MDS ENERGY PUBLIC 2013-A LP - FORM 10-Q - August 13, 2014

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

 
Form 10-Q
 
 
(Mark One)
o
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ___________
 
 
MDS ENERGY PUBLIC 2013 - A LP
(Name of small business issuer in its charter)
 

Delaware
  
90-0852601
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
     
409 Butler Road
    
Suite A
    
Kittanning, PA
  
16201
(Address of principal executive offices)
  
(zip code)
 
Issuer’s telephone number, including area code: (855) 807-0807
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x 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 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,” “non accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer
o
Accelerated filer
o
       
Non-accelerated filer
o
Smaller reporting company
x
 
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
 
As of June 30, 2014 this Partnership had 15.5 units of limited partnership interest and 1,493.03 units of additional general partnership interest outstanding.
 
 
 

 

 
MDS ENERGY PUBLIC 2013 – A LP
(A Delaware Limited Partnership)
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
 
Implications of Being an Emerging Growth Company
         
     
PAGE
         
       
         
 
1
  
   
1
  
   
2
  
   
3
  
   
4
  
   
5
  
         
 
11
  
         
 
15
  
         
   
16
  
         
 
16
  
         
 
16
  
 
17
  
         
 
18
  
         
CERTIFICATIONS
      
 
 
 

 

 
IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY.
 
The Jumpstart Our Business Startups Act (the “JOBS Act”) became law in April 2012. The Partnership is an “emerging growth Company” as defined in the JOBS Act, and it is eligible for certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that usually apply to public companies.
 
These exemptions include, among others, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, any requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) which require mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor must provide additional information about the audit and the issuer’s financial statements, nor with new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Partnership has not yet decided whether to use any or all of the exemptions.
 
Additionally, under Section 107 of the JOBS Act, an “emerging growth company” is eligible for the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Act”) to comply with new or revised accounting standards. This means an “emerging growth company” can delay adopting certain accounting standards until those standards otherwise become applicable to private companies. However, the Partnership is electing to “opt out” of that extended transition period, and therefore will comply with new or revised accounting standards on the dates the standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that the Partnership’s decision to opt out of the extended transition period for compliance with new or revised accounting standards is irrevocable.
 
The Partnership could continue to be an “emerging growth company” until the earliest of:
 
 
(iv)
the last day of the first fiscal year in which it has total annual gross revenue of $1 billion or more;
 
 
(ii)
the last day of the fiscal year following the fifth anniversary of the date of the first sale of its units pursuant to its prospectus and Registration Statement with the SEC;
 
 
(iii)
the date that it becomes a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”), which would occur if the market value of its units held by non-affiliates exceeds $700 million, measured as of the last business day of its most recently completed second fiscal quarter; or
 
 
(iv)
the date on which it has, during the preceding three year period, issued more than $1 billion in non-convertible debt.
 
The Partnership anticipates that it will continue to be an emerging growth company until the termination of the five year period described in (ii), above.
 
 
 

 

 
 
 
The MDS ENERGY PUBLIC 2013-A LP
  
 
 
   
June 30, 2014
        
   
(Unaudited)
    
December 31, 2013
  
             
Assets
            
Current Assets
            
Cash and Cash Equivalents
   $ 6     $ 1,312,723  
Accounts Receivable
     612,531          
Total Current Assets
     612,537       1,312,723  
                 
Drilling advances to Managing General Partner
     5,178,553       15,001,000  
                 
Oil and Gas properties, successful efforts method
     9,690,695       124,987  
Oil and Gas properties - net
     9,690,695       124,987  
                 
Total Assets
   $ 15,481,785     $ 16,438,710  
                 
Liabilities
                
Current Liabilities
                
Due to Managing General Partner
   $ -     $ 2,448,088  
Distributions Payable
     297,767          
Total Liabilities
     297,767       2,448,088  
                 
Asset Retirement Obligations
     162,370          
                 
Partners’ Equity
     15,021,648       15,038,885  
Subscription Receivable
             (1,048,263 )
Partners’ Equity
     15,021,648       13,990,622  
                 
