snyder Brothers, Inc. The personnel of the driller/operator’s affiliates’ (MDS Energy, Ltd. and First Class Energy LLC) manage and operate the MGP’s business. These affiliates have limited information with respect to the ultimate recoverable reserves and production decline rates of vertical wells drilled in the Marcellus Shale primary area. The MGP and its affiliates receive substantial fees and profits in connection with the Partnership’s business.

  

Governance

 

The Partnership has no executive officers and currently does not have any directors. Because the Partnership itself does not employ any persons, the MGP has determined that the Partnership will rely on a Code of Business Conduct and Ethics adopted by the MGP that applies to the executive officers, employees and other persons performing services for the MGP.

 

Conflicts of Interest

 

Conflicts of interest are inherent in natural gas and oil partnerships involving non-industry investors because the transactions are entered into without arms’ length negotiation. The interests of the investors and those of the MGP and its affiliates may be inconsistent in some respects, and the MGP’s actions may not be the most advantageous to investors.

 

8
 

 

The Partnership does not directly employ any of the persons responsible for its management or operation. Rather, the personnel of the MGP manage and operate the Partnership’s business, and they will also spend a substantial amount of time managing the business and affairs of the MGP’s other affiliates, which creates a conflict regarding the allocation of their time between the Partnership’s business and affairs and the MGP’s other business interests. In this regard, the Partnership’s policies and procedures for reviewing, approving or ratifying related party transactions with the MGP are set forth in the partnership agreement.

 

Liquidity and Capital Resources

 

Natural Gas Sales

 

The Partnership currently uses the “net-back” method of accounting for arrangements related to its commodity sales. This Partnership sells commodities at the wellhead and collects a price and recognizes revenues based on the wellhead sales price as transportation costs downstream of the wellhead are incurred by the purchaser and reflected in the wellhead price.

 

As of June 30, 2015, all of the aggregate capital from our offering of the units has been expended, fourteen wells have been completed and producing revenue as of June 30, 2015. As of June 30, 2015, approximately $320,000 of gross revenue from the sale of natural gas had been received for approximately 157,000 MCF of production with an average realized price of $2.04 per MCF. In addition approximately $128,000 of gross revenue from the sale of natural gas had been recorded as revenue as a result of the Partnership estimating revenue from production for which the proceeds of the sale of the natural gas had not yet been received and those amounts are recorded as accounts receivable. The average realizable price per MCF for this estimated revenue is $1.37 per MCF for estimated production of 93,400 MCF of production.

 

Natural gas pricing is predominately driven by the supply and demand in the physical and financial markets. Natural gas is sold under various purchase contracts with monthly pricing provisions based on NYMEX pricing, adjusted for differentials. Natural gas prices vary by locality, depending upon the distance to markets, availability of pipeline capacity and supply and demand relationships in that region. The Marcellus shale region, where this production is derived from, has a negative price differential making the prices we are realizing lesser than NYMEX.

 

For the six month period ended June 30, 2015 compared to the same period for 2014 natural gas production increased approximately 26% as a result of additional Partnership wells being revenue producing during the six month period ended June 30, 2015. Additionally, there was a significant decrease in the average price per MCF for the six month period ended June 30, 2015. The average price per MCF for the six months ended June 30, 2015 was approximately $1.64 compared to $3.92 per MCF for the six months ended June 30, 2014.

 

During the three months ended June 30, 2015, the Partnership recognized approximately $214,000 of revenue from the sale of approximately 140,600 MCF’s. Compared to approximately $940,000 of revenue from the production of 215,700 MCF’s of production in the three month period ended June 30, 2014. The three month production from June 30, 2015 compared to the same period in 2014 decreased approximately 35% while the average price per MCF decreased 66%.

