Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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: 001-35719

Southcross Energy Partners, L.P.

(Exact name of registrant as specified in its charter)

(214) 979-3700

(Registrant’s telephone number, including area code)

(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 o No x

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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. (Check one):

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

Indicate the number of units outstanding of the issuer’s classes of common units, subordinated units and General Partner units, as of the latest practicable date:

Table of Contents

Explanatory Note

As generally used in the energy industry and in this report, the following terms have the following meanings:

/d:  Per day

Bbls:  Barrels

Condensate:  Hydrocarbons that are produced from natural gas reservoirs but remain liquid at normal temperature and pressure

Lean gas:  Natural gas that is low in NGL content

MMBtu:  One million British thermal units

Mcf:  One thousand cubic feet

Mgal: One thousand gallons

MMcf:  One million cubic feet

NGLs:  Natural gas liquids, which consist primarily of ethane, propane, isobutane, normal butane, natural gasoline and stabilized condensate

Residue gas:  The pipeline quality natural gas remaining after natural gas is processed and NGLs removed

Rich gas:  Natural gas that is high in NGL content

Throughput:  The volume of natural gas or NGLs transported or passing through a pipeline, plant, terminal or other facility

Southcross Energy LLC and Southcross Energy Partners, L.P:

Southcross Energy LLC, a Delaware limited liability company, is the predecessor for accounting purposes (the “Predecessor”) of Southcross Energy Partners, L.P. (the “Partnership”). The accompanying financial statements and related notes include the assets, liabilities, results of operations and cash flows of the Predecessor prior to the Predecessors’ contribution of its subsidiaries to the Partnership in connection with the Partnership’s initial public offering (“IPO”).

On November 7, 2012, the Partnership completed its IPO. Also, on November 7, 2012, in connection with the closing of the IPO, the following transactions occurred:

·                  The Predecessor conveyed all of its limited liability company interests in its operating subsidiaries to Southcross Energy Operating, LLC (“Southcross Operating”) as a capital contribution;

·                  The Predecessor conveyed a limited liability company interest in Southcross Operating to Southcross Energy Partners GP, LLC, the Partnership’s general partner (the “General Partner”) as a capital contribution with a value equal to 2.0% of the equity value of the Partnership (the “GP Contribution Interest”);

·                  The General Partner conveyed the GP Contribution Interest to the Partnership in exchange for (i) 498,518 general partner units in the Partnership representing a continuation of its 2.0% general partner interest; and (ii) the Partnership’s incentive distribution rights (“IDRs”);

·                  The Predecessor conveyed its remaining interest in Southcross Operating to the Partnership in exchange for (i) 3,213,713 common units (1,863,713 common units subsequent to the purchase of 1,350,000 common units from the Predecessor when the underwriters fully exercised their over-allotment option on November 26, 2012 (the “Over-Allotment Option”)) representing a 12.9% limited partner interest (7.5% limited partner interest, including the exercise of the Over-Allotment Option on November 26, 2012), (ii) 12,213,713 subordinated units representing a 49.0% limited partner interest, (iii) the Partnership’s assumption of the Predecessor’s outstanding debt under its credit agreement, (iv) the right to receive $7.5 million sourced from new debt the Partnership incurred and (v) the right to receive $38.5 million in cash, a portion of which was used to reimburse the Predecessor for certain capital expenditures it incurred with respect to the contributed assets;

·                  Pursuant to the Partnership’s long term incentive plan, the Partnership granted 146,000 phantom units, with distribution equivalent rights, to certain of our employees;

·                  The Partnership issued 9,000,000 common units to the public (10,350,000 common units including the exercise of the Over-Allotment Option);

2

Table of Contents

·                  The Partnership used the proceeds from the IPO, net of underwriters’ and structuring fees, plus borrowings under the Partnership’s senior secured credit facility to (i) repay the outstanding debt under the Predecessor’s credit agreement of $270.0 million, (ii) make cash distributions to the Predecessor of $38.5 million including reimbursements for certain capital expenditures the Predecessor incurred with respect to assets the Predecessor contributed to the Partnership and (iii) distribute $7.5 million to the Predecessor;

·                  The Partnership utilized $25.2 million representing the funds received in connection with the Over-Allotment Option to purchase and retire 1,350,000 common units from the Predecessor; and

·                  The Predecessor used the combined proceeds from the IPO and the Over-Allotment Option of $71.2 million ($46.0 million and $25.2 million, respectively) received from the Partnership to redeem Series B Redeemable Preferred units and Series C Redeemable Preferred units of the Predecessor.

