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FISH > SEC Filings for FISH > Form 10-K/A on 28-Mar-2014All Recent SEC Filings

Show all filings for MARLIN MIDSTREAM PARTNERS, LP

Form 10-K/A for MARLIN MIDSTREAM PARTNERS, LP


28-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, references in this report to "we," "our," "us," or like terms, when used in a historical context, refer to the combined businesses and assets of Marlin Midstream and Marlin Logistics, and when used in the present tense or prospectively, refer to the Partnership and its subsidiaries.

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.
General Trends and Outlook
In 2014, our strategic objectives will continue to be focused on maintaining stable distributable cash flows from our existing assets and executing on growth opportunities to increase our long-term distributable cash flows. We believe the key elements to stable distributable cash flows are our significant fee-based business plus our assets that are strategically positioned to capitalize on drilling activity and related demand for midstream natural gas services. We expect to continue to pursue a multi-faceted growth strategy, which includes maximizing opportunities provided by our partnership with NuDevco Midstream Partners LP, pursuing strategic and accretive third party acquisitions and capitalizing on organic expansion opportunities in order to grow our distributable cash flows.
                                   HIGHLIGHTS
Significant financial highlights during the year ended December 31, 2013 include
the following:
         In connection with our IPO on July 31, 2013, we issued 6,875,000 common
          units, representing a 38.6% limited partner interest, to the public for
          $20.00 per common unit. Net proceeds of $125.3 million, after
          underwriting discounts, structuring fees, and other direct IPO costs,
          were used to repay the existing credit facility of $121.9 million,
          outstanding amounts on the revolving credit facility of approximately
          $10.0 million, and settling the interest rate swap liability of
          approximately $0.1 million.


         In connection with our IPO on July 31, 2013, we entered into a new
          $50.0 million senior secured revolving credit facility, which matures
          on July 31, 2017.

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         We declared and paid a prorated cash distribution for the third quarter
          of 2013 in the amount of $0.23 per unit and declared a cash
          distribution for the fourth quarter of 2013 in the amount of $0.35 per
          unit.


         Following the closing of the IPO, we assigned all of our existing
          commodity-based gathering and processing agreements with third party
          customers to AES and entered into a new three-year fee-based gathering
          and processing agreement with AES with a minimum volume commitment of
          80 MMcf/d.


         We entered into transloading services agreements with AES, each with
          three year terms, minimum volume commitments and annual inflation
          adjustments.

Significant operational highlights during the year ended December 31, 2013 included the following:

         Our crude oil logistics assets became operational in 2013. Following
          the closing of the IPO, our crude oil logistics revenues are generated
          under transloading services agreements that we entered into with AES.


         We completed construction of our Oak Hill Lateral gathering line and
          installed molecular sieves at our Panola 1 processing facility.

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 AES, substantially all of which 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.

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. The total net asset value transferred to the affiliates was $9.4 million. Additionally, NuDevco assumed $11.7 million of the non-current accounts payable balance owed by Marlin Midstream to affiliates of SEV and Marlin Midstream was released from such obligation.

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 at   Limited Partner
                                      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 %

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HOW WE EVALUATE OUR OPERATIONS
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our results of operations and profitability and include: (i) gross margin; (ii) volume commitments and throughput volumes (including gathering, plant, and transloader throughput); (iii) operation and maintenance expenses; (iv) adjusted EBITDA; and
(v) distributable cash flow. Gross margin, adjusted EBITDA and distributable cash flow are not measures under accounting principles generally accepted in the United States of America, or GAAP. To the extent permitted, we present certain non-GAAP measure and reconciliations of those measures to their most directly comparable financial measure as calculated and presented in accordance with GAAP. These non-GAAP measures may not be comparable to a similarly titled measure of another company because other entities may not calculate these non-GAAP measures in the same manner. Volumes - We view throughput and storage volumes for our gathering and processing and our crude oil logistics segment as important factors affecting our profitability. We gather and transport the natural gas and NGLs under fee-based transportation contracts. Revenue from these contracts is derived by applying the rates stipulated to the volumes transported. Pipeline throughput volumes from existing wells connected to our pipelines will naturally decline over time as wells deplete. Accordingly, to maintain or to increase throughput levels on these pipelines and the utilization rate of our natural gas processing plants, we must continually obtain new supplies of natural gas and NGLs. Our ability to maintain existing supplies of natural gas and NGLs and obtain new supplies are impacted by: (1) the level of workovers or recompletions of existing connected wells and successful drilling activity in areas currently dedicated to our pipelines; and (2) our ability to compete for volumes from successful new wells in other areas. The throughput volumes of NGLs and gas on our pipelines are substantially dependent upon the quantities of NGLs and gas produced at our processing plants. We regularly monitor producer activity in the areas we serve and in which our pipelines are located, and pursue opportunities to connect new supply to these pipelines. d.

In Thousands, except volume data        Years Ended December 31,
                                        2013        2012      2011
Gross Margin                       $   38,861     $ 30,026  $ 36,962
Gas volumes (MMcf/d) (2)                  219
Transloading volumes (Bbls/d) (2)      18,980
Adjusted EBITDA                    $   16,880     $  9,239  $ 19,730
Distributable Cash Flow (1)        $   12,982          n/a       n/a

(1) We will distribute available cash within 45 days after the end of the quarter, beginning with the quarter ending September 30, 2013. For the three months ended September 30, 2013, distributable cash is prorated from our IPO on July 31, 2013 through September 30, 2013.
(2) Volumes reflect the minimum volume commitment under our fee-based contracts or actual throughput, whichever is greater, for the post-IPO period.