 

Natural Gas Production Costs

 

Generally, natural gas production costs vary with changes in total natural gas production volumes. In addition, general field services and all other costs vary and can fluctuate based on services required, but are expected to increase as wells age and require more extensive repair and maintenance. These costs include water hauling and disposal, equipment repairs and maintenance, snow removal, environmental compliance and remediation and service rig workovers. Production costs for the six months ended June 30, 2015 were approximately $171,000. Production costs for the three months ended June 30, 2015 were approximately $86,000.

 

Natural gas production costs for the six months ended June 30, 2015 compared to the same period in 2014 increased approximately $86,000 as a result of the Partnership wells not being completed and revenue producing as of June 30, 2014. Additionally, in the second quarter of 2014 only six of the fourteen Partnership wells were completed and revenue producing resulting in less well operations costs in 2014 as compared to 2015.

 

Natural gas production costs for the three months ended June 30, 2015 increased marginally by approximately $1,700 compared to the same period in 2014. Natural gas production costs per MCF increased to $.61 during 2015 from $.50 in 2014 due to the timing of the wells being in-line and the initial flush period that was incurred during the initial year of production.

 

Depreciation, Depletion and Amortization

 

DD&A expense for operations was approximately $344,000 for the six months ended June 30, 2015 from production of 272,600 MCFs. DD&A expenses for the three months ended June 30, 2015 were approximately $177,000 from production of approximately 140,600 MCFs. The DD&A expense rate per MCF is estimated at $1.26. DD&A expenses for the six months ended June 30, 2015 compared to the same period during 2014 had a rate decrease of approximately 35% primarily driven by the decrease in the natural gas prices which resulted in an impairment of oil and gas properties as of December 31, 2014.

 

DD&A expense related to natural gas properties is directly related to proven reserves and production volumes. DD&A expense decreased approximately $241,000 for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 due to two factors the first is a decrease in production volumes, and a decreased DD&A rate. The DD&A expense rate per MCF decreased to $1.26 for the three months ended June 30, 2015 compared to $1.94 during the same period in 2014, due to the increase in oil and gas properties and decreased production.

 

Direct costs - general and administrative

 

Direct costs increased for the six month period ended June 30, 2015 compared to the same period in 2014 due to increased impact fees of approximately $37,000 due to the completion of additional Partnership wells during the first and second quarter of 2015 and increased professional fees of $50,000.

 

Direct costs for the three month period ended June 30, 2015 compared to the same period in 2014 increased by $11,000 due to increased professional fees of $25,000 offset by six wells being completed during the second quarter of 2014 incurring impact fees compared to two wells being completed during the three months ended June 30, 2015 resulting in a decrease of approximately $14,000 in impact fees.

  

Financial Condition, Liquidity and Capital Resources

 

This Partnership’s primary source of liquidity has been cash flows from operating activities. Fluctuations in this Partnership’s operating cash flows are substantially driven by changes in commodity prices and sales volumes. This source of cash has been primarily used to fund this Partnership’s operating costs, direct costs-general and administrative, capital program and distributions to the Investor Partners and the MGP.

 

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This Partnership’s future operations are expected to be conducted with available funds and revenues generated from natural gas production activities. Natural gas production from existing properties is generally expected to continue a gradual decline in the rate of production over the remaining life of the wells.

  

Working Capital

  

At June 30, 2015, this Partnership had working capital of $36,260, compared to working capital of $133,732 at December 31, 2014. The decrease of $97,472 between June 30, 2015 and December 31, 2014 was primarily due to an increase in cash of $4,670, increase of current liabilities of approximately $6,000 and a decrease in current assets of approximately $96,000.

  

Cash Flows

  

Operating Activities

  

This Partnership’s cash flows from operating activities in 2015 were primarily impacted by commodity prices, operating costs and professional fees.

  

Net cash flows from operating activities were $199,534 for the six months ended June 30, 2015 compared to $384,875 for the comparable period in 2014. The decrease in cash from operating activities was primarily due to a decrease in natural gas pricing.