The financial statements in this report reflect the Predecessor’s financial statements.  The effects of the IPO and related transactions occurring in November 2012 are not reflected in these financial statements.

The results of the Predecessor for the three and nine month periods ended September 30, 2012 may not be indicative of the Partnership’s future financial results.

3

Table of Contents

FORM 10-Q

TABLE OF CONTENTS

Southcross Energy Partners, L.P.

4

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SOUTHCROSS ENERGY LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit information)

(Unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements.

5

Table of Contents

SOUTHCROSS ENERGY LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except unit information)

(Unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements.

6

Table of Contents

SOUTHCROSS ENERGY LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements.

7

Table of Contents

SOUTHCROSS ENERGY LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

8

Table of Contents

SOUTHCROSS ENERGY LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

(In thousands)

(Unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements.

9

Table of Contents

SOUTHCROSS ENERGY LLC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.              ORGANIZATION AND BASIS OF PRESENTATION

Organization

On November 7, 2012, Southcross Energy Partners, L.P. (the “Partnership”) completed its initial public offering (the “IPO”) and after the completion of the IPO and full exercise of the underwriters’ over-allotment option, Southcross Energy LLC, a Delaware limited liability company and the predecessor for accounting purposes of the Partnership (the “Predecessor”) (collectively, the Partnership and the Predecessor are herein referred to as the “Company,” “we,” “us” and “our”) owns all of the equity interests in Southcross Energy Partners GP, LLC, the Partnership’s general partner (the “General Partner”) as well as common and subordinated units of the Partnership. The Predecessor’s total direct and indirect equity ownership in the partnership is 58.5%. The accompanying condensed consolidated financial statements as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 reflect the financial and operating results of the Predecessor.

The Predecessor, formed on June 2, 2009, and its subsidiaries are controlled through investment funds and entities associated with Charlesbank Capital Partners, LLC (“Charlesbank”).

The following activities occurred in connection with the closing of the IPO:

Activity of the Predecessor

·                  The Predecessor conveyed the following:

·                  its direct and indirect ownership in its operating subsidiaries to Southcross Energy Operating, LLC, the Partnership’s operating subsidiary (“Southcross Operating”);

·                  an interest in Southcross Operating to the General Partner as a capital contribution; and

·                  its remaining interest in Southcross Operating to the Partnership in exchange for:

·                  3,213,713 common units, representing a 12.9% limited partner interest in the Partnership;

·                  12,213,713 subordinated units, representing a 49.0% limited partner interest in the Partnership; and

·                  the assumption by the Partnership of the Predecessor’s existing debt under its credit agreement of $270.0 million, which included an additional $5.0 million in borrowings during November 2012.

·                  The Predecessor paid the accumulated 18% priority return on both Series B Redeemable Preferred units and Series C Redeemable Preferred units accrued through the IPO closing date and redeemed all of the outstanding Series C Redeemable Preferred units and approximately 22% of the outstanding Series B Redeemable Preferred units, by paying $46.0 million to the owners of such redeemable preferred units.

Activity of the General Partner

·                  The General Partner conveyed its interest in Southcross Operating to the Partnership in exchange for:

·                  a continuation of its 2% general partner interest in the Partnership; and

·                  the Partnership’s incentive distribution rights (“IDR”).

Activity of the Partnership

·                  The Partnership used the proceeds from its IPO of approximately $168.0 million, net of underwriters’ and structuring fees to:

·                  repay $129.5 million of debt outstanding under the Predecessor’s credit agreement which the Partnership assumed; and

·                  to make a $38.5 million distribution, including reimbursements for certain capital expenditures, to the Predecessor.

·                  The Partnership issued 9,000,000 common units to the public, representing a 36.1% limited partner interest in the Partnership;

10

Table of Contents

·                  The Partnership established a long term incentive plan and granted 146,000 phantom units with distribution equivalent rights to certain employees.

·                  The Partnership entered into a $350.0 million senior secured credit facility and borrowed $150.0 million.  The Partnership used proceeds of $147.5 million (net of $2.5 million in lender fees and expenses) for repayment of $140.0 million of the Predecessor’s debt and $7.5 million for distribution to the Predecessor;

·                  The Partnership retired all of the Predecessor’s assumed debt of $270.0 million then outstanding under the Predecessor’s credit agreement; and

·                  The Partnership assumed responsibility for all of the Predecessor’s $26.7 million of outstanding letters of credit.

