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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-33631
Quicksilver Gas Services LP
(Exact name of registrant as specified in its charter)
     
Delaware   56-2639586
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
777 West Rosedale, Fort Worth, Texas   76104
(Address of principal executive offices)   (Zip Code)
817-665-8620
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
     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 þ No o
     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 o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
            Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller Reporting company o            
        (Do not check if a 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 o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common units, as of the latest practicable date:
     
Title of Class   Outstanding as of October 26, 2009
     
Common Units   12,313,451
 
 

 


 

QUICKSILVER GAS SERVICES LP
INDEX TO FORM 10-Q
For the Period Ended September 30, 2009
             
 
PART I. FINANCIAL INFORMATION        
 
           
  Financial Statements (Unaudited)     5  
 
           
 
  Condensed Consolidated Statements of Income     5  
 
           
 
  Condensed Consolidated Balance Sheets     6  
 
           
 
  Condensed Consolidated Statements of Cash Flows     7  
 
           
 
  Condensed Consolidated Statements of Changes in Partners’ Capital     8  
 
           
 
  Notes to Condensed Consolidated Interim Financial Statements     9  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     16  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     25  
 
           
  Controls and Procedures     25  
 
           
PART II. OTHER INFORMATION        
 
           
  Legal Proceedings     26  
 
           
  Risk Factors     26  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     32  
 
           
  Defaults Upon Senior Securities     32  
 
           
  Submission of Matters to a Vote of Security Holders     32  
 
           
  Other Information     32  
 
           
  Exhibits     33  
 
           
Signatures     34  
 EX-31.1
 EX-31.2
 EX-32.1

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DEFINITIONS
As used in this report, unless the context otherwise requires:
“Bbl” or “Bbls” means barrel or barrels
“Btu” means British Thermal units, a measure of heating value
“EBITDA” means earnings before interest, taxes, depreciation and accretion
“LIBOR” means London InterBank Offered Rate
“Management” means management of Quicksilver Gas Services LP’s General Partner
“MMBtu” means million Btu
“MMBtud” means million Btu per day
“Mcf” means thousand cubic feet
“MMcf” means million cubic feet
“MMcfd” means million cubic feet per day
“MMcfe” means MMcf of natural gas equivalents, calculated as one Bbl of oil or NGLs equaling six Mcf of gas
“MMcfed” means MMcfe per day
“NGL” or “NGLs” means natural gas liquids
COMMONLY USED TERMS
Other commonly used terms and abbreviations include:
“FASB” means the Financial Accounting Standards Board, which promulgates accounting standards
“FASC” means the FASB Accounting Standards Codification, which is the single source of authoritative GAAP not promulgated by the SEC
“GAAP” means Generally Accepted Accounting Principles in the United States
“Gas Gathering and Processing Agreement” means the Sixth Amended and Restated Gas Gathering and Processing Agreement, dated September 1, 2008, among Quicksilver Resources Inc., Cowtown Pipeline Partners L.P. and Cowtown Gas Processing Partners L.P.
“General Partner” means Quicksilver Gas Services GP LLC, a Delaware limited liability company, which is owned by Quicksilver
“IPO” means our initial public offering completed on August 10, 2007
“KGS Predecessor” means prior to the IPO, collectively Cowtown Pipeline L.P., Cowtown Pipeline Partners L.P., Cowtown Gas Processing L.P. and Cowtown Gas Processing Partners L.P.
“Lake Arlington Gas Gathering Agreement” means the Amended and Restated Gas Gathering Agreement, dated September 1, 2008, among Quicksilver Resources Inc. and Cowtown Pipeline L.P. and subsequently assigned to Cowtown Pipeline Partners L.P.
“Omnibus Agreement” means the Omnibus Agreement, dated August 10, 2007, among Quicksilver Gas Services LP, Quicksilver Gas Services GP LLC and Quicksilver Resources Inc., as amended
“Partnership Agreement” means the Second Amended and Restated Agreement of Limited Partnership of Quicksilver Gas Services LP, dated February 19, 2008
“Quicksilver” means, Quicksilver Resources Inc. and its subsidiaries
“Quicksilver Counties” means Hood, Somervell, Johnson, Tarrant, Hill, Parker, Bosque and Erath Counties in Texas where Quicksilver conducts the majority of its U.S. operations
“SEC” means the United States Securities and Exchange Commission

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Forward-Looking Information
     Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.   Forward-looking statements reflect our current expectations or forecasts of future events.   Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “aim,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements.   Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties.   Consequently, no forward-looking statements can be guaranteed.   Actual results may vary materially.   You are cautioned not to place undue reliance on any forward-looking statements and should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.   Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
    changes in general economic conditions;
 
    fluctuations in natural gas prices;
 
    failure or delays in Quicksilver and third parties achieving expected production from natural gas projects;
 
    competitive conditions in our industry;
 
    actions taken or non-performance by third parties, including suppliers, contractors, operators, processors, transporters and customers;
 
    fluctuations in the value of certain of our assets and liabilities;
 
    changes in the availability and cost of capital;
 
    operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
 
    construction costs or capital expenditures exceeding estimated or budgeted amounts;
 
    the effects of existing and future laws and governmental regulations;
 
    the effects of existing or future litigation; and
 
    certain factors discussed elsewhere in this quarterly report.
     The list of factors is not exhaustive, and new factors may emerge or changes to these factors may occur that would impact our business.   Additional information regarding these and other factors may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K.   All such risk factors are difficult to predict and are subject to material uncertainties that may affect actual results and may be beyond our control.   The forward-looking statements included in this report are made only as of the date of this report, and we undertake no obligation to update any of these forward-looking statements to reflect subsequent events or circumstances except to the extent required by applicable law.
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
QUICKSILVER GAS SERVICES LP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
In thousands, except for per unit data - Unaudited
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
Revenue
                               
Gathering and transportation revenue - Quicksilver
  $ 14,542     $ 8,674     $ 42,708     $ 22,350  
Gathering and transportation revenue
    615       1,553       2,259       4,006  
Gas processing revenue - Quicksilver
    8,155       7,345       25,541       21,866  
Gas processing revenue
    295       1,507       1,344       3,797  
Other revenue - Quicksilver
    691       225       1,141       675  
 
               
Total revenue
    24,298       19,304       72,993       52,694  
 
               
 
                               
Expenses
                               
Operations and maintenance
    5,694       4,772       17,108       15,034  
General and administrative
    1,733       1,473       5,463       4,712  
Depreciation and accretion
    5,745       3,866       16,554       10,429  
 
               
Total expenses
    13,172       10,111       39,125       30,175  
 
               
 
                               
Operating income
    11,126       9,193       33,868       22,519  
 
                               
Other income
    -       4       1       10  
Interest expense
    2,238       2,703       7,924       7,542  
 
               
 
                               
Income before income taxes
    8,888       6,494       25,945       14,987  
 
                               
Income tax provision
    235       106       446       109  
 
               
Net income
  $ 8,653     $ 6,388     $ 25,499     $ 14,878  
 
               
 
                               
General partner interest in net income
  $ 382     $ 137     $ 886     $ 314  
Common and subordinated unitholders’ interest in net income
    8,271       6,251       24,613       14,564  
 
                               
Earnings per common and subordinated unit:
                               
Basic
  $ 0.35     $ 0.26     $ 1.03     $ 0.61  
Diluted
    0.31       0.26       0.92       0.61  
 
                               
Weighted average number of common and subordinated units outstanding:
                               
Basic
    23,827       23,783       23,827       23,783  
Diluted
    27,981       26,829       28,319       23,924  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for unit data - Unaudited
                 
    September 30,   December 31,
    2009   2008
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 548     $ 303  
Accounts receivable
    528       2,082  
Accounts receivable from Quicksilver
    5,066       -  
Prepaid expenses and other current assets
    348       594  
 
       
Total current assets
    6,490       2,979  
 
               
Property, plant and equipment, net
    455,661       488,120  
Other assets
    1,635       1,916  
 
       
 
  $ 463,786     $ 493,015  
 
       
 
               
LIABILITIES AND PARTNERS’ CAPITAL
               
Current liabilities
               
Current maturities of debt
  $ 2,200     $ 1,375  
Accounts payable to Quicksilver
    -       10,502  
Accrued additions to property, plant and equipment
    3,335       17,433  
Accounts payable and other
    4,706       1,930  
 
       
Total current liabilities
    10,241       31,240  
 
               
Long-term debt
    206,900       174,900  
Note payable to Quicksilver
    52,966       52,271  
Repurchase obligations to Quicksilver
    67,236       123,298  
Asset retirement obligations
    8,639       5,234  
Deferred income tax liability
    815       369  
Commitments and contingent liabilities (Note 8)
               
 
               
Partners’ capital
               
Common unitholders (12,313,451 and 12,269,714 units issued and outstanding at September 30, 2009 and December 31, 2008, respectively)
    114,256       108,036  
Subordinated unitholders (11,513,625 units issued and outstanding at September 30, 2009 and December 31, 2008)
    2,351       (2,328 )
General partner
    382       (5 )
 
       
Total partners’ capital
    116,989       105,703  
 
       
 
  $ 463,786     $ 493,015  
 
       
The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands – Unaudited
                 
    Nine Months Ended September 30,
    2009   2008
Operating activities:
               
Net income
  $ 25,499     $ 14,878  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    16,259       10,297  
Accretion of asset retirement obligation
    295       132  
Deferred income taxes
    446       52  
Equity-based compensation
    1,289       758  
Non-cash interest expense
    4,535       7,196  
Changes in assets and liabilities:
               