  

Financing Activities

  

This Partnership initiated cash distributions to investors during 2014 and has distributed $194,864 for the six months ended June 30, 2015 for the comparable period in 2014 the Partnership distributed $297,767.

 

Funding of the Proposed Activities

 

The Partnership will depend on the proceeds of the offering and the MGP’s capital contribution to carry out its proposed activities. The MGP paid all of the Partnership’s organization and offering costs (excluding sales commissions) up to 8% of the Partnership’s subscription proceeds and it contributed all of the leases (but the MGP retained the other lease rights) for each well to be drilled by the Partnership.

 

The MGP believes that the Partnership’s liquidity requirements will be satisfied from the proceeds of the offering and the MGP’s capital contributions and the Partnership’s production revenues from its wells.

 

If the Partnership requires additional funds for cost overruns or additional development or remedial work after a well begins producing, then these funds may be provided by:

 

subscription proceeds, if available, which will result in the Partnership either drilling fewer wells or acquiring a lesser working interest in one or more wells;

 

borrowing from the MGP, its affiliates, or third-parties if available on terms deemed reasonable by the MGP;

 

retaining Partnership revenues

  

The amount that may be borrowed by the Partnership from the MGP, its affiliates and third-parties may not at any time exceed 5% of the Partnership’s subscription proceeds and must be without recourse to the other investors. Notwithstanding, this limitation will not affect the Partnership’s ability to enter into agreements and financial instruments relating to hedging up to 50% of the Partnership’s natural gas and oil production and pledging up to 100% of the Partnership’s assets and reserves in connection therewith. The Partnership’s repayment of any borrowings would be from its production revenues and would reduce or delay any cash distributions.

 

Participation in Costs and Revenues and Distributions

 

Please refer to Note 4 – Participation in Costs and Revenues for the details of how the Partnership’s costs and revenues will be charged and credited between the MGP and the investors in the Partnership after deducting from the Partnership’s gross revenues the landowner royalties and any other lease burdens. Some of the percentages will be determined either by the actual costs incurred by the Partnership to drill and complete its wells or by the final amount of the MGP’s capital contribution to the Partnership, which will not be known until after all of the Partnership’s wells have been drilled and completed.

 

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Availability of Financing to the Managing General Partner and associated entities

 

In July 2014, certain of the wholly-owned companies of MDS Associated Companies, Inc., an affiliate of the MGP, agreed to revise their existing line of credit with PNC Bank, National Association. Under the revised terms, $3,000,000 of the existing balance on the line of credit was converted to a term note of 60 months duration with an interest rate of LIBOR plus 2.45%. As of June 30, 2015, the outstanding balance was $2,450,000. In addition, there is a line of credit for working capital in the amount of $2,000,000 that matures on July 30, 2015 with an interest rate of LIBOR plus 2.45% and a line of credit for equipment in the amount of $4,500,000 that matures July 31, 2015 with an interest rate of LIBOR plus 2.50%. As of June 30, 2015, there was no outstanding balance under the working capital line of credit and the outstanding balance under the equipment line of credit was $4,091,219 which was converted to a term note of 60 months duration with an interest rate of LIBOR plus 2.50%. All credit facilities are guaranteed by all the wholly-owned companies of the MDS Associated Companies, Inc. including the MGP. The credit facilities are secured by all of the assets of the borrowers, including the MGP’s, except fixtures used in connection with wells and the production and transportation of natural gas and oil from the wells. The obligations of the borrowers under these facilities have been guaranteed by Michael D. Snyder.

