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FISH > SEC Filings for FISH > Form 10-Q on 5-Sep-2013All Recent SEC Filings

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Form 10-Q for MARLIN MIDSTREAM PARTNERS, LP


5-Sep-2013

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited combined financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited combined financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations as of and for the year ended December 31, 2012 and 2011 included in the prospectus relating to our initial public offering ("Prospectus") that was filed with the Securities and Exchange Commission ("SEC") on July 25, 2013. Unless otherwise noted, references to "we," "us," "our," the "Partnership" or "Marlin Midstream Partners" refers to Marlin Midstream Partners, LP and its subsidiaries.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS We have made in this report, and may from time to time otherwise make in other public filings, press releases and discussions by management, forward-looking statements concerning our operations, economic performance and financial condition. These statements can be identified by the use of forward-looking terminology including "may," "will," "believe," "expect," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or financial condition or include other "forward-looking" information. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will be realized. These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:

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

the volume of crude oil that we transload;

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


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

the level of our operating expenses;

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


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


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


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


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


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


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

the cost of acquisitions, if any;

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

our debt service requirements and other liabilities;

fluctuations in our working capital needs;

our ability to borrow funds and access capital markets;

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restrictions contained in our debt agreements;

the amount of cash reserves established by our general partner;

other business risks affecting our cash levels; and

other factors discussed below and elsewhere in "Risk Factors" in our Prospectus.

The risk factors and other factors noted throughout or incorporated by reference in this report could cause our actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Overview
We are a fee-based, growth-oriented Delaware limited partnership formed to develop, own, operate and acquire midstream energy assets. We currently provide natural gas gathering, compression, dehydration, treating, processing and hydrocarbon dew-point control and transportation services, which we refer to as our midstream natural gas business, and crude oil transloading services, which we refer to as our crude oil logistics business. Our assets and operations are organized into the following two segments:
Midstream Natural Gas
Our primary midstream natural gas assets currently consist of (i) two related natural gas processing facilities located in Panola County, Texas with an approximate design capacity of 220 MMcf/d, (ii) a natural gas processing facility located in Tyler County, Texas with an approximate design capacity of 80 MMcf/d, (iii) two natural gas gathering systems connected to our Panola County processing facilities that include approximately 65 miles of natural gas pipelines with an approximate design capacity of 200 MMcf/d, and (iv) two NGL transportation pipelines with an approximate design capacity of 20,000 Bbls/d that connect our Panola County and Tyler County processing facilities to third party NGL pipelines. Our primary midstream natural gas assets are located in long-lived oil and natural gas producing regions in East Texas and gather and process NGL-rich natural gas streams associated with production primarily from the Cotton Valley Sands, Haynesville Shale, Austin Chalk and Eaglebine formations.
Crude Oil Logistics
Our crude oil logistics assets currently consist of two crude oil transloading facilities: (i) our Wildcat facility located in Carbon County, Utah, where we currently operate one skid transloader and two ladder transloaders, and (ii) our Big Horn facility located in Big Horn County, Wyoming, where we currently operate one skid transloader and one ladder transloader. Our transloaders are used to unload crude oil from tanker trucks and load crude oil into railcars and temporary storage tanks. Our Wildcat and Big Horn facilities provide transloading services for production originating from well-established crude oil producing basins, such as the Uinta and Powder River Basins, which we believe are currently underserved by our competitors. Our skid transloaders each have a transloading capacity of 475 Bbls/hr, and our ladder transloaders each have a transloading capacity of 210 Bbls/hr. Our crude oil logistics segment had no material assets or operations as of or prior to June 30, 2013.

INITIAL PUBLIC OFFERING

On July 31, 2013, we completed an initial public offering ("IPO") of 6,875,000 common units at a public offering price of $20.00 per common unit less an underwriting discount of $1.20 per common unit for net proceeds, before expenses, of $18.80 per common unit. Our sponsor, NuDevco Partners, LLC ("NuDevco"), is the ultimate parent company of Spark Energy Ventures, LLC ("SEV"). NuDevco also owns NuDevco Midstream Development, LLC ("NuDevco Midstream") and Associated Energy Services, LP ("AES"). Following the closing of the offering, we entered into fee-based commercial agreements with Anadarko Petroleum Corporation ("Anadarko") and AES, substantially all of which will include minimum volume commitments and annual inflation adjustments. In connection with the offering, NuDevco and its affiliates conveyed Marlin Midstream, LLC ("Marlin Midstream") and Marlin Logistics, LLC ("Marlin Logistics") to us.