Accounts receivable
    1,554       (1,001 )
Prepaid expenses and other assets
    234       (171 )
Accounts receivable and payable with Quicksilver
    (2,248 )     3,435  
Accounts payable and other
    3,405       789  
 
       
Net cash provided by operating activities
    51,268       36,365  
 
       
 
               
Investing activities:
               
Capital expenditures
    (50,067 )     (112,200 )
Assets purchased pursuant to repurchase obligations
    (5,645 )     -  
 
       
Net cash used in investing activities
    (55,712 )     (112,200 )
 
       
 
               
Financing activities:
               
Proceeds from revolving credit facility borrowings
    46,500       99,300  
Repayments of credit facility
    (14,500 )     -  
Repayment of subordinated note payable to Quicksilver
    -       (825 )
Distributions to unitholders
    (27,248 )     (23,423 )
Other
    (63 )     -  
 
       
Net cash provided by financing activities
    4,689       75,052  
 
       
 
               
Net cash increase (decrease)
    245       (783 )
 
               
Cash at beginning of period
    303       1,125  
 
       
 
               
Cash at end of period
  $ 548     $ 342  
 
       
 
               
Cash paid for interest
  $ 3,700     $ 1,465  
Cash paid for income taxes
    -       332  
Non-cash transactions:
               
Working capital related to capital expenditures
    4,502       27,314  
Disposition (acquisition) of property, plant and equipment under repurchase obligation, net
    47,577       (64,950 )
Equity contribution related to assets not purchased pursuant to repurchase obligations
    11,809       -  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
In thousands – Unaudited
                                 
    Partners’ Capital
    Limited Partners        
                    General    
         Common          Subordinated           Partner              Total     
 
                               
Balance at December 31, 2008
  $ 108,036     $ (2,328 )   $ (5 )   $ 105,703  
Equity-based compensation expense recognized
    1,289       -       -       1,289  
Distributions paid to partners
    (13,668 )     (12,780 )     (800 )     (27,248 )
Net income
    12,720       11,893       886       25,499  
Contribution by Quicksilver
    5,942       5,566       301       11,809  
Other
    (63 )     -       -       (63 )
 
               
Balance at September 30, 2009
  $ 114,256     $ 2,351     $ 382     $ 116,989  
 
               
The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
     Organization — Quicksilver Gas Services LP (“KGS” or the “Partnership”) is a Delaware limited partnership formed in January 2007 for the purpose of completing a public offering of common units and concurrently acquiring midstream assets.   KGS’ general partner is owned by Quicksilver.
     As of September 30, 2009 the ownership of KGS is as follows:
         
    Ownership
    Percentage
Common unitholders:
       
Public
    27.2 %
Quicksilver
    23.5 %
Subordinated unitholders:
       
Quicksilver
    47.4 %
 
   
Total limited partner interest
    98.1 %
 
   
 
       
General Partner interest:
       
Quicksilver
    1.9 %
 
   
Total
    100.0 %
 
   
     Neither KGS nor the general partner has any employees.   Employees of Quicksilver have been seconded to our general partner pursuant to a services and secondment agreement.   The seconded employees, including field operations personnel, general and administrative personnel and a vice president, operate or directly support our gathering and processing assets.
     Description of Business — We are engaged in gathering and processing natural gas and NGLs produced from the Barnett Shale formation in the Fort Worth Basin located in Texas.   We provide services under contracts, whereby we receive fees for performing gathering and processing services.   We do not take title to the natural gas or associated NGLs that we gather and process and therefore avoid direct commodity price exposure.
     KGS owns or operates the following assets:
    The Cowtown System, located in the southern portion of the Fort Worth Basin, which includes:

  -   the Cowtown Pipeline, consisting of a 245 mile pipeline gathering system and gas compression facilities.   This system gathers natural gas produced by KGS’ customers and delivers it for processing;
 
  -   the Cowtown Plant, consisting of a 125 MMcfd natural gas processing unit and a 75 MMcfd natural gas processing unit that extract NGLs from the natural gas stream and deliver customers’ residue gas to unaffiliated pipelines for transport downstream; and
 
  -   the Corvette Plant, placed into service during the first quarter of 2009, consisting of a 125 MMcfd natural gas processing unit that extracts NGLs from the natural gas stream and delivers customers’ residue gas to unaffiliated pipelines for transport downstream.
    The Lake Arlington Dry System, located in Tarrant County, Texas, purchased from Quicksilver in the fourth quarter of 2008, which consists of a 7 mile pipeline gathering system and a gas compression facility.   This system gathers natural gas produced by KGS’ customers and delivers it to unaffiliated pipelines for transport downstream.
     As more fully described in Note 2, KGS’ financial statements also include the results of operations of the Hill County Dry System, located in the southern portion of the Fort Worth Basin.   This system consists of a 78 mile pipeline gathering system and a gas compression facility that deliver customers’ gas to unaffiliated pipelines for transport downstream.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of Presentation — The accompanying condensed consolidated interim financial statements and related notes present our financial position, results of operations, cash flows and changes in partners’ capital.   These unaudited condensed consolidated interim financial statements have been prepared in accordance with GAAP.   These financial statements should be read in conjunction with the audited financial statements included in our 2008 Annual Report on Form 10-K.   In management’s opinion, all necessary adjustments to fairly present our results of operations, financial position and cash flows for the periods presented have been made and all such adjustments are of a normal and recurring nature.   Certain disclosures normally included in financial statements have been condensed or omitted.   The results of operations for an interim period are not necessarily indicative of annual results.
     Use of Estimates — The preparation of the financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities that exist as of the date of the financial statements.   Estimates and judgments are based on information available at the time such estimates and judgments are made.   Although management believes the estimates are appropriate, actual results can differ from those estimates.
     Repurchase Obligations to Quicksilver — On June 5, 2007, KGS Predecessor sold pipeline and gathering assets to Quicksilver with KGS having either the obligation or option to repurchase the pipelines and gathering assets at a future date.
     These assets’ conveyance to Quicksilver was not treated as a sale for accounting purposes because KGS operates them and intended to repurchase them.   Accordingly, the original cost and subsequently incurred costs were recognized in both KGS’ property, plant and equipment and our repurchase obligations to Quicksilver.   KGS’ results of operations include the revenue and expenses for these operations.   For the nine months ended September 30, 2009, KGS recognized $3.4 million of interest expense associated with the repurchase obligations to Quicksilver based on a weighted-average interest rate of 3.71%.
     As of September 30, 2009, only the Hill County Dry System (HCDS), which KGS is obligated to purchase from Quicksilver at its fair market value, is the subject of a repurchase obligation.   The HCDS comprises the repurchase obligation to Quicksilver with an aggregate amount of $67.2 million, including accrued interest.   KGS has two years from the date it receives notice from Quicksilver that the system is complete and has commenced commercial service to repurchase the HCDS.   Quicksilver expects capital expenditures of approximately $1 million for the remainder of 2009 for expansion of the HCDS.
     During the quarter ended September 30, 2009, KGS’ independent directors voted to acquire certain of the Cowtown Pipeline assets subject to the repurchase obligation that had an original cost of approximately $5.6 million.   KGS paid $5.6 million for these assets in September 2009.   Furthermore, the independent directors elected not to acquire certain Cowtown Pipeline assets that had been included in the repurchase obligation.   In doing so, KGS derecognized assets with a carrying value of $56.8 million and also derecognized liabilities associated with the repurchase of $68.6 million.   The difference of $11.8 million between the assets’ carrying values and their repurchase obligation is reflected as an increase in equity.   KGS entered into an agreement with Quicksilver to permit KGS to transport third party gas across the laterals retained by Quicksilver for a fee.   Quicksilver provided notice to KGS during April 2009 that the Cowtown Pipeline assets with an original construction cost of $62.5 million were available for purchase.
     The decision not to purchase certain Cowtown Pipeline assets will not have a material effect on KGS’ gathering and processing revenues as the natural gas stream from these laterals continues to flow into the Cowtown Pipeline gathering and processing facilities owned by KGS.
     KGS previously exercised its obligation to purchase the Lake Arlington Dry System during the fourth quarter of 2008 for approximately $42 million.
     Net Income per Limited Partner Unit — KGS’ net income is allocated to the general partner and the limited partners, including the holders of the common and subordinated units, in accordance with their respective ownership percentages, after giving effect to incentive distributions paid to the general partner.   Basic earnings per unit is computed by dividing net income attributable to unitholders by the weighted-average number of units outstanding during each period.   Diluted earnings per unit is computed using the treasury stock method, which considers the impact to net income and common equivalent units from the potential issuance of common units.