Total liabilities and partners’ equity
   $ 15,481,785     $ 16,438,710  
 
The accompanying notes are an integral part of these unaudited financial statements
 
1
 

 

 
The MDS ENERGY PUBLIC 2013-A LP
(unaudited)
 
   
For the Six Months ended
    
For the Three Months ended
  
    June 30    
June 30
  
     2014      2013      2014      2013  
                                 
Revenue
                                
Revenue
   $ 939,734     $ -     $ 939,734     $ -  
Miscellaneous
     193       -       36       -  
Total Revenue
     939,927       -       939,770       -  
                                 
Expenses
                                
Royalty Expense
     115,512               115,512          
Gathering Expense
     66,771               66,771          
Well Maintenance
     17,600               17,600          
Depreciation, Depletion and Amortization
     419,109               419,109          
Impact Fee
     40,333               40,333          
Bank Fees
     72               72          
Total Expenses
     659,397       -       659,397       -  
Net Income
   $ 280,530     $ -     $ 280,373     $ -  
 
The accompanying notes are an integral part of these unaudited financial statements
 
2
 

 

 
The MDS ENERGY PUBLIC 2013-A LP
For the Six Months ended June 30, 2014
(unaudited)
 
   
Investor
    
Managing General
    
Subscription
    
 
  
   
Partners
    
Partner
    
Receivable
     Total   
Balance at December 31, 2013
   $ 14,927,939     $ 110,946     $ (1,048,263 )   $ 13,990,622  
                                 
Collection of Subscription Receivable
                     1,048,263       1,048,263  
                                 
Distriubtions
     (250,065 )     (47,702 )             (297,767 )
                                 
Net Income
     235,589       44,941               280,530  
                                 
Balance at June 30, 2014
   $ 14,913,464     $ 108,185     $ -     $ 15,021,648  
 
The accompanying notes are an integral part of these unaudited financial statements
 
3
 

 

 
The MDS ENERGY PUBLIC 2013-A LP
(unaudited)
 
   
For the Six Months Ended June 30
  
   
2014
    
2013
  
Cash flows from Operating activities
            
             
Net Income
   $ 280,530     $ -  
Adjustments to reconcile net income to cash provided by operations
                
Depletion
     417,595          
Accretion
     1,514          
Total Adjustments to net income to reconcile to net cash provided by operating activities
     419,109       -  
Changes in assets and liabilities
                
Accounts Receivable
     (612,531 )        
Distributions Payable
     297,767          
Net Cash provided by operating activities
     384,875       -  
                 
Cash flows from investing activities
                
Drilling Advances paid to the Managing General Partner
     9,822,447          
Oil and Gas Properties
     (9,822,447 )        
Net cash used for investing activities
     -       -  
                 
Cash flows from financing activities
                
Collection of Subscription Receivable
     1,048,263       100  
Distributions
     (297,767 )        
Advances from the Managing General Partner
     (2,448,088 )        
Net cash (used) provided by financing activities
     (1,697,592 )     100  
                 
Net change in cash and cash equivalents
     (1,312,717 )     100  
Cash and cash equivalents at beginning of year
     1,312,723       -  
                 
Cash and cash equivalents at end of period
   $ 6     $ 100  
 
The accompanying notes are an integral part of these unaudited financial statements
 
4
 

 

 
MDS ENERGY PUBLIC 2013-A LP
 
JUNE 30, 2014 and DECEMBER 31, 2013 (unaudited)
 
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
 
On May 3, 2012 (date of inception), MDS Energy Public 2013-A LP (Partnership), a Delaware limited partnership, was formed for the purpose of drilling developmental natural gas wells. The Partnership has a maximum 50-year term, although the Partnership intends to terminate when all of the wells invested in by the Partnership become uneconomical to continue to operate, which may be approximately 15 years or longer. The Partnership was formed by MDS Energy Development, LLC (MDS), a related party, as the MGP and M/D Gas, Inc. (M/D), a related party. In accordance with the terms of the limited partnership agreement, the Managing General Partner (MGP) is authorized to manage all activities of the Partnership and initiates and completes substantially all transactions.
 