Subsequent to the IPO and the concurrent activity by the Company, the Partnership owns the Predecessors’ operating subsidiaries and will continue to provide the services of the Predecessor.

In connection with the full exercise of the underwriter’s over-allotment option which closed on November 26, 2012 (the “Over-Allotment Option”), the following occurred:

Activity of the Partnership

·                  The Partnership’s underwriters purchased 1,350,000 additional common units in the Partnership for approximately $25.2 million in proceeds, net of underwriters’ and structuring fees;

·                  The Partnership used the net proceeds of $25.2 million to acquire 1,350,000 common units from the Predecessor; and

·                  The Partnership redeemed and retired the 1,350,000 common units acquired from the Predecessor.

Activity of the Predecessor

·                  The Predecessor used a portion of the proceeds from the redemption of the common units to pay the accumulated 18% priority return on the outstanding Series B Redeemable Preferred units of $313,684;

·                  The Predecessor used the remaining proceeds of approximately $24.9 million to redeem 2,489,081 Series B Redeemable Preferred units from the owners of the units resulting in 858,717 Series B Redeemable Preferred units outstanding, which will remain the obligation of the Predecessor; and

·                  The Predecessor subsequently held 1,863,713 common units representing, with its 12,213,713 subordinated units, a 56.5% limited partner interest in the Partnership and 498,518 general partner units representing a 2.0% general partner interest in the Partnership.

The Company is a midstream natural gas company with operations in Texas, Mississippi and Alabama. The Company operates as one reportable segment and provides natural gas gathering, processing, treating, compression and transportation services and natural gas liquids (“NGL”) fractionation and transportation services for its producer customers, and sources, purchases, transports and sells natural gas and NGLs to power generation, industrial and utility customers.

Organizational Structure

The following table depicts the ownership structure following the IPO and the Over-Allotment Option:

11

Table of Contents

Basis of Presentation

These unaudited interim condensed consolidated financial statements for the Predecessor were prepared under the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Accordingly, these financial statements do not include all of the disclosures required by GAAP and should be read along with the Predecessor’s 2011 audited consolidated financial statements and related notes included in the Partnership’s Rule 424(b)(4) Prospectus filed with the SEC on November 2, 2012 (the “Prospectus”). The Predecessor’s financial statements as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, are unaudited and have been prepared on the same basis as the annual consolidated financial statements.  All intercompany accounts and transactions have been eliminated in the preparation of the accompanying financial statements.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments consisting of normal recurring accruals necessary for the fair presentation of the results of operations for the three and nine months ended September 30, 2012 and 2011.  Information for interim periods may not be indicative of the Predecessor’s operating results for the entire year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on management’s best available knowledge of current and future events, actual results may differ from those estimates.

Significant Accounting Policies

There were no changes to the significant accounting policies described in the Predecessor’s 2011 audited consolidated financial statements and related notes included in the Prospectus.  For information on our significant accounting policies, see Note 2 of the Predecessor’s 2011 audited consolidated financial statements included in the Prospectus.

Recent Accounting Pronouncements -  Accounting standard-setting organizations frequently issue new or revised accounting rules. We regularly review new pronouncements to determine the impact, if any, on our consolidated financial statements.

Effective January 1, 2012, the Predecessor adopted the revised accounting guidance associated with the presentation of comprehensive income, which did not have a material impact on the financial statements. There were no other new pronouncements that had or are expected to have a material impact on the Predecessor’s financial statements.

3. ACQUISITIONS

Enterprise Alabama Intrastate, LLC

The Predecessor completed the acquisition of Enterprise Alabama Intrastate, LLC (“EAI”) from Enterprise GTM Holdings L.P. for $21.8 million on September 1, 2011. EAI owns approximately 388 miles of two to sixteen inch natural gas pipeline assets located in northwest and central Alabama, provides gathering, transportation and compression services and engages in the purchase and sale of natural gas.  EAI’s identifiable assets acquired and liabilities assumed by the Predecessor were recorded based upon the fair values determined on the date of acquisition.

The fair values of the EAI property, plant and equipment were determined based upon assumptions related to expected future cash flows, discount rates and asset lives using currently available information. The Company utilized a mix of the cost, income and market approaches in determining the estimated fair values of such assets. The fair value measurements and models are classified as non-recurring level 3 measurements consistent with accounting standards related to the determination of fair value.

The Predecessor completed its assessment of the fair value of the assets acquired and liabilities assumed as of March 31, 2012 and determined the consideration given was equal to the fair value of net assets acquired; thus, no goodwill was recorded.