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     The following is a reconciliation of the weighted-average common and subordinated units used in the calculations of basic and diluted earnings per unit for the periods presented.   The impact of the convertible subordinated note to Quicksilver is dilutive for the three months ended September 30, 2009 and 2008, based principally upon KGS units’ market price during that time.   The impact of the convertible subordinated note to Quicksilver is dilutive for the nine months ended September 30, 2009, but was anti-dilutive for the nine months ended September 30, 2008, based principally upon KGS units’ market price during that time.   Approximately 2.9 million potentially dilutive securities for the subordinated note to Quicksilver were excluded from the diluted net income per unit calculations for the nine months ended September 30, 2008.
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
    (In thousands, except per unit data)
Common and subordinated unitholders’ interest in net income
  $ 8,271     $ 6,251     $ 24,613     $ 14,564  
Impact of interest on subordinated note to Quicksilver
    416       659       1,490       -  
 
               
Income available assuming conversion of convertible debt
  $ 8,687     $ 6,910     $ 26,103     $ 14,564  
 
               
 
                               
Weighted-average common and subordinated units - basic
    23,827       23,783       23,827       23,783  
Effect of restricted phantom units
    486       141       486       141  
Effect of subordinated note to Quicksilver (1)
    3,668       2,905       4,006       -  
 
               
Weighted-average common and subordinated units - diluted
        27,981           26,829           28,319           23,924  
 
               
 
                               
Earnings per common and subordinated unit:
                               
Basic
  $ 0.35     $ 0.26     $ 1.03     $ 0.61  
Diluted
  $ 0.31     $ 0.26     $ 0.92     $ 0.61  
 
                               
Assumed conversion price (1)
  $ 15.04     $ 18.25     $ 13.77       N/A  
     (1) Assumes that convertible debt is converted using the average closing price per unit.   Note 6, Long-Term Debt, in the consolidated financial statements in our 2008 Annual Report on Form 10-K contains a more complete description of our indebtedness.
     Comprehensive Income — Comprehensive income is equal to net income for all periods presented due to the absence of any other comprehensive income items.
Recently Issued Accounting Standards
     Accounting standard-setting organizations frequently issue new or revised accounting rules.   We regularly review all new pronouncements to determine their impact, if any, on our financial statements.   Below, we present a discussion of only those pronouncements that have an impact on our financial statements.
Pronouncements Impacting KGS That Have Been Implemented
     In June 2009, the FASB issued guidance that identified the FASB Accounting Standards Codification as the single source of authoritative GAAP not promulgated by the SEC.   The FASB also issued various technical corrections in Updates No. 2009-01 through 2009-03 and Update No. 2009-07.   The FASC retains existing GAAP and had no effect on our financial statements upon its adoption by us on September 30, 2009, although all references to GAAP herein have been converted to the codified reference.
     The FASB issued revised guidance for business combinations in December 2007, which retained fundamental requirements that the acquisition method of accounting be used for all business combinations and that an acquirer be identified for each business combination.   The acquirer is the entity that obtains control in the business combination and the guidance establishes the criteria to determine the acquisition date.   An acquirer is also required to recognize the assets acquired and liabilities assumed measured at their fair values as of the acquisition date.   In addition, acquisition costs are required to be recognized separately from the acquisition.   Additional clarifications were issued on April 1, 2009 that address application issues regarding initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.   We will apply this guidance, found in FASC Topic 805, Business Combinations, to any acquisition we enter into after January 1, 2009, but otherwise adoption had no effect on our financial statements.

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     In February 2008, the FASB issued guidance which allowed for a one-year deferral of the effective date of the accounting guidance in FASC Topic 820, Fair Value Measurements and Disclosures, as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis.   Beginning January 1, 2009, we applied the accounting guidance for all fair value measurements to non-financial assets and liabilities.
     The FASB issued guidance in 2008 to address how master limited partnerships should calculate earnings per unit using the two-class method and how current period earnings of a master limited partnership should be allocated among the general partner, limited partner, and other participating securities.   We adopted the guidance, found in FASC Subtopic 260-10, Earnings Per Share, on January 1, 2009, without material impact and with prior periods retroactively presented.
     The FASB issued guidance in June 2008 regarding unvested share-based payment awards that contain nonforfeitable rights to dividends.   The guidance was effective and adopted by us on January 1, 2009 and had no impact.   Under this guidance, found at FASC Subtopic 260-10, Earnings Per Share, unvested share-based payment awards that contain nonforfeitable rights to dividends (whether paid or unpaid) are participating securities and should be included in the computation of basic earnings per share pursuant to the two-class method.
     The FASB issued guidance in May 2009 for disclosure of events that occur after the balance sheet date but before financial statements are issued by public entities.   It mirrors the longstanding existing guidance for subsequent events that was promulgated by the American Institute of Certified Public Accountants.   We adopted the guidance found in FASC Subtopic 855-10, Subsequent Events, for the quarter ended September 30, 2009 when the guidance became effective, without impact.   We have carried out our evaluation for subsequent disclosure through November 9, 2009, the date these Financial Statements were issued.
     The FASB issued Update No. 2009-05 in August 2009, which updated FASC Topic 820, Fair Value Measurements and Disclosures, for the fair value measurement of liabilities.   We have adopted the guidance found in FASC Topic 820 for the quarter ended September 30, 2009.
Pronouncements Not Yet Implemented
There are currently no pronouncements that have been issued that will impact us that we have not adopted.
3. PARTNERS’ CAPITAL AND DISTRIBUTIONS
     The KGS Partnership Agreement requires that within 45 days after the end of each quarter, KGS distribute all of its “available cash” (as defined in the KGS Partnership Agreement) to unitholders of record on the applicable record date selected by the General Partner.
     The following table presents cash distributions for 2009 and 2008:
                     
    Attributable to the   Per Unit   Total Cash
Payment Date   Quarter Ended   Distribution (1)   Distribution
                (In millions)
Pending Distributions
                   
November 13, 2009 (2)
  September 30, 2009   $ 0.390     $ 9.7  
 
                   
Completed Distributions
                   
August 14, 2009 (3)
  June 30, 2009   $ 0.370     $ 9.1  
May 15, 2009 (3)
  March 31, 2009   $ 0.370     $ 9.1  
February 13, 2009 (3
  December 31, 2008   $ 0.370     $ 9.1  
November 14, 2008 (4)
  September 30, 2008   $ 0.350     $ 8.5  
August 14, 2008 (4)
  June 30, 2008   $ 0.350     $ 8.5  
May 15, 2008
  March 31, 2008   $ 0.315     $ 7.6  
 
(1)   Represents common and subordinated unitholders
(2)   Total cash distribution includes an Incentive Distribution Rights amount of approximately $219,000 to the General Partner
(3)   Total cash distribution includes an Incentive Distribution Rights amount of approximately $90,000 to the General Partner
(4)   Total cash distribution includes an Incentive Distribution Rights amount of approximately $20,000 to the General Partner

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4. PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment consisted of the following:
                 
    September 30,   December 31,
    2009   2008
    (In thousands)
Gathering and transportation systems
  $ 159,982     $ 179,594  
Processing plants
    286,467       157,353  
Construction in progress - plant
    -       106,563  
Construction in progress - pipeline
    6,269       27,994  
Rights-of-way and easements
    35,542       39,473  
Land
    1,321       1,239  
Buildings and other
    2,654       1,836  
 
       
 
    492,235       514,052  
Accumulated depreciation
    (36,574 )     (25,932 )
 
       
Net property, plant and equipment
  $ 455,661     $ 488,120  
 
       
5. RELATED-PARTY TRANSACTIONS
     KGS routinely conducts business with Quicksilver and its affiliates.   For a more complete description of our agreements with Quicksilver, see Note 2 and Note 11 to the consolidated financial statements in our 2008 Annual Report on Form 10-K.
     During the quarter and nine months ended September 30, 2009, Quicksilver accounted for more than 90% of our total revenue.   All cash disbursements for our operations and maintenance expenses and general and administration expenses for the quarter and nine months ended September 30, 2009 were paid to Quicksilver, which processes such amounts on our behalf.
     In June 2009, KGS entered into an agreement with Quicksilver in which KGS waived its right to purchase midstream assets located in and around the Alliance Airport area in Tarrant County, Texas (the “Alliance Midstream Assets”).   The agreement permitted Quicksilver to own and operate the Alliance Midstream Assets and granted KGS an option at fair market value and a right of first refusal to purchase the Alliance Midstream Assets and additional midstream assets located in Denton County, Texas.   As of September 30, 2009, assets subject to this agreement have a recognized cost of approximately $92 million.
     KGS entered into a lease agreement, effective June 2009, in which KGS leased compressors to Quicksilver for use with the Alliance Midstream Assets.   KGS recognized $0.5 million in revenue during the quarter ended September 30, 2009 related to this agreement.
6. LONG-TERM DEBT
     Long-term debt consisted of the following:
                 
    September 30,   December 31,
    2009   2008
    (In thousands)  
Credit Agreement
  $ 206,900     $ 174,900  
Subordinated Note to Quicksilver
    55,166       53,646  
 
           
 
    262,066       228,546  
Current maturities of debt
    (2,200 )     (1,375 )
 
       
Long-term debt
  $ 259,866     $ 227,171  
 
       
     At September 30, 2009, the lenders’ commitments under our credit agreement were $235 million and could be further increased to as much as $350 million with additional commitments and lender consent.   Based on our results through September 30, 2009, our total borrowing capacity was $235 million.   The weighted-average interest rate as of September 30, 2009 was 1.50%.   During October 2009, our lenders amended the credit agreement and increased their commitments to a total of $320

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million, and with additional commitment increases and lender consent, our available capacity could expand to $350 million.   Also as part of the amendment in October 2009, the credit agreement borrowing spreads were revised as follows:
         
Interest rate option            After Amendment           
 
ABR borrowings
  2.00% to 3.00%
Eurodollar borrowings
  3.00% to 4.00%
Swingline borrowings
  3.00% to 4.00%
Commitment fee on used capacity
  0.50%
     Note 6, Long-Term Debt, in the consolidated financial statements in our 2008 Annual Report on Form 10-K contains a more complete description of our indebtedness.
7. ASSET RETIREMENT OBLIGATIONS
     The following table provides information about our estimated asset retirement obligations:
         