On May 2, 2013, the Partnership’s registration statement on Form S-1 (File No. 333-181993, 333-181993-01, 333-181993-02 and 333-181993-03) was declared effective for the Partnership’s public offering pursuant to which the Partnership began soliciting potential investors on a “best efforts” basis. As of December 31, 2013, the Partnership sold had 1,508.53 units and received gross proceeds of $15,001,000 which were paid to the MGP acting as operator and general drilling contractor under the Partnership’s drilling and operating agreement. The MGP contributed leases, tangible equipment, and paid all syndication and offering costs, excluding sales commissions for a total capital contribution of approximately $1,325,067. The proceeds from the offering will be used to cover intangible drilling costs and equipment costs associated with the drilling of developmental natural gas wells in the Marcellus Shale formation in Pennsylvania.
 
General partner units will be automatically converted by the Partnership to limited partners units after the drilling and completion of all of the Partnership’s wells. A well is deemed to be completed when production equipment is installed, even though the well may not yet be connected to a pipeline for production of natural gas.
 
In our opinion, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Partnership’s financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The information presented in this Quarterly Report on Form 10-Q should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in its 2013 Form 10-K.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
A summary of significant accounting policies consistently applied by management in the preparation of the accompanying balance sheets follows:

Cash and Cash Equivalents - The Partnership’s cash and cash equivalents include cash and interest-bearing money market deposits held by major financial institutions having original maturities of 90 days or less. These amounts may at times be in excess of federally insured amounts.

Accounts Receivable – The Partnership records an estimate of revenue to be received in future months for production in the months prior to the end of the reporting period, based upon estimated production information that is available to it. Substantially all of the Partnership’s production is sold to a related party of the Partnership. Management determined that no allowance for uncollectible amounts was necessary at June 30, 2014.

Prepaid Drilling Programs –The Partnership invested cash received in the offering with a related party that was used in the future drilling efforts related to the exploration and production of natural gas and oil.

Oil and Gas Properties - The Partnership accounts for its natural gas properties under the successful efforts method of accounting. Costs of proved developed producing properties and developmental dry hole costs are capitalized and depreciated or depleted by the unit-of-production method based on estimated proved developed producing reserves. Property acquisition costs are depreciated or depleted on the unit-of-production method based on estimated proved reserves. Leased property was contributed by the managing general partner, and was utilized in the drilling efforts of the Partnership. The Partnership calculates depreciation, depletion and amortization (DD&A) expense by using as the denominator the Partnership’s estimated period-end reserves adjusted to add back current period production. Upon the sale or retirement of significant portions of or complete fields of depreciable or depletable property, the net book value thereof, less proceeds or salvage value, is recognized in the statement of operations as a gain or loss. Upon the sale of individual wells, the proceeds are credited to accumulated DD&A. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs and costs of carrying and retaining unproved properties are expensed.
 
5
 

 


The estimates of proved reserves are based on quantities of gas that were determined by management engineering and geological analysis demonstrates, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic conditions. Annually, the Partnership will engage independent petroleum engineers to prepare a reserve and economic evaluation of all its properties on a well-by-well basis as of December 31. The process of estimating and evaluating gas reserves is complex, requiring significant decisions in the evaluation of available geological, geophysical, engineering and economic data. The data for a given property may also change substantially over time as a result of numerous factors, including additional development activity, evolving production history and a continual reassessment of the viability of production under changing economic conditions. As a result, revisions in existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the Partnership’s most accurate assessments possible, the subjective decisions and variances in available data for various properties increase the likelihood of significant changes in these estimates. Because estimates of reserves significantly affect the Partnership’s DD&A expense, a change in its estimated reserves could have an effect on the its income or loss.
 