12

Table of Contents

The reconciliation of the fair values of the assets acquired and liabilities assumed related to the EAI purchase price was as follows (in thousands):

The Predecessor attributed $1.7 million to intangible assets associated with long term supply and gathering contracts assumed in the acquisition (See Note 5).

In the third quarter of 2011, the Predecessor expensed $0.2 million of transaction costs associated with the acquisition of EAI.  These costs are reported within general and administrative expenses.

The following unaudited pro forma financial information of the Predecessor assumes that the EAI acquisition occurred on January 1, 2011 and includes adjustments for income from operations, including depreciation and amortization, as well as the effects of financing the acquisition (in thousands, except unit information):

The unaudited pro forma information is not necessarily indicative of what the Predecessor’s results of operations would have been if the transaction had occurred on that date, or what the Partnership’s financial position or results from operations will be for any future periods.

Both revenue and net income generated by EAI are immaterial for the period between the EAI acquisition date (September 1, 2011) and September 30, 2011.

13

Table of Contents

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

Depreciation is provided using the straight-line method based on the estimated useful life of each asset.

Costs related to projects during construction, including interest on funds borrowed to finance the construction of facilities, are capitalized as construction in progress.  For the three months ended September 30, 2012 and 2011, the Predecessor capitalized interest of $2.2 million and $0.6 million, respectively. For the nine months ended September 30, 2012 and 2011, the Predecessor capitalized interest of $4.5 million and $0.9 million, respectively.

5. INTANGIBLE ASSETS

Intangible assets of $1.6 million and $1.7 million as of September 30, 2012 and December 31, 2011, respectively, represent the value assigned to the long term supply and gathering contracts assumed by the Predecessor in the EAI acquisition. The majority of assumed contracts are life of lease, and the Predecessor determined that the useful economic lives of the underlying producing leases were at least as long as the expected life of the acquired pipelines.  These intangible assets are amortized on a straight line basis over the 30 year expected useful lives of the contracts.  Amortization expense related to intangible assets for the periods presented was not material.

6. OTHER ASSETS

Other assets consisted of the following (in thousands):

14

Table of Contents

The Predecessor deferred certain costs and fees incurred in conjunction with its financing under its credit agreement dated June 10, 2011 (the “Credit Agreement”). These deferred costs were being amortized to interest expense over the five-year term of the Credit Agreement.

The Predecessor incurred $2.3 million in costs as a result of entering into an amendment of the Credit Agreement on February 7, 2012, which modified the existing agreement. These deferred financing costs, along with the then existing unamortized deferred financing costs of $2.2 million, are being amortized over the remaining life of the Credit Agreement through the maturity date of June 10, 2016 and were reflected in Other Assets. Amortization of deferred financing costs was as follows (in thousands):

7. LONG TERM DEBT

For the nine months ended September 30, 2012, the Predecessor had weighted average borrowings outstanding under the Credit Agreement of $236.3 million at an effective average interest rate of 3.85%. For the nine months ended September 30, 2011, the Predecessor had weighted average borrowings outstanding under the Credit Agreement of $131.7 million at an effective average interest rate of 3.64%. As of September 30, 2012, the Predecessor had an outstanding term loan of $150.2 million with a LIBOR based interest rate of 4.47% and a revolver loan of $103.0 million with an effective interest rate of 4.47%, excluding the effects of any hedging. As of September 30, 2012, the Predecessor was in compliance with all of its financial loan covenants.

Amendment to the Credit Agreement—February 7, 2012

On February 7, 2012, the Predecessor entered into the first amendment of the Credit Agreement. The amendment was accounted for as a modification of an existing debt agreement and was entered into in order to modify the covenants to reflect the Predecessor’s need for expansion capital to support its growth plans. This amendment did not change the term loan or revolver loan capacity, but eased financial covenant measures and modified loan pricing for when the Predecessor’s leverage ratio was greater than 5.0 times.

On November 7, 2012, the Partnership, in connection with the IPO, assumed and repaid $270.0 million, representing all of the Predecessor’s outstanding debt under the Credit Agreement at that time (See Note 1).

Additionally, in connection with the closing of the IPO, the Partnership entered into a $350.0 million senior secured credit facility with Wells Fargo Bank, N.A., and a syndicate of lenders (the “Senior Secured Credit Facility”).  The Partnership utilized the Senior Secured Credit Facility to fund fees and expenses incurred in connection with the IPO and for the repayment of a portion of the Predecessor’s debt.