    Nine Months Ended
    September 30, 2009
    (In thousands)
Beginning asset retirement obligations
  $ 5,234  
Incremental liability incurred
    3,619  
Repurchase obligations not exercised
    (509 )
Accretion expense
    295  
 
   
Ending asset retirement obligations
  $ 8,639  
 
   
8. COMMITMENTS AND CONTINGENT LIABILITIES
     In February 2009, McGuffy Energy Services, L.P. (“McGuffy”) filed a lawsuit against us and subsequently added Quicksilver as a party.   McGuffy alleged, among other things, claims for breach of contract, fraud and negligent misrepresentation arising from a written agreement by which McGuffy was retained to provide certain engineering and construction services for KGS’ Corvette Plant.   McGuffy further sought to foreclose on a $3.2 million lien that it filed on the Corvette Plant.   In March 2009, we filed a lawsuit against McGuffy seeking damages and declaratory relief for the disputes between KGS and McGuffy.   The McGuffy subcontractors that made demands on KGS were also named as parties.   Several of the subcontractor defendants filed counterclaims against us.   As of December 31, 2008 and prior to the lawsuit filed by McGuffy, KGS had recognized $2.0 million as part of the Corvette Plant construction costs related to services provided by McGuffy.   In July and August 2009, KGS entered into settlement agreements with McGuffy and its subcontractors.   During the quarters ended June 30, 2009 and September 30, 2009, KGS recognized an additional $0.9 million and $0.3 million, respectively, for a total of $3.2 million in settlement of all claims related to the construction of the Corvette Plant, including such amounts in its construction cost.
9. INCOME TAXES
     No provision for federal income taxes related to KGS’ results of operations is included in the accompanying unaudited condensed consolidated interim financial statements as such income is taxable directly to our unitholders.
     Note 9, Income Taxes, in the consolidated financial statements in our 2008 Annual Report on Form 10-K contains more information about our income taxes.

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10. EQUITY PLAN
     Awards of phantom units have been granted under KGS’ 2007 Equity Plan, which permits the issuance of up to 750,000 units.   The following table summarizes information regarding the phantom unit activity:
                                 
    Payable in cash   Payable in units
           
Weighted
         
Weighted
            Average Grant           Average Grant
    Units   Date Fair Value   Units   Date Fair Value
Unvested phantom units - January 1, 2009
    60,319     $ 21.63       139,918     $ 25.15  
Vested
               (25,609 )     13.53                  (49,789 )     25.25  
Issued
    920       13.40       405,428       10.06  
Cancelled
    (5,973 )     21.36       (9,885 )     15.90  
 
               
Unvested phantom units - September 30, 2009
    29,657     $ 28.42       485,672     $ 12.73  
 
                   
     At January 1, 2009, KGS had total unvested compensation expense of $2.3 million related to phantom units.   KGS recognized compensation expense of approximately $1.9 million during the nine months ended September 30, 2009, including $0.3 million related to Quicksilver equity grants issued to employees seconded to KGS.   Grants of phantom units during the nine months ended September 30, 2009 had an estimated grant date fair value of $4.1 million.   KGS has unearned compensation expense of $3.1 million at September 30, 2009 that will be recognized in expense through May 2012.   Phantom units that vested during the nine months ended September 30, 2009 had a fair value of $1.6 million on their vesting date.
     On January 2, 2009, KGS awarded annual equity grants totaling 405,428 phantom units to the non-management directors, executive officers of KGS’ general partner and employees seconded to KGS.   Each phantom unit will settle in KGS units and had a grant date fair value of $10.06 per unit, which will be recognized over the vesting period of three years.   At September 30, 2009, 214,502 units were available for issuance under the 2007 Equity Plan.
     On October 7, 2009, unitholders approved an amendment to the 2007 Equity Plan, which increased the number of units available for issuance to 750,000 units as of November 4, 2009.
     Note 10, Equity Plan, in the consolidated financial statements in our 2008 Annual Report on Form 10-K contains a more complete description of KGS’ Equity Plan.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
     We are a growth-oriented Delaware limited partnership engaged in gathering and processing natural gas produced from the Barnett Shale geologic formation of the Fort Worth Basin located in Texas.   We began operations in 2004 to provide these services primarily to Quicksilver, the owner of our General Partner, and to other natural gas producers in this area.   During both the quarter and nine months ended September 30, 2009, more than 90% of our total gathering and processing volumes were comprised of natural gas owned or controlled by Quicksilver.
Our Operations
     The results of our operations are significantly influenced by the volumes of natural gas gathered and processed through our systems.   We gather and process natural gas pursuant to contracts under which we receive fees.   We do not take title to the natural gas or associated NGLs that we gather and process, and therefore, we avoid direct commodity price exposure.   However, a sustained decline in natural gas prices could result in reduced production volumes by our customers and a resulting decrease in our revenue.   Our contracts provide relatively stable cash flows, but no direct upside in higher commodity price environments.
Operational Measurement
     Our management uses a variety of financial and operational measures to analyze our performance.   We view these measures as important factors affecting our profitability and unitholder value and we review them regularly to identify trends in our operations.   These performance measures are outlined below:
     Volume – We must continually obtain new supplies of natural gas to maintain or increase throughput volumes on our gathering and processing systems.   We routinely monitor producer activity in the areas we serve to identify new supply opportunities.   Our ability to achieve these objectives is impacted by:
    the level of successful drilling and production activity in areas where our systems are located;
    our ability to compete with other midstream companies for production volumes; and
    our pursuit of new opportunities where a limited number of midstream companies conduct business.
     Adjusted Gross Margin – Adjusted gross margin information is a key measure used by management to evaluate the relationship between our gathering and processing revenue and our cost of operating our facilities, including our general and administrative overhead.   Adjusted gross margin is not a measure calculated in accordance with GAAP as it does not include deductions for expenses such as interest and income tax which are necessary to maintain our business.   In measuring our operating performance, adjusted gross margin should not be considered an alternative to, or more meaningful than, net income or operating cash flow determined in accordance with GAAP.   Our adjusted gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate adjusted gross margin in the same manner.   A reconciliation of adjusted gross margin to amounts reported under GAAP is presented in “Results of Operations.”
     Operating Expenses – Operating expenses are a separate measure that we use to evaluate the performance of our operations.   These expenses are comprised primarily of direct labor, insurance, property taxes, repair and maintenance expense, utilities and contract services, and are largely independent of the volumes through our systems, but may fluctuate depending on the scale of our operations during a specific period.   Our ability to manage operating expenses has a significant impact on our profitability and cash available for distribution.
     EBITDA – We believe that EBITDA is a widely accepted financial indicator of a company’s operational performance and its ability to incur and service debt, fund capital expenditures and make distributions.   EBITDA is not a measure calculated in accordance with GAAP, as it does not include deductions for items such as depreciation, interest and income taxes, which are necessary to maintain our business.   EBITDA should not be considered an alternative to net income, operating cash flow or any other measure of financial performance presented in accordance with GAAP.   EBITDA calculations may vary among entities, so our computation may not be comparable to EBITDA measures of other entities.   In evaluating EBITDA, we believe that investors should also consider, among other things, the amount by which EBITDA exceeds interest costs, how EBITDA compares to principal payments on debt and how EBITDA compares to capital expenditures for each period.   A reconciliation of EBITDA to amounts reported under GAAP is presented in “Results of Operations.”

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     EBITDA is also used as a supplemental performance measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:
    financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
    our operating performance as compared to those of other companies in the midstream industry without regard to financing methods, capital structure or historical cost basis; and
    the viability of acquisitions and capital expenditure projects and the rates of return on investment opportunities.

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RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
     The following discussion compares the results of operations for the three months ended September 30, 2009 to the three months ended September 30, 2008, which we refer to as the 2009 quarter and the 2008 quarter, respectively.
                 
        Three Months Ended September 30,    
    2009   2008
    (In thousands)
 
               
Total revenues
  $ 24,298     $ 19,304  
Operations and maintenance expense
    5,694       4,772  
General and administrative expense
    1,733       1,473  
 
       
Adjusted gross margin
    16,871       13,059  
Other income
    -           4  
 
       
EBITDA
            16,871               13,063  
Depreciation and accretion expense
    5,745       3,866  
Interest expense
    2,238       2,703  
Income tax provision
    235       106  
 
       
Net income
  $ 8,653     $ 6,388  
 
       
The following table summarizes our volumes:
                                 
    Gathering   Processing
    2009   2008   2009   2008
    (MMcf)
Cowtown System
    13,238       15,130       13,197       14,122  
Lake Arlington Dry System
    6,302       3,174       -            -       
Hill County Dry System
    1,983       1,287       -           -      
 
               
 
                               
Total
    21,523       19,591       13,197       14,122  
 
                 
The following table summarizes the changes in our revenue:
                                 
    Gathering   Processing   Other   Total
    (In thousands)
Revenue for the three months ended September 30, 2008
  $ 10,227     $ 8,852     $ 225     $ 19,304  
Volume changes
    1,009       (580 )     -           429  
Price changes
    3,921       178       466       4,565  
 
               
 
                               
Revenue for the three months ended September 30, 2009
  $ 15,157     $ 8,450     $ 691     $ 24,298  
 
               