Organizational and Offering Costs - The MGP has paid all organizational and offering expenses, excluding sales commissions. $1,200,080 in these costs have been incurred prior to December 31, 2013. The organizational and offering costs paid by the MGP were a portion of the MGP’s capital contributions. The MGP incurred and contributed the minimum, 8% of the subscription proceeds, to the Partnership.

Impairment of Long-Lived Assets - Impairment of long-lived assets is recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying value. The carrying value of the assets is then reduced to their estimated fair value, which is usually measured based on an estimate of future discounted cash flows. There were no impairment losses for the six months ended June 30, 2014 and the year ended December 31, 2013.

Production Tax Liability – Production tax liability represents estimated taxes, primarily ad valorem and property to be paid to the states and counties in which the Partnership operates. The Partnership’s share of the tax expense is included in gathering expense. The Partnership’s taxes payable are included in accounts payable on the balance sheets.

Proceeds from the Sale of Wells/Leases - If the parties’ capital accounts are adjusted to reflect the depletion of a natural gas or oil property of the Partnership, then the portion of the total amount realized by the Partnership on the taxable disposition of the property that represents recovery of its simulated tax basis in the property shall be allocated to the parties in the same proportion as the aggregate adjusted tax basis of the property was allocated to the parties or their predecessors in interest. If the parties’ capital accounts are adjusted to reflect the actual depletion of a natural gas or oil property of the Partnership, then the portion of the total amount realized by the Partnership on the taxable disposition of the property that equals the parties’ aggregate remaining adjusted tax basis in the property shall be allocated to the parties in proportion to their respective remaining adjusted tax bases in the property. Thereafter, any excess will be allocated to the managing general partner in an amount equal to the difference, if any, between the fair market value of the lease at the time it was contributed to the Partnership and its simulated or actual adjusted tax basis at that time. Any excess shall be credited generally in accordance with the sharing ratio utilized for the allocation of production revenues.
 
Asset Retirement Obligations - The Partnership applies the provisions of “Accounting for Asset Retirement Obligations” and “Accounting for Conditional Asset Retirement Obligations” and accounts for asset retirement obligations by recording the fair value of its plugging and abandonment obligations when incurred, which is at the time the well is completely drilled. Upon initial recognition of an asset retirement obligation, the Partnership increases the carrying amount of the long-lived asset by the same amount as the liability. Over time, the asset retirement obligations are accreted, over the estimated life of the related asset, for the change in their present value. The initial capitalized costs are depleted over the useful lives of the related assets, through charges to depreciation, depletion and amortization. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs and changes in the estimated timing of settling asset retirement obligations.
 
As managing general partner, MDS has the right to withhold $200 per month of partnership revenues in partnership reserves to cover future plugging and abandonment costs of the well, beginning one year after each partnership well begins producing. This $200 also includes the managing general partner’s share of revenues. The managing general partner’s retained revenues will be used exclusively for plugging and abandonment of the well. To the extent any portion of those reserves ultimately is not required for the plugging and abandonment costs of the well it will be returned to the general operating revenue of the Partnership. There were no funds withheld from the Partnership’s revenues for future plugging and abandonment costs during the six months ended June 30, 2014 and the year ended December 31, 2013.
 
6
 

 

 
Additionally, MDS maintains performance bonds for plugging, reclaiming and abandoning of the Partnership’s wells as required by governmental agencies. If a government agency were required to access these performance bonds to cover plugging, reclaiming or abandonment costs on a Partnership well, the Partnership would be obligated to fund any amounts in excess of funds previously withheld by the managing general partner to cover these expenses.

Equipment Proceeds - Proceeds from the sale or other disposition of equipment will be credited to the parties charged with the costs of the equipment in the ratio in which the costs were charged.

Income Taxes - Since the taxable income or loss of the Partnership is reported in the separate tax returns of the individual partners, no provision has been made for income taxes by the Partnership.

Accounting for uncertainty in income taxes requires financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. Under this guidance, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the standard. The Partnership did not have any unrecognized tax benefits, and there was no effect on its financial condition. The Partnership has not identified any uncertain tax positions and as such no interest or penalties have been included in other expense on the statement of operations. The Partnership will file a U.S. federal income tax return, but income will be passed through to the partners.
 