The Partnership may utilize the Senior Secured Credit Facility for working capital requirements and capital expenditures, the purchase of assets, the payment of distributions, repurchase of units and general purposes of the Partnership. The interest rate on this facility as of the IPO date was LIBOR plus 3.25%.  The Senior Secured Credit Facility matures on November 7, 2017, the fifth anniversary of the IPO closing date.

In addition, the Senior Secured Credit Facility includes a sublimit of up to $75.0 million for letters of credit. Substantially all of the Partnership’s assets are pledged as collateral under the Senior Secured Credit Facility. The Senior Secured Credit Facility contains various covenants and restrictive provisions and also requires maintenance of certain financial and operational covenants including but not limited to the following:

·                  prior to exercising a one-time covenant election in connection with the issuance of certain unsecured notes, a consolidated total leverage ratio (generally defined as debt to EBITDA, as adjusted) of not more than 5.25 to 1.00 with step downs as set forth in the Senior Secured Credit Facility, and a consolidated interest coverage ratio of not less than 2.75 to 1.00. The requirement to maintain a certain consolidated total leverage ratio is subject to a provision for increases to 5.00 to 1.00 in connection with certain future acquisitions;

15

Table of Contents

·                  upon exercising a one-time covenant election in connection with the issuance of certain unsecured notes, a consolidated total leverage ratio of not more than 5.25 to 1.00, a consolidated senior secured leverage ratio of not more than 3.50 to 1.00 and a consolidated interest coverage ratio of not less than 2.75 to 1.00;

·                  by December 31, 2012 the Bonnie View fractionation facility must have processed at least an average of 7,000 Bbls/d per day over a period of seven consecutive days; and

·                  by December 31, 2012 the Woodsboro gas processing facility must have processed at least an average of 80 MMcf/d per day over a period of seven consecutive days.

8. MEMBERS’ EQUITY

As of September 30, 2012, the Predecessor’s common equity was comprised of 1,313,445 Class A common units, of which 114,580 were unvested, and 28,639 Class B units, of which 11,456 were unvested. As of December 31, 2011, the Predecessor’s common equity was comprised of 1,415,729 Class A common units, of which 217,483 were unvested, and 57,279 Class B units, of which 34,367 were unvested. The Class B units have the same distribution and liquidation rights as the Class A common units; however, they do not have voting rights. All Class A common units and Class B units were purchased for, and have a par value of, $1.00 per unit.

Certain of the Class A common units and all of the Class B units contain time- and performance-vesting conditions. Time-vesting units vest ratably over five years subject to certain accelerated vesting based primarily on change of control or certain termination causes. Performance-vesting units will vest, if at all, upon Charlesbank attaining certain investment multiples and internal rates of return in connection with a liquidity event. Both the time- and performance-vesting units require continued employment through any vesting date.  The change in structure and ownership as a result of the IPO did not create a change of control event under the terms of the time- and performance-vesting units.

There was no compensation expense incurred for the time- or performance-vesting units as the prices paid for the units were equal to the fair value of the units on the date purchased. Upon an employee’s termination of employment, any unvested incentive units are subject to the Predecessor’s right, but not obligation, to repurchase such units at the employee’s initial acquisition cost (or less in certain circumstances).

On August 6, 2009, five members of the Predecessor’s management team purchased, directly or indirectly through Estrella Energy, LP, Class A common units and Class B units along with Charlesbank, for the same value as Charlesbank, ($1.00 per unit). Estrella Energy, LP was partially owned by a non-management third-party, and thus a portion of the time- and performance-based units (“Third-Party Units”) owned by Estrella Energy, LP were owned indirectly by the non-management third-party. On March 20, 2012, Estrella Energy, LP was dissolved and the Predecessor purchased and retired the Third-Party Units for $15.3 million. Management did not receive any consideration in connection with such repurchase.

The following table provides information regarding the Predecessor’s outstanding time- and performance-vesting incentive units held by management as of September 30, 2012:

Long Term Incentive Plan

As of September 30, 2012, the Predecessor did not have any long term incentive plans or units authorized for issuance under unit-based compensation plans. Subsequent to September 30, 2012 and in connection with the IPO, the Partnership established a long term incentive plan and granted 146,000 phantom units with distribution equivalent rights (See Note 1).