Additionally at the closing of the IPO, we issued 2,474,545 common units and 8,724,545 subordinated units to NuDevco Midstream Development. We terminated our commodity-based gas gathering and processing agreement with AES and assigned all our remaining keep-whole and other commodity-based gathering and processing agreements with third party customers to AES. We entered into transloading services agreements with AES, each with three year terms, minimum volume commitments and annual inflation adjustments.

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

Our partnership agreement provides for a minimum quarterly distribution of $0.35 per unit for each whole quarter, or $1.40 per unit on an annualized basis.

As of the closing of the IPO, the unit ownership was as follows:

                                    Number of units   Limited Partner
                                   at July 31, 2013      Interest
Publicly held common units                6,875,000           38.6 %
Common units held by NuDevco              1,849,545           10.4 %
Subordinated units held by NuDevco        8,724,545           49.0 %
General partner units                       356,104            2.0 %
   Total                                 17,805,194          100.0 %

FACTORS AFFECTING THE COMPARABILITY OF OPERATING RESULTS
Our future results of operations may not be comparable to our historical results
of operations for the reasons described below:
Revenues
There are differences in the way we generated revenues historically and the way
we will generate revenues subsequent to the closing of the IPO.
 Gathering and Processing Agreements.


               Until 2011, our gathering and processing agreements with third
                parties and our affiliates were primarily keep-whole contracts.
                Under these contracts, we were required to make up or "keep the
                producer whole" for the condensate and NGL volumes extracted from
                the natural gas stream through the delivery of or payment for a
                thermally equivalent volume of residue gas. The cost of these
                "replacement" natural gas volumes was recorded in our cost of
                revenues. Beginning in late 2011, we contracted with Anadarko and
                other third party producers at our Panola County processing
                facilities for significant volumes under a fee-based processing
                model. A substantial majority of these agreements provide for
                minimum volume commitments. Following the closing of the IPO,
                substantially all of our gathering and processing gross margin is
                generated under existing third-party fee-based gathering and
                processing agreements and from the fee-based gathering and
                processing agreement that we entered into with AES at the closing
                of the IPO.


               Beginning on January 1, 2012, our commercial agreements with
                Anadarko at our Panola County processing facilities were amended
                such that Anadarko began receiving the NGLs extracted on an
                in-kind basis. As a result, we do not sell the NGLs extracted
                under these amended agreements, and therefore the NGLs recovered
                under these amended agreements are not included in our natural
                gas, NGLs and condensate sales. Under our commercial agreements
                that do not require us to deliver NGLs to the customer in kind,
                including our gathering and processing agreement with AES that we
                entered into in connection with the closing of the IPO, we
                provide NGL transportation services to the customer whereby we
                purchase the NGLs from the customer at an index price, less
                fractionation and transportation fees, and simultaneously sell
                the NGLs to third parties at the same index price, less
                fractionation fees. The revenues generated by these activities is
                substantially offset by a corresponding cost of revenue that is
                recorded when we compensate the customer for its contractual
                share of the NGLs.

Transloading Services Agreements.

               Following the closing of the IPO, our crude oil logistics
                revenues are generated under transloading services agreements
                that we entered into with AES at the closing of the IPO. Under
                the transloading

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services agreements with AES, we receive a per barrel fee for crude oil transloading services, including fees in respect of shortfall payments related to AES' minimum volume commitments under these agreements from time to time. Because our crude oil logistics assets did not become operational until 2013, our future results of operations will not be comparable to our historical results of operations regarding our crude oil logistics segment.