Revenue Recognition - Sales of gas are recognized when gas has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. Gas is sold by MDS to Snyder Brothers, Inc., Agent, an affiliated entity, in the market at prevailing prices with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of gas and prevailing supply and demand conditions, so that the price of the gas fluctuates to remain competitive with other available gas supplies. As a result, the Partnership’s revenues from the sale of gas will suffer if market prices decline and benefit if they increase. However, MDS may from time to time enter into derivative agreements, usually with a term of two years or less which may either fix or collar a price in order to reduce market price fluctuations. The Partnership believes that the pricing provisions of its gas contracts are customary in the industry. The Partnership did not enter into derivative agreements for the six months ended June 30, 2014 and the year ended December 31, 2013.

Sales of oil are recognized when evidence of a sales arrangement exists, the oil is verified as produced and is delivered from storage tanks at well locations to a purchaser, collection of revenue from the sale is reasonably assured and the sales price is determinable.
 
Transfers and Presentments - There is no established public trading market for the Partnership’s units and the Partnership does not anticipate that a market for the Partnership’s units will develop. The Partnership’s units may be transferred only in accordance with the provisions of the Partnership Agreement which require:
 
 
●
the MGP may require an opinion of counsel that registration under applicable federal and state law is not required;
 
●
the transfer not result in materially adverse tax consequences to the Partnership; and
 
●
the transfer must not contravene any terms of the Partnership Agreement.
 
An assignee of a unit may become a substituted partner only upon meeting the following conditions:
 
●    the assignor gives the assignee the right;
 
●
the assignee pays to the Partnership all costs and expenses incurred in connection with the substitution; and
 
●
the assignee executes and delivers the instruments, which the MGP requires to effect the substitution and to confirm his or her agreement to be bound by the terms of the Partnership Agreement.
 
A substitute partner is entitled to all of the rights of full ownership of the assigned units, including the right to vote.
 
Investor Partners may request that the MGP repurchase their units at any time beginning with the fifth anniversary after December 31, 2013 provided that certain conditions are met. The repurchase price is set at the greater of the partner’s share of (i) predominantly 70% of the Partnership’s present worth of future net revenues from the proved reserves as determined under the last reserve report and is reduced by an amount equal to all of the Partnership’s debts or (ii) an amount equal to three times the total amount of distributions paid by the Partnership to the participant during the previous twelve months. The MGP is also permitted to adjust the purchase price under certain conditions for changes occurring after the date of the presentment request. Repurchase requests are fulfilled by the MGP on a first-come, first-served basis and may not exceed 5% of the total units outstanding. The MGP may suspend the presentment feature at any time if it determines that it does not have sufficient cash flow or it is unable to borrow funds on terms it deems reasonable.
 
7
 

 


Use of Estimates - The Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities and expenses and the disclosure of contingent assets and liabilities to prepare these financials statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Estimates of gas reserve quantities provide the basis for calculation of depletion, depreciation, amortization and impairment, each of which represent a significant component of the financial statements.

NOTE 3 - PARTICIPATION IN COSTS AND REVENUES
 
As of June 30, 2014, approximately $630,000 of gross revenue from the sale of natural gas had been received or was known with certainty and not distributed, which is 157,100 MCF at an average price per MCF of $4.03. These amounts are recorded as accounts receivable net of total expenses to be deducted from those amounts of approximately $175,000. In addition approximately $223,000 of gross revenue from the sale of natural gas had been recorded as revenue as a result of the Partnership estimating revenue not yet received, which is 58,603 MCF at an average price per MCF of $3.80. These amounts are recorded as accounts receivable net of total expenses estimated to be deducted from those amounts of approximately $65,000.
 
The following table sets forth how the Partnership’s costs and revenues will be charged and credited between the MGP and investors in the Partnership, after deducting from the Partnership’s gross revenues the landowner royalties and any other lease burdens. Some of the line items in the table do not have percentages stated, because the percentages will be determined either by the actual costs incurred by the Partnership to drill and complete its wells or by the final amount of the MGP’s capital contribution to the Partnership.