Earnings Per Unit

The Predecessor has included a calculation for earnings per common unit for all periods presented in which common units were outstanding. The Predecessor calculates earnings per common unit by first deducting the amount of cumulative returns on all classes of redeemable preferred and preferred units from net income and dividing the result by the weighted average number of vested common units. For both periods presented in which common units were outstanding, no unvested common units were included in the computation of the diluted per-unit amount because all would have been anti-dilutive to the net loss per common unit.

16

Table of Contents

9. PREDECESSOR PREFERRED UNITS

Preferred Units

As of September 30, 2012 and December 31, 2011, the Predecessor’s cumulative preferred units were comprised of 11,850,374 units with a par value of $10 per unit, which accrued value (in the form of additional preferential rights to receive distributions) at a rate of 10% per annum, compounded quarterly.  The cumulative preferred units remain the obligation of the Predecessor and were not conveyed to the Partnership in connection with the IPO.

Except in the case of cash distributions made for the purpose of paying federal income taxes, which are made to both preferred and common equity owners in direct proportion to the owners’ respective share of taxable income, owners of the preferred equity receive cash distributions before owners of common equity. The cumulative preferred units and their cumulative return are subordinated to all redeemable preferred units and their cumulative return as discussed below. With the exception of cash distributions for federal income tax purposes, the Credit Agreement included certain covenants that restricted the Predecessor’s ability to pay cash dividends to its owners. The Predecessor adjusts the carrying value of the Preferred Units to reflect the cumulative right to receive distributions on a quarterly basis. As of September 30, 2012 and December 31, 2011, the preferred units’ cumulative right to receive future cash distributions was $43.3 million and $31.8 million, respectively, as a result of the cumulative preferred return on such units.

Redeemable Preferred Units

On June 10, 2011, in connection with the Predecessor entering into its Credit Agreement, Charlesbank and certain of the Predecessor’s existing investors contributed a total of $15.0 million in exchange for 1.5 million Redeemable Preferred Units. The Redeemable Preferred Units have a par value of $10 per unit and accrue value (in the form of an additional preferential right to receive distributions) at a rate of 18% per annum, compounded quarterly. These Redeemable Preferred Units could be redeemed in whole or in part at any time, or would be redeemed by the Predecessor promptly after the satisfaction of all obligations under the Credit Agreement, to the extent of available funds. The Predecessor adjusts the carrying value of the Redeemable Preferred Units to reflect the cumulative right to receive distributions on a quarterly basis. As of September 30, 2012 and December 31, 2011, the right of the Redeemable Preferred Units to receive future cash distributions included an additional $3.9 million and $1.6 million, respectively, as a result of the cumulative preferred return on such units. The Redeemable Preferred Units and their cumulative return remain the obligation of the Predecessor and were not conveyed to the Partnership in connection with the IPO.

Series B Redeemable Preferred Units

On March 20, 2012, Charlesbank and certain of the Predecessor’s existing investors contributed $25.3 million and an affiliate of Wells Fargo Securities, LLC contributed $10.0 million to the Predecessor in exchange for 2.53 million units and 1.0 million units, respectively, of a new, Series B class, of Redeemable Preferred Units (“Series B Units”). On June 26, 2012, Charlesbank and certain of the Predecessor’s existing investors contributed $7.5 million to the Predecessor in exchange for 0.75 million Series B Units.

On September 30, 2012, the Series B Units were comprised of 4.28 million units with a par value of $10 per unit, which accrue value (in the form of an additional preferential right to receive distributions) at a rate of 18% per annum, compounded quarterly. The Series B Units could be redeemed by the Predecessor in whole or in part at any time, or would be redeemed by the Predecessor promptly after the satisfaction of all its obligations under the Credit Agreement, to the extent of available funds.  The Series B Units and their cumulative return remain the obligation of the Predecessor and were not conveyed to the Partnership in connection with the IPO.  The Predecessor adjusts the carrying value of the Series B Units to reflect the cumulative right to receive distributions on a quarterly basis. As of September 30, 2012, the Series B Units’ right to receive future cash distributions included $3.8 million as a result of the cumulative preferred return.

Series C Redeemable Preferred Units

On June 26, 2012, Charlesbank and certain of the Predecessor’s existing investors and other institutional investors contributed $30.0 million to the Predecessor in exchange for 3.0 million units of a new, Series C class, of Redeemable Preferred Units (“Series C Units”). As of September 30, 2012, the Series C Units were comprised of 3.0 million units with a par value of $10 per unit, which accrue value (in the form of an additional preferential right to receive distributions) at a rate of 18% per annum, compounded quarterly. As of September 30, 2012, the Series C Units’ right to receive future cash distributions included $1.4 million as a result of the cumulative preferred return.  The Series C Units and their cumulative return remain the obligation of the Predecessor and were fully redeemed in connection with the IPO (See Note 1).