Operating and General and Administrative Expenses With respect to our operation and maintenance expenses and general and administrative expenses, prior to the IPO, we employed all of our operational personnel and most of our general and administrative personnel directly, and incurred direct operating and general and administrative charges with respect to their compensation. In connection with the closing of the IPO, all of our personnel were transferred to affiliates of NuDevco. As a result, following the closing of the IPO, we reimburse NuDevco for the compensation of these employees on a direct or allocated basis, depending on whether those employees spend all or only a part of their time working for us. As a result of this change, the amount of our affiliate operation and maintenance expenses and affiliate general and administrative expenses will increase, and the amount of our non-affiliate operation and maintenance expenses and non-affiliate general administrative expenses will decrease, compared to historical amounts.
Our historical general and administrative expenses included certain expenses allocated by affiliates of NuDevco for general corporate services, such as information technology, treasury, accounting and legal services, as well as direct expenses. These allocated expenses were charged or allocated to us based on the nature of the expenses and our proportionate share of departmental usage, wages or headcount. Following the closing of the IPO, affiliates of NuDevco will continue to charge us a combination of direct and allocated monthly general and administrative expenses related to the management and operation of our midstream natural gas and crude oil logistics businesses, and will also charge us an annual fee, initially in the amount of $0.6 million, for the executive management services of W. Keith Maxwell III and Terry D. Jones in lieu of any other compensation to these individuals.
In addition, we expect our general and administrative expenses will increase due to the costs of operating as a publicly traded partnership, including costs associated with ongoing SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, Sarbanes-Oxley compliance expenses, expenses associated with listing on NASDAQ, independent auditor fees, legal fees, investor relations expenses, registrar and transfer agent fees, director and officer insurance expenses and director compensation expenses. We estimate that these incremental general and administrative expenses, which also include increased personnel costs, will be approximately $2.8 million per year, including the costs associated with the initial implementation of our Sarbanes-Oxley Section 404 internal controls review and testing. The initial annual executive management fee of $0.6 million described above is also included in this incremental amount. Financing
There are differences in the way we finance our operations as compared to the way we financed our operations on a historical basis. Historically, our operations were financed by cash generated from operations, equity investments by our sole Member and borrowings under our existing credit facility. Approximately $130.9 million and $126.5 million were outstanding under our existing credit facility as of June 30, 2013 and December 31, 2012, respectively. In connection with the closing of the IPO, we repaid the full amount of our existing credit facility, settled our related interest rate swap liability and entered into a new $50.0 million senior secured revolving credit facility. Following the closing of the IPO, we intend to make minimum cash distributions to our unitholders at an initial distribution rate of $0.35 per unit per quarter ($1.40 per unit on an annualized basis). Based on the terms of our cash distribution policy, we expect that we will distribute to our unitholders and our general partner most of the cash generated by our operations. As a result, we expect to fund future capital expenditures primarily from external sources, including borrowings under our new revolving credit facility and future issuances of equity and debt securities.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
The following table presents selected financial data related to our midstream
natural gas segment for each of the three months ended June 30, 2013 and 2012.

(in thousands, except operating data)            Three months ended
                                           June 30, 2013     June 30, 2012      Change       % Change
REVENUES:
 Natural gas, NGLs and condensate revenue $       3,844     $       6,630     $  (2,786 )      (42.0 )%
 Gathering, processing and other revenue          6,454             2,622         3,832        146.1  %
  Total Revenues                                 10,298             9,252         1,046         11.3  %
OPERATING EXPENSES:
 Cost of natural gas, NGLs and condensate
revenue                                           2,680             4,007        (1,327 )      (33.1 )%
 Operation and maintenance                        3,700             4,097          (397 )       (9.7 )%
 General and administrative                       1,321               931           390         41.9  %
 Property and other taxes                           332               219           113         51.6  %
 Depreciation expense                             2,050             1,921           129          6.7  %
  Total operating expenses                       10,083            11,175        (1,092 )       (9.8 )%
  Operating income                                  215            (1,923 )       2,138       (111.2 )%
Interest expense, net of amounts
capitalized                                      (1,426 )          (1,120 )        (306 )       27.3  %
Loss on interest rate swap                            5               (73 )          78       (106.8 )%
Net income (loss)                         $      (1,206 )   $      (3,116 )   $   1,910        (61.3 )%

Key Performance Metrics:
Gross Margin                              $       7,618     $       5,245     $   2,373
Adjusted EBITDA                           $       2,278     $           1     $   2,277

Throughput Volumes:
  Processing Facilities (MMcf)                   14,261            10,807         3,454         32.0  %

Midstream Natural Gas
Natural gas, NGLs and condensate revenue decreased $2.8 million, or 42%, to $3.8 million for the three months ended June 30, 2013 as compared to $6.6 million for the three months ended June 30, 2012. The decrease in natural gas, NGLs and condensate revenue is primarily due to declining NGL prices and a decrease in NGL volumes sold from our Panola County processing facilities. The average price of ethane decreased by 32% to $0.27 per gallon for the three months ended June 30, 2013 from $0.40 per gallon for the three months ended June 30, 2012, and the average price of propane decreased by 6% to $0.91 per gallon for the three months ended June 30, 2013 from $0.98 per gallon for the three months ended June 30, 2012. Similarly, the average price per gallon of isobutane, normal butane and natural gasoline decreased by 27%, 23%, and 1%, respectively, for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. Declining NGL prices attributed to a $2.0 million decrease in our NGL sales for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012.
In addition, we entered into an additional commercial agreement with Anadarko at our Panola County processing facilities, effective August 1, 2012. Under this agreement, Anadarko receives the NGLs extracted on an in-kind basis. We do not sell the NGLs extracted under this agreement, and therefore the NGLs recovered under this agreement are not included in our natural gas, NGLs and condensate sales. As a result, although the number of barrels of NGLs that we recovered increased by