               
   
Managing General Partner
  
Units Issued
by the
Partnership
  
           
Partnership costs:
          
Dealer-Manager fee and organization and offering costs, except sales commissions
    
100
%
  
0
%
Sales Commissions (1)
    
0
%
  
100
%
Lease costs
    
100
%
  
0
%
Intangible drilling costs (2)
    
0
%
  
100
%
Equipment costs (3)
    
0
%
  
100
%
Operating, administrative, direct and all other costs
      
(4)
    
(4)
Partnership revenues:
              
Interest income on subscription proceeds (5)
    
0
%
  
100
%
Equipment proceeds (3)
    
0
%
  
100
%
               
All other revenues including production revenues and other interest income
      
(5)(6)(7)
    
(5)(6)(7)
 
 
1.
The subscription proceeds were used to pay 100% of the sales commissions
 
2.
The subscription proceeds were used to pay 100% of the intangible drilling costs incurred by the Partnership in drilling and completing its wells.
 
3.
The subscription proceeds of investors in the Partnership were used to pay 100% of the equipment costs incurred by the Partnership in drilling and completing its wells. Equipment proceeds, if any, and depreciation will also be allocated 100% to investors in the Partnership.
 
4.
These costs, which will also include plugging and abandonment costs of the wells after the wells have been drilled, produced and depleted, will be charged to the parties in the same ratio as the related production revenues being credited.
 
5.
The subscription proceeds earned interest until the escrow account was broken. This interest was credited to the investors’ account. All other interest income, including interest earned on the deposit of operating revenues, will be credited as natural gas production revenues are credited.
 
6.
The MGP and the investors will share in all of the Partnership’s other revenues in the same percentage that their respective capital contributions bear to the Partnership’s total capital contributions, except that the MGP will receive an additional 8% of the Partnership’s revenues.
 
7.
If a portion of the MGP’s Partnership net production revenue is subordinated, then the actual allocation of Partnership net production revenues between the MGP and the investors will vary from the allocation described in (6) above.

8
 

 

 
NOTE 4 – PARTNERS CAPITAL
 
MDS contributed leased property valued at $124,987 that was included as a contribution of partners’ capital at December 31, 2013.
 
The Partnership Agreement provides that MDS shall review the accounts of the Partnership at least monthly to determine whether cash distributions are appropriate and the amount to be distributed, if any.
 
The Partnership Agreement provides for the enhancement of investor cash distributions if the Partnership does not meet a performance standard defined in the agreement during the first 8 years of operations beginning the earlier of the first full year of operation after all wells begin production or 12 months after the final closing of the Partnership. In general, if the cumulative distributions to the investors is less than 10% of their subscriptions for years 1 through 5 and 7.5% of their subscriptions for years 6 through 8, MDS will subordinate up to 60% of its share, as MGP, of Partnership net production revenues.
 
Subsequent to December 31, 2013, the Partnership received approximately $1,048,000 of cash deposits for subscriptions receivable as of December 31, 2013. Cash on hand at December 31, 2013 was approximately $1,313,000. The MGP advanced to the Partnership approximately $2,361,000 at December 31, 2013, so that the Partnership could pay drilling advances to the drilling contractor. The advance of $2,361,000 was repaid by January 27, 2014.

NOTE 5 – PROPERTIES
 
The Partnership is engaged solely in oil and gas activities, all of which are located in Pennsylvania. Costs capitalized for these activities at June 30, 2014 are as follows:
         
Leasehold Costs
   $ 124,987  
Asset Retirement Obligation Asset
     160,856  
Development Costs
     9,822,447  
Oil and gas properties, successful efforts method
     10,108,290  
Less: Accumulated Depreciation, Depletion and
        
Amortization
     (417,595 )
Oil and Gas Properties – net
   $ 9,690,695  
 
Six wells are revenue producing as of June 30, 2014.