17

Table of Contents

None of the Preferred Units and Redeemable Preferred Units were conveyed in the IPO, and remain the obligation of the Predecessor. The order of priority of the classes of Redeemable Preferred Units is as follows:

·                  Series C Units and their cumulative return are senior to the Series B Units and their cumulative return;

·                  Series B Units and their cumulative return are senior to the Redeemable Preferred Units and their cumulative return; and

·                  Redeemable Preferred Units and their cumulative return are senior to the Preferred Units.

Subsequent to September 30, 2012, the Predecessor paid $71.2 million from proceeds related to the IPO and the Over-Allotment Option to the owners of Series B Units and Series C Units for the accumulated 18% priority return on both Series B Units and Series C Units and redeemed all of the outstanding Series C Units and approximately 80% of the outstanding Series B Units.

10. CONCENTRATION OF CREDIT RISK AND TRADE ACCOUNTS RECEIVABLE

The Company’s markets are in Texas, Alabama and Mississippi. The Predecessor has a concentration of trade accounts receivable due from customers engaged in the purchase and sale of natural gas and NGL products, and other services. These concentrations of customers may affect our overall credit risk in that these customers may be similarly affected by changes in economic, regulatory or other factors. The Company analyzes customers’ historical financial and operational information prior to extending credit.

Formosa Hydrocarbons Company, Inc. (“Formosa”) was a significant customer for both the three and nine months ended September 30, 2012 and 2011, respectively. The contract with Formosa expires in 2013 and the Company does not expect to renew the contract. We anticipate that we will have the ability to take the same natural gas volume from our producers and process it at our own facilities, in particular at our new Woodsboro processing facility.

During 2011 Sherwin Alumina Company (“Sherwin”) also was a significant customer for both the three and nine month periods ended September 30, 2011.

Consolidated revenue attributed to Formosa and Sherwin was as follows (in thousands):

The Company’s ten largest customers represented 59.0% and 72.8% of consolidated revenue for the three month period ended September 30, 2012 and 2011, respectively. For the nine month periods ended September 30, 2012 and 2011, the Company’s ten largest customers represented 66.0% and 73.5% of consolidated revenue, respectively.

The Company did not record a provision for uncollectable accounts receivable as of September 30, 2012 and December 31, 2011.

18

Table of Contents

11. TOTAL REVENUE

The Predecessor had revenue consisting of the following categories (in thousands):

12. COMMITMENTS AND CONTINGENCIES

Leases

The Company has a non-cancelable lease for its office facilities in Dallas, Texas which expires August 16, 2016.  Rent expense related to the lease was as follows (in thousands):

Outstanding commitments related to expansion projects

During 2011, the Predecessor commenced construction of a new 200 MMcf/d Woodsboro processing plant in Refugio County, Texas. The Predecessor completed construction and commenced operations in July 2012 with capitalized costs of $104.9 million.  In addition, during November 2011, the Predecessor finalized the acquisition of an existing fractionation plant and entered into contracts to refurbish and install this equipment at its Bonnie View site. In July 2012, the Predecessor announced an expansion of the Bonnie View fractionator with a target completion during February 2013.  As of September 30, 2012, the Predecessor had $25.9 million in commitments outstanding for expansion projects.

13. RELATED PARTY TRANSACTIONS

Charlesbank

Charlesbank provided certain management services to the Predecessor under the terms of an agreement (“Charlesbank Agreement”)  which specified an annual management fee of $0.6 million, plus expenses. The Predecessor expensed such services, which are reported within general and administrative expenses; however, the payment of these fees was not allowed under the Predecessor’s Credit Agreement, as amended, for the nine-month period ended September 30, 2012 (See Note 7).  Therefore, no payments under the Charlesbank Agreement were made during the nine months ended September 30, 2012.  Additionally, in connection with the IPO, the Charlesbank Agreement was terminated.  The Predecessor’s management services expense related to the Charlesbank Agreement was as follows (in thousands):

Wells Fargo Bank, N.A.