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     Total Revenue and Volumes — Approximately $3.3 million of the increase in revenue is related to additional compression fees on the Cowtown System and the Hill County Dry System where additional compression assets were placed into service during the current year.   Additionally, $1.0 million of the increase in revenue was due to the increases in volumes that we gathered in the Fort Worth Basin.   This increase was partially offset by lower processed volumes on the Cowtown System.   The increase in gathered volumes is due to increased well connections related to the continued development of the Fort Worth Basin, particularly in the Lake Arlington area.   For all of 2009, we expect daily volumes to remain relatively flat or slightly higher than we had in the 2009 quarter.
     Operations and Maintenance Expense — The increase in operations and maintenance expense was mainly due to the continued expansion of our natural gas gathering systems.   However, the increases in our 2009 quarter operations and maintenance expenses have been less significant than the increase in our revenue.   We expect operations and maintenance expenses to be relatively flat with the 2009 quarter for the remainder of 2009.
     General and Administrative Expense — The increase in general and administrative expense results from our expanded operations and the increase in the allocable portion of Quicksilver’s overhead costs, primarily related to safety and purchasing.   General and administrative expense includes $0.4 million and $0.3 million of equity-based compensation for each of the quarters ended September 30, 2009 and 2008, respectively.
     Adjusted Gross Margin and EBITDA — Adjusted gross margin and EBITDA increased primarily as a result of the increase in revenue described above.   As a percentage of revenue, adjusted gross margin and EBITDA increased from 68% in the 2008 quarter to approximately 69% in the 2009 quarter, primarily due to the increase in revenue, which was partially offset by an increase in operations and maintenance expense associated with our current scale of operations and higher general and administrative expense.
     Depreciation and Accretion Expense — Depreciation and accretion expense increased primarily as a result of the property, plant and equipment placed into service since September 30, 2008 expanding our gathering network and increasing our processing capability.   The Corvette Plant being placed into service during the first quarter of 2009 contributed approximately $1.0 million to the increase in depreciation and accretion expense for the 2009 quarter.
     Interest Expense — Interest expense decreased due to lower effective interest rates, partially offset by greater amounts outstanding under the revolving credit agreement.
The following table summarizes the details of interest expense for the three months ended September 30, 2009 and 2008:
                 
    Three Months Ended September 30,
    2009   2008
    (In thousands)  
 
               
Interest cost:
               
Revolving credit facility
  $ 1,001     $ 847  
Repurchase obligation
    814       1,736  
Subordinated note to Quicksilver
    423       672  
 
       
Total cost
    2,238       3,255  
Less interest capitalized
    -           (552 )
 
       
Interest expense
  $ 2,238     $ 2,703  
 
       

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Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
     The following discussion compares the results of operations for the nine months ended September 30, 2009 to the nine months ended September 30, 2008, which we refer to as the 2009 period and the 2008 period, respectively:
                 
    Nine Months Ended September 30,
    2009   2008
    (In thousands)
 
               
Total revenues
  $ 72,993     $ 52,694  
Operations and maintenance expense
    17,108       15,034  
General and administrative expense
    5,463       4,712  
 
       
Adjusted gross margin
    50,422       32,948  
Other income
    1       10  
 
       
EBITDA
    50,423       32,958  
Depreciation and accretion expense
    16,554       10,429  
Interest expense
    7,924       7,542  
Income tax provision
    446       109  
 
       
Net income
  $ 25,499     $ 14,878  
 
       
The following table summarizes our volumes:
                                 
    Gathering   Processing
    2009   2008   2009   2008
    (MMcf)
Cowtown System
    42,771       42,459       41,958       40,870  
Lake Arlington Dry System
    17,237       6,198       -           -      
Hill County Dry System
    5,564       2,612       -           -      
 
               
 
                               
Total
    65,572       51,269       41,958       40,870  
 
               
The following table summarizes the changes in our revenue:
                                 
    Gathering   Processing   Other   Total
    (In thousands)
Revenue for the nine months ended September 30, 2008
  $ 26,356     $ 25,663     $ 675     $ 52,694  
Volume changes
    7,353       683       -           8,036  
Price changes
    11,258       539       466       12,263  
 
               
 
                               
Revenue for the nine months ended September 30, 2009
  $ 44,967     $ 26,885     $ 1,141     $ 72,993  
 
               

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     Total Revenue and Volumes — Approximately $8.0 million of the increase in revenue was due to the increases in volumes that we gathered and processed in the Fort Worth Basin.   The increase in gathered volumes is due to increased well connections related to the continued development of the Fort Worth Basin, particularly in the Lake Arlington area.   Additionally, $9.6 million of the increase in revenue is related to additional compression fees on the Cowtown System and the Hill County Dry System where additional compression assets were placed into service during 2009.   For all of 2009, we expect daily volumes to remain relatively flat or slightly lower than we had in the 2009 period.
     Operations and Maintenance Expense — The increase in operations and maintenance expense was mainly due to the continued expansion of our natural gas gathering systems and processing facilities with the addition of the Corvette Plant.   However, the increases in our operations and maintenance expenses have been less significant than the increases in our throughput volumes and revenue.   We expect operations and maintenance expenses to be relatively flat for the remainder of 2009.
     General and Administrative Expense — The increase in general and administrative expense was primarily the result of our expanded operations and the increase in the allocable portion of Quicksilver’s overhead costs, primarily related to safety and purchasing.   General and administrative expense includes $1.3 million and $1.0 million of equity-based compensation for the nine months ended September 30, 2009 and 2008, respectively.
     Adjusted Gross Margin and EBITDA — Adjusted gross margin and EBITDA increased primarily as a result of the increase in revenue described above.   As a percentage of revenue, adjusted gross margin and EBITDA increased from 63% in the 2008 period to approximately 69% in the 2009 period, primarily due to the increase in revenue, which was partially offset by an increase in operations and maintenance expense associated with our current scale of operations and higher general and administrative expense.
     Depreciation and Accretion Expense — Depreciation and accretion expense increased primarily as a result of the property, plant and equipment placed into service since September 30, 2008 in expanding our gathering network and increasing our processing capability.   The Corvette Plant being placed into service during the first quarter of 2009 contributed approximately $2.6 million to the increase in depreciation and accretion expense for the 2009 period.
     Interest Expense — Interest expense increased primarily due to greater amounts outstanding under the revolving credit agreement, partially offset by lower effective interest rates.
The following table summarizes the details of interest expense for the nine months ended September 30, 2009 and 2008:
                 
    Nine Months Ended September 30,
    2009   2008
    (In thousands)
 
               
Interest cost:
               
Revolving credit facility
  $ 3,325     $ 1,691  
Repurchase obligation
    3,389       4,663  
Subordinated note to Quicksilver
    1,520       2,161  
 
       
Total cost
    8,234       8,515  
Less interest capitalized
    (310 )     (973 )
 
       
Interest expense
  $ 7,924     $ 7,542  
 
       

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Liquidity and Capital Resources
     The volumes of natural gas gathered and processed through our systems are dependent upon the natural gas volumes produced by our customers, which may be affected by prevailing natural gas prices, the availability and cost of capital, the level of successful drilling activity and other factors beyond their control.   Although Quicksilver has mitigated its near-term exposure to low prices through the use of derivative financial instruments covering portions of its expected 2009, 2010 and 2011 production, we cannot predict whether or when natural gas prices will increase or decrease.   In addition, there continues to be uneasiness in the credit and financial markets.   In response, Quicksilver and other customers have experienced year-over-year reductions in their planned levels of capital expenditures and drilling activity for 2009.   Quicksilver has continued to adjust its drilling program throughout 2009 which has resulted in reduced capital expenditures in the southern part of the Fort Worth Basin impacting gathering and processing volumes in the Cowtown System.   If these conditions were to persist or worsen over a prolonged period of time, we could experience significant reductions in volumes through our systems and therefore reductions of revenue and cash flows.   Our sources of liquidity include:
    cash generated from operations;
    borrowings under our revolving credit agreement; and
    future capital market transactions.
     We believe that the cash generated from these sources will be sufficient to meet our expected $0.39 per unit quarterly cash distributions and satisfy our short-term working capital and maintenance capital expenditure requirements.
Cash Flows
                 
    Nine Months Ended September 30,
             2009                     2008         
    (In thousands)
Net cash provided by operating activities
  $ 51,268     $ 36,365  
Net cash used in investing activities
    (55,712 )     (112,200 )
Net cash provided by financing activities
    4,689       75,052  
     Our cash flows are significantly influenced by Quicksilver’s production in the Fort Worth Basin.   As Quicksilver and others have developed the Fort Worth Basin, we have expanded our gathering and processing facilities to serve the additional volumes produced by such development.
     Cash Flows Provided by Operating Activities — The increase in cash flows provided by operating activities resulted primarily from increased revenue and higher profitability associated with the natural gas gathered and processed through our systems.
     Cash Flows Used in Investing Activities — The decrease in cash flows used in investing activities resulted from the lower capital expenditures used to expand our gathering system and processing capabilities.   For the nine months ended September 30, 2009, we spent $28.0 million on gathering assets, which included $5.6 million on the purchase of the Cowtown Pipeline assets from Quicksilver and $27.7 million on processing facilities, which included $26.2 million related to the Corvette Plant.   The cash flows used in investing activities during the first nine months of 2009 include the payment of $27.4 million that was incurred and accrued at December 31, 2008.
     Cash Flows Provided by Financing Activities — Cash flows provided by financing activities in the first nine months of 2009 consisted primarily of the net proceeds from borrowings under our credit agreement of $32.0 million used to fund the expansion of our gathering system and processing facilities, partially offset by distributions of $27.2 million to our unitholders from cash generated from operations.
     Information regarding historical and pending cash distributions is included in Note 3 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report.
Capital Expenditures
     The midstream energy business is capital intensive, requiring significant investment for the acquisition or development of new facilities, particularly in emerging production areas such as the Fort Worth Basin.   We categorize our capital expenditures as either:

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    expansion capital expenditures, which are made to construct additional assets, expand and upgrade existing systems, or acquire additional assets; or
    maintenance capital expenditures, which are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and extend their useful lives, or to maintain existing system volumes and related cash flows.
     We anticipate that we will continue to make capital expenditures to develop our gathering and processing network as Quicksilver continues to expand its development efforts in the Fort Worth Basin.   Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives and to maintain our distribution levels.
     During the quarter ended September 30, 2009, KGS’ independent directors voted to acquire certain of the Cowtown Pipeline assets subject to the repurchase obligation that had an original cost of approximately $5.6 million.   KGS paid $5.6 million for these assets in September 2009.   Furthermore, the independent directors elected not to acquire certain Cowtown Pipeline assets that had been included in the repurchase obligation.   In doing so, KGS derecognized assets with a carrying value of $56.8 million and also derecognized liabilities associated with the repurchase of $68.6 million.   The difference of $11.8 million between the assets’ carrying values and their repurchase obligation is reflected as an increase in equity.   KGS entered into an agreement with Quicksilver to permit KGS to transport third party gas across the laterals retained by Quicksilver for a fee.   Quicksilver provided notice to KGS during April 2009 that the Cowtown Pipeline assets with an original construction cost of $62.5 million were available for purchase.
     During the nine months ended September 30, 2009, we decreased gross property, plant and equipment by $21.8 million, due to the $56.8 million of derecognized assets related to the election not to purchase certain Cowtown Pipeline laterals, offset by expansion capital expenditures of approximately $15.1 million, $7.5 million in maintenance capital expenditures, $3.1 million in asset retirement cost and $9.3 million in capital expenditures related to assets subject to repurchase obligations, mainly in the Hill County Dry System (HCDS).   We expect remaining capital expenditures for 2009 to be approximately $7 million, excluding any expenditures to reacquire or develop assets subject to repurchase obligations.
     Quicksilver has the right to complete construction of the HCDS, which we are obligated to purchase from Quicksilver at fair market value.   The repurchase obligation to Quicksilver is solely comprised of HCDS with an aggregate amount of $67.2 million, including accrued interest.   We have two years to repurchase the HCDS from the date we receive notice from Quicksilver that the system is complete and has commenced commercial service.   Quicksilver expects to incur capital expenditures of approximately $1 million for the HCDS during the remainder of 2009.
     We operate Quicksilver’s midstream assets subject to repurchase for which we receive a fee of $75,000 per month.
     We regularly review opportunities for both organic growth projects and acquisitions that will enhance our financial performance.   Since we strive to distribute most of our available cash to our unitholders, we will depend on a combination of borrowings under our revolving credit agreement, operating cash flows and debt or equity offerings to finance any future growth capital expenditures or acquisitions.
Debt
     Credit Agreement — At September 30, 2009, the lenders’ commitments under our credit agreement were $235 million and could be further increased to as much as $350 million with additional commitments and lender consent.   Based on our results through September 30, 2009, our total borrowing capacity was $235 million and our borrowings were $206.9 million.   The weighted-average interest rate as of September 30, 2009 was 1.50%.   During October 2009, our lenders amended the credit agreement and increased their commitments to a total of $320 million, and with additional commitment increases and lender consent, our available capacity could expand to $350 million.   Note 6 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report also contains information regarding changes to our interest rate spreads pursuant to the credit agreement amendment.
     At September 30, 2009, our revolving credit agreement required us to maintain a ratio of our consolidated trailing 12-month EBITDA (as defined in our credit agreement) to our net interest expense of not less than 2.5 to 1.0; and a ratio of total consolidated funded indebtedness to consolidated trailing 12-month EBITDA of not more than 4.5 to 1.0.   Our repurchase obligations to Quicksilver, our obligations to Quicksilver under the subordinated note described below, and the capitalized or non-cash interest thereon, are excluded for purposes of determining our covenant compliance.

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     This credit agreement also contains various covenants that limit, among other things, our ability to:
    incur further indebtedness;
 
    grant liens;
 
    sell assets; and
 
    engage in transactions with affiliates.
     Subordinated Note — The principal payment for the quarter ended September 30, 2009 was not permitted by the debt ratio requirements of the subordinated note.   Interest expense of $1.5 million recognized during the nine months ended September 30, 2009 was added to the outstanding principal amount.   The interest rate at September 30, 2009 was 2.71%.
     Note 6, Long-Term Debt, in the consolidated financial statements in our 2008 Annual Report on Form 10-K contains a more complete description of our indebtedness.
     Repurchase Obligations to Quicksilver — The information regarding repurchase obligations to Quicksilver is included in Note 2 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report.
Contractual Obligations and Commercial Commitments
     There have been no significant changes to our contractual obligations and commercial commitments as disclosed in Item 7 in our 2008 Annual Report on Form 10-K except for the satisfaction of the $13.8 million of contractual obligations related to the Corvette Plant.
Recently Issued Accounting Standards
     The information regarding recent accounting pronouncements is included in Note 2 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report.
Critical Accounting Estimates
     Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated interim financial statements and related footnotes contained within Item 1 of Part I of this Quarterly Report.   Our critical accounting estimates used in the preparation of the consolidated financial statements were discussed in our 2008 Annual Report on Form 10-K.   These critical estimates, for which no significant changes have occurred in the nine months ended September 30, 2009, include estimates and assumptions pertaining to:
    depreciation expense for property, plant and equipment;
 
    repurchase obligations to Quicksilver;
 
    asset retirement obligations; and
 
    equity-based compensation.
     The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.   These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions.   The estimates and assumptions could change materially as conditions within and beyond our control change.   Accordingly, actual results could differ materially from those estimates.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     We have established policies and procedures for managing risk within our organization, including internal controls.   The level of risk assumed by us is based on our objectives and capacity to manage risk.
Credit Risk
     Our primary credit risk is that we are dependent on Quicksilver for the majority of our natural gas volumes and are consequently subject to the risk of nonpayment or late payment by Quicksilver for gathering and processing fees.   Quicksilver’s credit ratings are below investment grade, where we expect them to remain for the foreseeable future.   Accordingly, this risk is higher than it might be with a more creditworthy contract counterparty or with a more diversified group of customers.   Unless and until we significantly increase our customer base, we expect to continue to be subject to significant and non-diversified risk of nonpayment or late payment of our fees.   Additionally, broad market factors such as lower credit availability, prompt us to perform frequent credit analyses of our customers.   We have not had any significant losses due to counter-party failures to perform.
Interest Rate Risk
     As base interest rates remain low, the credit markets have caused the spreads charged by lenders to increase.   As base rates or spreads increase, our financing costs will increase accordingly.   Although this could limit our ability to raise funds in the capital markets, we expect that our competitors would face similar challenges with respect to funding acquisitions and capital projects.
     We are exposed to variable interest rate risk as a result of borrowings under our revolving credit agreement, our subordinated note and repurchase obligations to Quicksilver.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
     We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Securities Exchange Act Rule 13a-15.   Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2009, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
     There has been no change in our internal control over financial reporting during the quarter ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
     As discussed in Note 8 to our condensed consolidated interim financial statements included in Item 1 of Part I of this Quarterly Report, KGS has entered into settlement agreements with McGuffy and its subcontractors.   The lawsuit filed on February 19, 2009 in the 335th Judicial District Court of Hood County, Texas was dismissed on September 14, 2009, the lawsuit filed on March 3, 2009 in the 67th Judicial District Court of Tarrant County, Texas was dismissed on September 8, 2009, and the lawsuit transferred May 19, 2009 to the 335th Judicial District Court of Hood County, Texas was dismissed on September 17, 2009.
     There have been no other material changes in legal proceedings from those described in Item 1 of Part II of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009.
Item 1A. Risk Factors
     The following risk factors update the risk factors set forth in Part I, Item IA, “Risk Factors” of our 2008 Annual Report on Form 10-K.   You should carefully consider the following risk factors together with all of the other information included in this quarterly report and the other information that we file with the SEC, including the financial statements and related notes, when deciding to invest in us.   Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business.   You should be aware that the occurrence of any of the events described herein and elsewhere in this quarterly report could have a material adverse effect on our business, financial position, results of operations and cash flows.   In that case, we may be unable to make distributions to our unitholders and the trading price of our common units could decline.
We are dependent on a single natural gas producer, Quicksilver, for a majority of our volumes.   The loss of this customer would result in a material decline in our volumes, revenue and cash available for distribution.
     We rely on Quicksilver for the majority of our natural gas throughput.   During 2009, Quicksilver has accounted for more than 90% of our natural gas throughput.   Accordingly, we are indirectly subject, to a significant degree, to the various risks to which Quicksilver is subject.
     We may be unable to negotiate on favorable terms, if at all, any extension or replacement of our contract with Quicksilver to gather and process Quicksilver’s production from the Quicksilver Counties after the initial 10-year term of the contract.   Furthermore, during the term of the contract and thereafter, even if we are able to renew this contract, Quicksilver may have decreased production volumes in the Quicksilver Counties.   The loss of a significant portion of the natural gas volumes supplied by Quicksilver would result in a material decline in our revenue and cash available for distribution.
     Quicksilver has no contractual obligation to develop its properties in the Quicksilver Counties and may determine in the future that drilling activity in other areas is strategically more attractive than in the Quicksilver Counties.   A shift in Quicksilver’s focus away from the Quicksilver Counties could result in reduced volumes gathered and processed by us and a material decline in our revenue and cash available for distribution.
We may not have sufficient available cash to enable us to make cash distributions to holders of our common units and subordinated units at the current distribution rate under our cash distribution policy.
     In order to maintain our current cash distributions of $0.39 per unit per quarter, or $1.56 per unit per year, we will require available cash of approximately $9.7 million per quarter, or $38.8 million per year.   The amount of cash we can distribute depends principally upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
    the fees we charge and the margins we realize for our services;
 
    the level of production, and the price of natural gas, NGLs, and condensate;
 
    the volume of natural gas and NGLs we gather and process;
 
    the level of competition from other midstream energy companies;
 
    the level of our operating cost structure; and
 
    prevailing economic conditions.