NOTE 6 – ASSET RETIREMENT OBLIGATION

Changes in carrying amount of asset retirement obligations associated with oil and gas properties for June 30, 2014 are as follows:
         
Balance at beginning of year:
   $ –  
Obligations assumed with development activities
     160,856  
Accretion expense
     1,514  
Balance at end of year
   $ 162,370  
 
The above acretion expense expense is included in depreciation, depletion and amortization in the partnership statement of operations.
 
NOTE 7 - RELATED-PARTY ACTIVITIES
 
MDS, through entities under common ownership, will perform drilling, gathering, transportation, well services and gas marketing for the Partnership and will be paid at competitive rates for these services. First Class Energy, an entity under common ownership will perform much of the drilling services on behalf of the MGP. The MGP will also receive a fully accountable reimbursement for actual administrative costs. During the six months ended June 30, 2014, the MGP was paid $1,750,754 to administer the partial drilling of thirteen wells. At June 30, 2014, $ 17,600 was due to the MGP for well maintenance fees related to the revenue producing wells and this amount is included in the accounts receivable on the balance sheet.
 
NOTE 8 - COMMITMENTS AND CONTINGENCIES
 
Environmental
 
Due to the nature of the natural gas industry, the Partnership is exposed to environmental risks through the services provided to it by affiliated companies.
 
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The affiliated companies have various policies and procedures to avoid environmental contamination and mitigate the risks from environmental contamination. The affiliated companies conduct periodic reviews to identify changes in their environmental risk profile. Liabilities are accrued when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. The MGP is not aware of any environmental claims existing as of June 30, 2014. However, there can be no assurance that current regulatory requirements will not change or unknown past noncompliance with environmental laws will not be discovered on the Partnership’s properties.
 
Legal
 
Neither the Partnership nor the MGP are party to any pending legal proceeding that the MGP believes would have a materially adverse effect on the Partnership’s business, financial condition, results of operations or liquidity.
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
 
The following discussion and analysis should be read together with the Partnership’s unaudited condensed balance sheets and related notes thereto set forth in this Quarterly Report on Form 10-Q. Please also refer to the Partnership’s prospectus dated May 2, 2013 for further details regarding the matters discussed below.
 
Forward-Looking Statements
 
When used in this Form 10-Q, the words “believes”, “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. These risks and uncertainties could cause actual results to differ materially from the results stated or implied in this document. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those reflected in any forward-looking statements, as a result of a variety of risks and uncertainties, including those described under “Cautionary Statements Regarding Forward Looking Statements” and “Risk Factors” of the prospectus dated May 2, 2013.
 
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Partnership undertakes no obligation to publicly release the results of any revisions to forward-looking statements which the Partnership may make to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
Overview
 
Business of the Partnership, the Managing General Partner and Certain Relationships
 
The Partnership is drilling primarily development wells which means a well drilled within the proved area of a natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive. Only vertical natural gas wells in the Marcellus Shale primary area in western Pennsylvania will be drilled, which may produce a small amount of oil. The Partnership Agreement governs the rights and obligations of the partners. The investment return will depend solely on the operations and success or lack of success of the Partnership.
 
The Partnership has been formed as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. As of December 31, 2013, 1,508.53 units had been sold for an aggregate price of $15,001,000
 
The MGP of the Partnership is MDS Energy Development, LLC (“MDS”), a Pennsylvania limited liability company. The MGP’s affiliates, MDS Energy, Ltd. and M/D Gas, Inc., have previously sponsored and serve as MGP of seven private drilling partnerships, in the aggregate. Also, MDS sponsored its first private drilling partnership in 2012 and it may sponsor additional private drilling partnerships.
 