The Predecessor entered into the Credit Agreement with a syndicate of financial institutions and other lenders, which included Wells Fargo Bank, N.A., an affiliate of which is a member of the Predecessor’s equity investor group (See Note 7).  Affiliates of

19

Table of Contents

Wells Fargo Bank, N.A. have from time to time engaged in commercial banking and financial advisory transactions with the Predecessor in the normal course of business, including the interest rate swap contract that the Predecessor entered into on March 2, 2012 (See Note 15).

Officers

On August 6, 2009, an officer of the Predecessor borrowed $150,000 from the Predecessor to fund the acquisition of units of preferred and common equity of the Predecessor pursuant to the terms and conditions of a promissory note executed between the officer and the Predecessor. The balance due to the Predecessor was $25,911 as of December 31, 2011. The note was paid in full on March 16, 2012.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

Accounting standards related to the determination of fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Predecessor used the market approach for recurring fair value measurements and to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Predecessor categorized the assets or liabilities recorded at fair value based upon the following fair value hierarchy:

·                  Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

·                  Level 2 valuations use inputs, in the absence of actively quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

·                  Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. The Predecessor used the most meaningful information available from the market combined with internally developed valuation methodologies to develop the best estimate of fair value.

The carrying amount reported in the condensed consolidated balance sheet for cash and cash equivalents, trade accounts receivable and trade accounts payable approximates fair value due to the short maturity of these instruments.

The Predecessor determined that the fair value of its debt as of September 30, 2012 and December 31, 2011 approximates book value as there has been no significant change in market conditions or debt pricing affecting the Predecessor.

In its normal course of business, the Company periodically enters into month-ahead swap contracts to economically hedge its exposure to certain intra-month natural gas index pricing risk.

The current portion of the interest rate swap liability of $0.3 million was included within other current liabilities, and the non-current portion of the interest rate swap liability of $0.4 million was included within other non-current liabilities as of September 30, 2012. The interest rate cap liability was included within other non-current liabilities as of December 31, 2011.

20

Table of Contents

The fair value of the interest rate cap and interest rate swap liabilities were as follows (in thousands):

15. DERIVATIVES

In its normal course of business, the Predecessor periodically entered into month-ahead swap contracts to economically hedge its exposure to certain intra-month natural gas index pricing risk. There were no outstanding month-ahead swap contracts as of September 30, 2012 and total volume of month-ahead swap contracts outstanding as of December 31, 2011 was 372,000 MMBtu. The Predecessor defined the contracts as Level 2, as the index price associated with such contracts was observable and tied to the quoted first-of-the-month natural gas index price. The fair value of such contracts was immaterial as of September 30, 2012 and December 31, 2011.

The realized gains or losses on these derivatives, reported within Total Revenues were as follows (in thousands):

On February 17, 2011, the Predecessor entered into an interest rate cap contract with Wells Fargo, N.A., effective March 31, 2011, for $80.0 million in notional value. The contract effectively capped the Predecessor’s LIBOR-based interest rate on that portion of debt on a sliding scale that started at 1.51% as of March 31, 2011 and increased to 4.57% at the end of the contract on June 30, 2014. The notional amount of debt specified in the cap contract declines over time so that the amount of debt covered equated to $65.0 million, $43.0 million and $23.0 million at December 31, 2011, 2012, and 2013, respectively. The Predecessor did not designate the interest rate cap as a hedging instrument for accounting purposes and, thus, the realized and unrealized gains and losses were recognized in interest expense during the period. The Predecessor defined this contract as a fair value hierarchy of Level 2.

In March 2012, the Predecessor terminated the interest rate cap and entered into an interest rate swap contract with Wells Fargo, N.A. The interest rate swap has a notional value of $150.0 million, and a maturity date of June 30, 2014. The Predecessor receives a floating rate based upon one-month LIBOR and pays a fixed rate under the interest rate swap of 0.54%.  The Predecessor designated the interest rate swap as a cash flow hedge for accounting purposes and, thus, to the extent the cash flow hedge was effective, unrealized gains and losses were recorded to accumulated other comprehensive income/(loss) and recognized in interest expense as the underlying hedged transactions (interest payments) were recorded. Any hedge ineffectiveness is recognized in interest expense immediately. The Predecessor did not have any hedge ineffectiveness during the period ended September 30, 2012. The Predecessor defined this contract as a fair value hierarchy of Level 2.

Based on current interest rates, the Predecessor estimated that approximately $0.3 million of hedging activity related to the interest rate swap contract will be reclassified from accumulated other comprehensive income/(loss) into results of operations within the next 12 months.

21

Table of Contents

The amounts recognized in interest expense associated with derivatives that are not designated as hedging instruments were as follows (in thousands):