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61% for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, the number of barrels of NGLs that we sold decreased by 23% for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. This resulted in a $0.8 million decrease in natural gas, NGLs and condensate revenue for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012.
Gathering, processing and other revenue increased by $3.8 million for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 as a result of increased throughput under fee-based agreements. We expect the trend of increased volumes under fee-based agreements to continue, consistent with our overall business strategy.
Cost of revenues are derived primarily from the creation of natural gas, NGL and condensate revenue. Total cost of natural gas, NGLs and condensate revenue decreased by $1.3 million, or 33%, to $2.7 million for the three months ended June 30, 2013 from $4.0 million for the three months ended June 30, 2012. The volume of gas redelivered or sold at the tailgates of our processing facilities is lower than the volume received or purchased at delivery points on our gathering systems or interconnecting pipelines due to the NGLs extracted when the natural gas is processed. Under our keep-whole agreements, we were required to make up or "keep the producer whole" for the condensate and NGL volumes extracted from the natural gas stream through the delivery of or payment for a thermally equivalent volume of residue gas. The cost of these "replacement" natural gas volumes was recorded in our cost of natural gas, NGLs and condensate revenue. Under our fee-based agreements, we do not bear the cost of these "replacement" volumes. There are no material costs categorized as costs of revenue directly identified with gathering, processing and other revenue. Operation and maintenance expenses are primarily composed of expenses related to labor, utilities and chemicals, property insurance premiums, compression costs and maintenance and repair expenses, which generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities performed during the period and the timing of these expenses.
General and administrative expense increased by $0.4 million, or 42%, to $1.3 million for the three months ended June 30, 2013 from $0.9 million for the three months ended June 30, 2012. The increase is primarily due to costs incurred during the three months ended June 30, 2013 for incremental audit fees, review fees and other miscellaneous internal costs to prepare our financial statements in accordance with the rules and regulations of the SEC.
Interest expense, net of amounts capitalized increased by $0.3 million, or 27%, to $1.4 million for the three months ended June 30, 2013 from $1.1 million for the three months ended June 30, 2012. The increase is primarily due to an increase in effective interest rates for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 and draws on our historical revolving credit facility in 2013.
Crude Oil Logistics
Our crude oil logistics assets became operational in 2013. As such, there are no material results of operations or material assets related to this segment for the three months ended June 30, 2013 and 2012.

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Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

The following table presents selected financial data related to our midstream
natural gas segment for each of the six months ended June 30, 2013 and 2012.
(in thousands)                                    Six months ended
                                           June 30, 2013     June 30, 2012      Change       % Change
REVENUES:
 Natural gas, NGLs and condensate revenue $       7,080     $      14,593     $  (7,513 )      (51.5 )%
 Gathering, processing and other revenue         10,721             5,292         5,429        102.6  %
  Total Revenues                                 17,801            19,885        (2,084 )      (10.5 )%
OPERATING EXPENSES:
 Cost of natural gas, NGLs and condensate
revenue                                           5,208             7,380        (2,172 )      (29.4 )%
 Operation and maintenance                        7,582             7,985          (403 )       (5.0 )%
 General and administrative                       2,809             1,752         1,057         60.3  %
 Property and other taxes                           577               428           149         34.8  %
 Depreciation expense                             4,035             3,777           258          6.8  %
  Total operating expenses                       20,211            21,322        (1,111 )       (5.2 )%
  Operating income                               (2,410 )          (1,437 )        (973 )       67.7  %
Interest expense, net of amounts
capitalized                                      (2,724 )          (2,261 )        (463 )       20.5  %
Loss on interest rate swap                           (6 )            (441 )         435        (98.6 )%
Net income (loss)                         $      (5,140 )   $      (4,139 )   $  (1,001 )       24.2  %

Key performance metrics:
Gross Margin                              $      12,593     $      12,505     $      88
Adjusted EBITDA                                   1,649             2,346     $    (697 )
. . .
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