 

In addition, MDS Energy, Ltd., an affiliate of the MGP, is a borrower under two financing arrangements (unsecured line of credit and an unsecured demand note) with David E. Snyder, the father of Michael D. Snyder. As of June 30, 2015 the aggregate principal amount outstanding under these financing arrangements was $2,275,000, which may increase or decrease in the future. The unsecured line credit is for $5,000,000 and borrowings bear interest at the prime lending rate less 1.25%. The outstanding balance as of June 30, 2015 was $1,175,000 and is payable on demand. The unsecured demand note bears interest at the Federal Fund target Rate plus 1% with a 2.5% floor and the outstanding balance was $1,100,000 and is payable on demand with interest payable quarterly. The financing arrangements are subordinated to MDS Associated Companies, Inc.’s obligations to PNC Bank, National Association, under the term note and line of credit described in the preceding paragraph.

  

Critical Accounting Policies

 

The discussion and analysis of the Partnership’s financial condition is based upon the Partnership’s condensed balance sheets, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The Partnership will base its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, and the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Partnership will evaluate its estimates on an on-going basis.

 

Actual results may differ from these estimates under different assumptions or conditions. A discussion of significant accounting policies the Partnership has adopted and followed in the preparation of its financial statements is included within “Notes to Financial Statements” in Part I, Item 1, “Financial Statements” in this quarterly report and in its Form 10-K dated March 13, 2015.

  

ITEM 4.          CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The MGP on behalf of the Partnership, with the participation of the MGP’s management, including the Chief Executive Officer and President and the Chief Financial Officer, evaluated the effectiveness of the Partnership’s disclosure controls and procedures as of June 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Partnership’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

 

Under the supervision of the MGP’s Chief Executive Officer and President, and Chief Financial Officer, the MGP has carried out an evaluation of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the MGP’s management, including the Chief Executive Officer and President and the Chief Financial Officer concluded that, at June 30, 2015, the Partnership’s disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Partnership’s internal control over financial reporting for the Partnership during the six months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

As an emerging growth company, the Partnership is exempt from the requirement to obtain an attestation report from the Partnership’s independent registered public accounting firm on the assessment of the Partnership’s internal controls pursuant to the Sarbanes-Oxley Act of 2002 until 2018, or such time that the Partnership no longer qualifies as an emerging growth company in accordance with the Jumpstart Our Business Startups Act of 2012.

 

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PART II OTHER INFORMATION

 

ITEM 1.          LEGAL PROCEEDINGS

 

The MGP is not aware of any legal proceedings filed against the Partnership.

 

Affiliates of the MGP are party to various routine legal proceedings arising in the ordinary course of their collective business. The MGP’s management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the MGP’s or Partnership’s financial condition or results of operations.

 

ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.          MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.          OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS
                         
EXHIBIT INDEX
                         
        Incorporated by Reference    

Exhibit

No. 

  Description   Form  

SEC File 

Number 

  Exhibit  

Filing 

Date 

  Filed Herewith
                         
4.2   Certificate of Limited Partnership for MDS Energy Public 2013-A LP   10-Q   333-181993-02   4.2   6/10/2013    
                         
31.1   Rule 13(a)-14(a) Certification of Principal Executive Officer.                   Filed herewith
                         
31.2   Rule 13(a)-14(a) Certification of Principal Financial Officer.                   Filed herewith
                         
32   Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.                   Filed herewith
                         
101.INS   XBRL Instance document                   Filed herewith
                         
101.SCH   XBRL Taxonomy Extension Schema Document                   Filed herewith
                         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document                   Filed herewith
                         
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document                   Filed herewith
                         
101.LAB   XBRL Taxonomy Extension Label Linkbase Document                   Filed herewith
                         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document                   Filed herewith
                           

Incorporate all by reference into the document rather than attach

  

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SIGNATURES

 

Pursuant to the requirements of the Securities of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

     
  MDS ENERGY PUBLIC 2013 - A LP
  By: MDS Energy Development, LLC, its Managing General Partner
     
Date: August 14, 2015 By: /s/ Michael D. Snyder
    Michael D. Snyder, Chief Executive Officer and President

  

In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 

     
Date: August 14, 2015 By: /s/ Dennis L. Hinderliter
    Dennis L. Hinderliter, Chief Financial Officer and Treasurer

 

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