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     In addition, the actual amount of cash we have available for distribution will depend on other factors, some of which may be beyond our control, including:
    the level of capital expenditures we make;
 
    our ability to make borrowings under our revolving credit agreement;
 
    the cost of acquisitions;
 
    our debt service requirements;
 
    fluctuations in our working capital needs;
 
    our ability to access capital markets;
 
    compliance with our debt agreements; and
 
    the amount of cash reserves established by our general partner.
The amount of cash we have available for distribution to holders of our common units and subordinated units depends primarily on our cash flow and not solely on profitability.
     The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which may be affected by non-cash items.   As a result, we may make cash distributions during periods when we report net losses, and conversely, we might fail to make cash distributions during periods when we report net profits.
     At the present level of outstanding units, we require $38.8 million of distributable cash flow annually to maintain the current level of distributions.   We may not have sufficient available cash from operating surplus each quarter to enable us to make cash distributions at the current distribution rate under our cash distribution policy.
Estimates of oil and gas reserves depend on many assumptions that may be inaccurate and any material inaccuracies could materially reduce the production that we gather and process and consequently could adversely affect our financial performance and our ability to make cash distributions.
     The reserve information for Quicksilver or any company represents only estimates based on reports prepared by petroleum engineers.   Such estimates are calculated using oil and gas prices in effect on the dates indicated in the reports.   Any significant price changes may have a material effect on the quantity and recoverability of reserves.   Petroleum engineering is a complex and subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner.   Estimates of economically recoverable oil and gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, including:
    historical production from the area compared with production from other comparable producing areas;
 
    the assumed effects of regulations by governmental agencies;
 
    assumptions concerning future oil and gas prices; and
 
    assumptions concerning future operating costs, severance and excise taxes, development costs and workover and remedial costs.
     Because all reserve estimates can be subjective, the number of wells that can be economically drilled, the quantities of oil and gas that are ultimately recovered and the timing of the recovery of oil and gas reserves may differ materially from those assumed in estimating reserves. Furthermore, different reserve engineers may interpret different results from the same available data.   Actual production could vary materially from estimates of reserves, which could result in material reductions in the volumes we gather and process and consequently could adversely affect our revenue and cash available for distribution.
Because of the natural decline in production from existing wells in our area of operations, our success depends on our ability to obtain new sources of supplies of natural gas.   Any decrease in supplies of natural gas could result in a material decline in the volumes we gather and process.
     Our gathering systems are connected to wells whose production will naturally decline over time, which means that our cash flows associated with these wells will also decline over time.   To maintain or increase throughput levels on our system, we must continually obtain new natural gas supplies.   Our ability to obtain additional sources of natural gas depends in part on the level of successful drilling activity near our pipeline systems by Quicksilver and our ability to compete for volumes from third parties from their successful new wells.
     We have no control over the level of drilling activity in our area of operations, the amount of reserves associated with the wells drilled or the rate at which production from a well will decline.   In addition, we have no control over producers’ drilling or

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production decisions, which are affected by, among other things, prevailing and projected energy prices, demand for hydrocarbons, the level of reserves, geological considerations, governmental regulations, availability of drilling rigs and other production and development services and the availability and cost of capital.   Fluctuations in energy prices can greatly affect investments to develop new natural gas reserves.   Decreases in drilling and capital investments in the Fort Worth Basin will decrease expected 2009 and future production activity.   Drilling activity generally decreases as natural gas prices decrease.   Declines in natural gas prices have caused a negative impact on exploration, development and production activity.   Reductions in exploration or production activity in our area of operations could lead to reduced utilization of our system.   Because of these factors, even if new natural gas reserves are known to exist in areas served by our assets, producers may choose not to develop those reserves.   Moreover, Quicksilver is not contractually obligated to develop the reserves it has dedicated to us in the Quicksilver Counties.   If reductions in drilling activity or competition result in our inability to obtain new sources of supply to replace the natural decline of volumes from existing wells, throughput on our system would decline, which could reduce our revenue and cash available for distribution.
Our construction of new assets may not result in revenue increases and is subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our cash flows, results of operations and financial condition.
     One of the ways we intend to grow our business is through the construction of new midstream assets.   Additions or modifications to our asset base involve numerous regulatory, environmental, political and legal uncertainties beyond our control and may require the expenditure of significant amounts of capital.   If we undertake these projects, they may not be completed on schedule, at the budgeted cost, or at all.   Moreover, our revenue may not increase as anticipated for a particular project.   For instance, we may construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize.   We do not have access to estimates of potential non-Quicksilver reserves in an area prior to constructing or acquiring facilities in such area.   To the extent we rely on estimates of future production by parties other than Quicksilver in our decision to expand our systems, such estimates may prove to be inaccurate due to numerous uncertainties inherent in estimating quantities of future production.   As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition.   In addition, expansion of our asset base generally requires us to obtain new rights-of-way.   We may be unable to obtain such rights-of-way or it may become more expensive for us to obtain or renew rights-of-way.   If the cost of rights-of-way increases, our cash flows could be adversely affected.
If we do not make acquisitions on economically acceptable terms, our future growth will be limited.
     In addition to expanding our existing systems, we may pursue acquisitions that would increase the cash generated by operations.   If we are unable to make these acquisitions because we are: (1) unable to identify attractive acquisition candidates, to analyze acquisition opportunities successfully from an operational and financial point of view or to negotiate acceptable purchase contracts with them; (2) unable to obtain financing for these acquisitions on economically acceptable terms; or (3) outbid by competitors, then our future growth and ability to increase distributions could be limited.   Furthermore, even if we do make acquisitions that we believe will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated by operations.
     Any acquisition involves potential risks, including, among other things:
    mistaken assumptions about volumes, revenue and costs, including synergies;
 
    an inability to integrate successfully the businesses we acquire;
 
    the assumption of unknown liabilities;
 
    limitations on rights to indemnity from the seller;
 
    mistaken assumptions about the overall costs of equity or debt;
 
    the diversion of management’s and employees’ attention from other business matters;
 
    unforeseen difficulties operating in new product areas, with new customers, or new geographic areas; and
 
    customer or key employee losses at the acquired businesses.
We depend on our midstream assets to generate our revenue, and if the utilization of these assets were reduced significantly, there could be a material adverse effect on our revenue, earnings, and ability to make distributions to our unitholders.
     Operations at our midstream assets could be partially curtailed or completely shut down, temporarily or permanently, as a result of:

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    operational problems, labor difficulties or environmental proceedings or other litigation that compel curtailing of all or a portion of the operations;
    catastrophic events at our facilities or at downstream facilities owned by others;
 