Gross Margin
Gross margin is a primary performance measure used by our management. We define gross margin as revenues less cost of revenues. Gross margin represents our profitability with minimal exposure to commodity price fluctuations, which we believe are not significant components of our operations. Gross margin is calculated as follows:

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In Thousands                                  Years Ended December 31,
                                              2013        2012      2011
Total operating income                   $    5,671     $  1,550  $ 14,365
 Operation and maintenance                   12,401       15,035    12,031
 Operation and maintenance-affiliates         3,490          793       327
 General and administrative                   3,699        3,045     3,260
 General and administrative-affiliates        4,187        1,021       907
 Property and other taxes                     1,216          893       490
 Depreciation expense                         8,197        7,689     5,365
 Loss on disposals of equipment                   -            -       217
Gross Margin                             $   38,861     $ 30,026  $ 36,962

Volume Commitments and Throughput
We view the volumes of natural gas and crude oil committed to our midstream natural gas and crude oil logistics assets, respectively, as well as the throughput volume of natural gas and crude oil as an important factor affecting our profitability. The amount of revenues we generate primarily depends on the volumes of natural gas and crude oil committed to our midstream natural gas assets and crude oil logistics assets, respectively, under our commercial agreements, the volumes of natural gas that we gather, process, treat and transport, the volumes of NGLs that we transport and sell, and the volumes of crude oil that we transload. Our success in attracting additional committed volumes of natural gas and crude oil and maintaining or increasing throughput is impacted by our ability to:

         utilize the remaining uncommitted capacity on, or add additional
          capacity to, our gathering and processing systems and our transloaders;


         capitalize on successful drilling programs by our customers on our
          current acreage dedications;


         increase throughput volumes on our gathering systems by increasing
          connections to other pipelines or wells;

secure volumes from new wells drilled on non-dedicated acreage;

attract natural gas and crude oil volumes currently gathered, processed, treated or transloaded by our competitors; and

identify and execute organic expansion projects.

Adjusted EBITDA and Distributable Cash Flow We use adjusted EBITDA to analyze our performance and define it as net income
(loss) before interest expense (net of amounts capitalized) or interest income, Texas margin tax, depreciation expense, equity based compensation expense and any gain/loss from interest rate derivatives. Although we have not quantified distributable cash flow on a historical basis, after the closing of the IPO we compute and present this measure, which we define as adjusted EBITDA plus interest income, less cash paid for interest expense and maintenance capital expenditures. Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of our consolidated and combined financial statements, such as industry analysts, investors, commercial banks and others, may use to assess:

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


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

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

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


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

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Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ended September 30, 2013, we distribute all of our available cash to unitholders of record on the applicable record date. Our cash distribution for the period from the completion of the IPO through September 30, 2013 was adjusted based on the actual length of the period. For the three months ended September 30, 2013, a distribution of $0.23 per unit was declared on October 18, 2013 and paid on November 4, 2013 to unitholders of record as of October 29, 2013. For the three months ending December 31, 2013, a distribution of $0.35 per unit was declared on January 21, 2014 and paid on February 7, 2014 to unitholders of record as of February 3, 2014. Adjusted EBITDA is calculated as follows:

In Thousands                                       Years Ended December 31,
                                                  2013       2012       2011
Net income (loss)                              $   1,186  $ (4,306 ) $  8,541
Interest expense, net of amounts capitalized       4,349     4,927      3,733
Interest and other income                              -       (23 )      (20 )
Texas margin tax expense                              88       101        (65 )
Equity based compensation                          3,012         -          -
Loss on interest rate swap                            48       851      2,176
Depreciation expense                               8,197     7,689      5,365
Adjusted EBITDA                                $  16,880  $  9,239   $ 19,730

Distributable cash flow subsequent to the IPO is calculated as follows:
Distributable cash flow for the period from July 31, 2013 to December 31, 2013:

In Thousands
Net income post IPO                                              $          7,190
Add:
  Equity based compensation                                                 3,012
  Interest expense, net of amounts capitalized                                352
  Depreciation expense                                                      3,425
  Texas margin tax                                                             60
Adjusted earnings                                                          14,039
Less:
  Maintenance capital expenditures                                           (782 )
  Cash interest expense                                                      (215 )
  Texas margin tax                                                            (60 )
Distributable cash flow                                          $         12,982

Note Regarding Non-GAAP Financial Measures Gross margin, adjusted EBITDA and distributable cash flow are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations.
Gross margin is a primary performance measure used by our management. We define gross margin as revenues less cost of revenues. Gross margin represents our profitability without regard to commodity sales and purchases, which we believe are not significant components of our operations. We use adjusted EBITDA to analyze our performance and define it as net income (loss) before interest expense (net of amounts capitalized) or interest income, state franchise tax, depreciation expense and any gain/loss from interest rate derivatives. Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial

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measures that management and external users of our combined financial statements, such as industry analysts, investors, commercial banks and others, may use to assess:
the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

the ability of our assets to generate earnings sufficient to support our decision to make cash distributions to our unitholders and general partner;
our ability to fund capital expenditures and incur and service debt;

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

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

The GAAP measure most directly comparable to gross margin is operating income. The GAAP measure most directly comparable to adjusted EBITDA and distributable cash flow is net income. These measures should not be considered as an alternative to operating income, net income, or any other measure of financial performance presented in accordance with GAAP. Each of these non-GAAP financial measures has important limitations as an analytical tool because it excludes some but not all items that affect net income. You should not consider these non-GAAP financial measures in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because each of these non-GAAP financial measures may be defined differently by other companies in our industry, our definition of them may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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 generate revenues subsequent to the closing of our 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.


               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.


               Following the closing of the IPO, we assigned all of our existing
                commodity-based gathering and processing agreements with third
                party customers to AES and entered into a new three-year
                fee-based gathering and processing agreement with AES with a
                minimum volume commitment of 80 MMcf/d.

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 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 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 executive management services. . . .

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