    an inability to obtain sufficient quantities of natural gas; or
 
    prolonged reductions in exploration or production activity by producers in the areas in which we operate.
     The magnitude of the effect on us of any curtailment of operations will depend on the length of the curtailment and the extent of the operations affected by such curtailment.   We have no control over many of the factors that may lead to a curtailment of operations.
     In the event that we are unable to provide either gathering or processing services, Quicksilver may use others to gather or process its production as it so determines.   In the event that we are unable to provide either gathering or processing services for 60 consecutive days, for reasons other than force majeure, causing Quicksilver’s wells to be shut-in (in the case of gathering) or resulting in Quicksilver’s inability to by-pass our gathering or processing facilities and deliver its natural gas production to an alternative pipeline (in the case of processing), Quicksilver has the right to terminate our gathering and processing agreement as it relates to the affected gas.   In light of our asset concentration, if such a termination were to occur, it could cause our revenue, earnings and cash distributions to our unitholders, to decrease significantly.
Pipelines and facilities interconnected to our natural gas and NGL pipelines and facilities could become unavailable to transport natural gas and NGLs, and our revenue and cash available for distribution could be adversely affected.
     We depend upon pipelines and other facilities owned by others to provide delivery options from our pipelines and facilities for our customers’ benefit.   Since we do not own or operate these assets, their continuing operation is not within our control.   If any of these pipelines and other facilities become unavailable to transport natural gas and NGLs, our revenue and cash available for distribution could be adversely affected.
A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenue to decline and operating expenses to increase.
     Our natural gas gathering and intrastate transportation operations are generally exempt from FERC regulation, but FERC regulation still affects these businesses and the markets for products derived from these businesses.   FERC’s policies and practices across the range of its oil and natural gas regulatory activities, including, for example, its policies on open access transportation, ratemaking, capacity release and market center promotion, indirectly affect intrastate markets.   In recent years, FERC has pursued pro-competitive policies in its regulation of interstate oil and natural gas pipelines.   However, we have no assurance that FERC will continue this approach as it considers matters such as pipeline rates and rules and policies that may affect rights of access to oil and natural gas transportation capacity.   In addition, the distinction between FERC-regulated transmission services and federally unregulated gathering services has regularly been the subject of litigation, so, the classification and regulation of some of our gathering facilities and intrastate transportation pipelines could change based on future determinations by FERC and the courts.   If our gas gathering and processing agreement with Quicksilver, or our performance under that agreement, becomes subject to FERC jurisdiction, the agreement may be terminated.
     State and local regulations also affect our business.   Common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer.   These statutes restrict our right to decide whose production we gather or transport.   Federal law leaves any economic regulation of natural gas gathering to the states.   Texas, the only state in which we currently operate, has adopted complaint-based regulation of gathering activities, which allows oil and natural gas producers and shippers to file complaints with state regulators in an effort to resolve access and rate grievances.   Other state and local regulations may not directly regulate our business, but may nonetheless affect the availability of natural gas for purchase, processing and sale, including state regulation of production rates and maximum daily production allowable from gas wells.   While our gathering lines currently are subject to limited state regulation, there is a risk that state laws will be changed, which may give producers a stronger basis to challenge the rates, terms and conditions of our gathering lines.
We are subject to environmental laws and regulations that may expose us to significant costs and liabilities.
     Our operations are subject to stringent and complex federal, state and local environmental laws and regulations.   We may incur substantial costs to conduct our operations in compliance with these laws and regulations.   Moreover, new or stricter environmental laws, regulations or enforcement policies could be implemented that significantly increase our compliance or remediation costs.   For example, uncertainty exists with respect to the regulation of hydraulic fracturing.   Legislation has been introduced in the

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United States Congress that would subject hydraulic fracturing to regulation under the Safe Drinking Water Act, and certain states are also evaluating whether additional regulation of hydraulic fracturing is appropriate.   To the extent further regulation of hydraulic fracturing affects the volume of natural gas or associated NGLs that we gather and process, such regulation could have an adverse effect on our business.   Greenhouse gas regulation is also the subject of significant uncertainty.   In addition to various other federal, regional, state and local greenhouse gas legislation and regulations that are currently in effect or under development, the United States Congress is currently considering legislation that would significantly curtail national greenhouse gas emissions.   The United States Environmental Protection Agency has also taken steps to declare that certain greenhouse gas emissions are contributing to air pollution which is an endangerment to human health, and may regulate greenhouse gas emissions under the federal Clean Air Act.
     Failure to comply with environmental laws and regulations or the permits issued under them may result in the assessment of administrative, civil, and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting our operations.   In addition, strict joint and several liabilities may be imposed under environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that did comply at the time those actions were taken.   Private parties may also have the right to pursue legal actions against us to enforce compliance, as well as to seek damages for non-compliance, with environmental laws and regulations or for personal injury or property damage that may result from environmental and other impacts of our operations.   We may not be able to recover some or any of these costs through insurance or increased revenue, which may materially reduce our earnings and have a material adverse effect on our ability to make cash distributions.
We may incur significant costs and liabilities as a result of pipeline integrity management program testing and any related pipeline repair or preventative or remedial measures.
     The DOT requires pipeline operators to develop integrity management programs for transportation pipelines located where a leak or rupture could harm “high consequence areas.” The regulations require operators to:
    perform ongoing assessments of pipeline integrity;
 
    identify and characterize applicable threats to pipeline segments that could impact a high consequence area;
 
    maintain processes for data collection, integration and analysis;
 
    repair and remediate pipelines as necessary; and
 
    implement preventive and mitigating actions.
     We currently estimate that we will incur costs of approximately $1.7 million through 2011 to perform the testing required by existing DOT regulations.   This estimate does not include the costs, if any, for repair, remediation, preventative or mitigating actions that may be determined to be necessary as a result of the testing program, which could be substantial.
We will be required to make substantial capital expenditures to increase our asset base.   If we are unable to obtain needed capital or financing on satisfactory terms, our ability to make cash distributions may be diminished or our financial leverage could increase.
     In order to increase our asset base, we will need to make expansion capital expenditures.   If we do not make sufficient or effective expansion capital expenditures, we may be unable to expand our business operations or increase our future cash distributions.   To fund our expansion capital expenditures, we will be required to use cash from our operations, incur borrowings or sell additional common units or other securities.   Such uses of cash from operations will reduce cash otherwise available for distribution to our unitholders.   Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition or general economic conditions at the time of any such financing or offering.   Even if we are successful in obtaining the necessary funds, the terms of such financings could adversely impact our ability to pay distributions to our unitholders.   Further, incurring additional debt may significantly increase our interest expense and financial leverage and issuing additional limited partner interests may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain the cash distribution rate, which could materially decrease our ability to pay distributions.
We do not own all of the land on which our pipelines and facilities are located, which could disrupt our operations.
     We do not own all of the land on which our pipelines and facilities have been constructed, which subjects us to the possibility of more onerous terms or increased costs to maintain valid rights-of-way.   We obtain standard easement rights to construct and operate our pipelines on land owned by third parties.   Our rights generally revert back to the landowner after we stop using the easement for its specified purpose.   Therefore, these easements exist for varying periods of time. Our loss of easement rights could

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have a material adverse effect on our ability to operate our business, thereby resulting in a material reduction in our revenue, earnings and ability to make cash distributions.
Our business involves many hazards and operational risks, some of which may not be fully covered by insurance.   The occurrence of a significant accident or other event that is not fully insured could curtail our operations and have a material adverse effect on our cash flows and, accordingly, the market price for our common units.
     Our operations are subject to many risks inherent in the midstream business including:
    damage to pipelines and plants, related equipment and surrounding properties caused by natural disasters and acts of terrorism;
 
    inadvertent damage from construction, farm and utility equipment;
 
    leaks or losses of natural gas or NGLs as a result of the malfunction of equipment or facilities;
 
    fires and explosions; and
 
    other hazards that could also result in personal injury, loss of life, pollution or suspension of operations.
     These risks could result in curtailment or suspension of our related operations.
     We are not fully insured against all risks inherent to our business.   For example, we do not have any property insurance on any of our underground pipeline systems that would cover damage to the pipelines.   We are not insured against all environmental incidents that might occur which may include certain types of toxic tort claims.   Any significant accident or event that is not fully insured could adversely affect our earnings and cash distributions.   In addition, we may not be able to economically obtain or maintain insurance of the type and amount we desire.   As a result of market conditions, premiums and deductibles for certain of our insurance policies could escalate further.   In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage.   Any type of catastrophic event could have a material adverse effect on our ability to distribute cash to our unitholders.
The provisions of our revolving credit agreement and the risks associated with our debt could adversely affect our business, financial condition, results of operations, ability to make distributions to unitholders and value of our units.
     Our revolving credit agreement restricts our ability to, among other things:
    incur additional debt;
 
    make distributions on or redeem or repurchase units;
 
    make certain investments and acquisitions;
 
    incur or permit certain liens to exist;
 
    enter into certain types of transactions with affiliates;
 
    merge, consolidate or amalgamate with another company; and
 
    transfer or otherwise dispose of assets.
     The provisions of our revolving credit agreement may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions.   In addition, a failure to comply with the provisions of our revolving credit agreement could result in an event of default which could enable our lenders, subject to the terms and conditions of the revolving credit agreement, to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable.   If we were unable to repay the accelerated amounts, our lenders could proceed against the collateral granted to them to secure such debt.   If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment.
We are exposed to the credit risks of Quicksilver, and any material nonpayment by Quicksilver could reduce our ability to make distributions to our unitholders.
     We are dependent on Quicksilver for the preponderance of the volumes that we gather and process, and are consequently subject to the risk of nonpayment or late payment by Quicksilver. Quicksilver’s credit ratings are below investment grade, where we expect them to remain for the foreseeable future.   Accordingly, this risk is higher than it would be with a more creditworthy counterparty or with a more diversified group of customers, and unless and until we significantly increase our customer base, we expect to remain subject to significant and non-diversified risk of nonpayment or late payment of our fees.   Any material nonpayment or nonperformance by Quicksilver could reduce our ability to make distributions to our unitholders.   Furthermore,

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Quicksilver is highly leveraged and subject to its own operating and regulatory risks, which could increase the risk that it may default on its obligations to us.
The loss of key personnel could adversely affect our ability to operate.
     We depend on the leadership, involvement and services of a relatively small group of Quicksilver’s key management personnel.   The loss of the services of any of these individuals could adversely affect our ability to operate our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.

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Item 6. Exhibits
     
  Exhibit No.    Description
 
   
*31.1
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
  Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*   Filed herewith

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 9, 2009
         
  QUICKSILVER GAS SERVICES LP

By: QUICKSILVER GAS SERVICES GP LLC, its
General Partner

 
 
  By:   /s/ Thomas F. Darden    
    Thomas F. Darden   
    President and Chief Executive Officer   
     
  By:   /s/ Philip Cook    
    Philip Cook   
    Senior Vice President – Chief Financial Officer   

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EXHIBIT INDEX
     
  Exhibit No.    Description
 
   
*31.1
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
  Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*   Filed herewith