First Class Energy, LLC will provide the necessary services to drill the wells on behalf of the MGP, which will also serve as the Partnership’s general drilling contractor and operator (“driller/operator”) and who will supervise the drilling, completing and operating (administrative, gathering, transportation, well services) of the wells to be drilled by the Partnership and will be paid at competitive rates for these services. The gas marketing will be handled by an affiliated company, Snyder Brothers, Inc. The personnel of the driller/operator’s affiliates’ (MDS Energy, Ltd. and First Class Energy LLC) manage and operate the MGP’s business. These affiliates have limited information with respect to the ultimate recoverable reserves and production decline rates of vertical wells drilled in the Marcellus Shale primary area. The MGP and its affiliates will receive substantial fees and profits in connection with the Partnership’s business.
 
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Governance
 
The Partnership has no executive officers and currently does not have any directors. Because the Partnership itself does not employ any persons, the MGP has determined that the Partnership will rely on a Code of Business Conduct and Ethics adopted by the MGP that applies to the executive officers, employees and other persons performing services for the MGP.
 
Conflicts of Interest
 
Conflicts of interest are inherent in natural gas and oil partnerships involving non-industry investors because the transactions are entered into without arms’ length negotiation. The interests of the investors and those of the MGP and its affiliates may be inconsistent in some respects, and the MGP’s actions may not be the most advantageous to investors.
 
The MGP does not directly employ any of the persons responsible for its management or operation. Rather, the personnel of MDS Energy, Ltd. and First Class Energy LLC manage and operate the MGP’s business, and they will also spend a substantial amount of time managing their own businesses and affairs as well as the business and affairs of the MGP’s other affiliates, which creates a conflict regarding the allocation of their time between the MGP’s business and affairs and their other business interests. In this regard, each partnership’s policies and procedures for reviewing, approving or ratifying related party transactions with the MGP are set forth in the partnership agreement. The partnership is developing an additional independent review process.
 
Liquidity and Capital Resources
 
Status of the Sale of the Limited Partner Units
 
As of December 31, 2013, 1,508.53 units had been sold for an aggregate purchase price of $15,001,000 of which $13,952,737 was received as of December 31, 2103. The remaining units purchase price of $1,048,263 was received in the first quarter 2014.
 

Natural Gas Sales

 

The Partnership currently uses the "net-back" method of accounting for these arrangements related to its commodity sales. This Partnership sells commodities at the wellhead and collects a price and recognizes revenues based on the wellhead sales price as transportation costs downstream of the wellhead are incurred by the purchaser and reflected in the wellhead price. The net-back method results in the recognition of a sales price that is below the indices for which the production is based.

 
As of June 30, 2014, approximately $9,822,000 of the aggregate capital of the units had been expended, six wells had been completed and are revenue producing. As of June 30, 2014, approximately $630,000 of gross revenue from the sale of natural gas had been received or was known with certainty and not distributed. These amounts are recorded as accounts receivable net of total expenses to be deducted from those amounts of approximately $175,000. In addition approximately $223,000 of gross revenue from the sale of natural gas had been recorded as revenue as a result of the Partnership estimating revenue not yet received. These amounts are recorded as accounts receivable net of total expenses estimated to be deducted from those amounts of approximately $65,000.
 

The Parnterships approximate gas revenue during the three months ended June 30, 2014 of 853,000 was a reflection of sales 6 wells being turned in line during the quarter. The average sales price per MCF was $3.92 for the current year three month period.

 

Natural Gas Production Costs

 

Generally, natural gas production costs vary with changes in total natural gas production volumes. In addition, general field services and all other costs vary and can fluctuate based on services required, but are expected to increase as wells age and require more extensive repair and maintenance. These costs include water hauling and disposal, equipment repairs and maintenance, snow removal, environmental compliance and remediation and service rig workovers. Production costs for the three months ended June 30, 2014 were approximately $240,288.

 

Depreciation, Depletion and Amortization

 

DD&A expense for continuing operations was approximately $419,109 for the three months ended June 30, 2014. Due to production of 215,703 MCF’s during the second quarter of 2014. The DD&A expense rate per MCF was approximately 1.94 for the three months ended June 30, 2014.

 
Funding of the Proposed Activities
 
The Partnership will depend on the proceeds of the offering and the MGP’s capital contribution to carry out its proposed activities. The MGP paid all of the Partnership’s organization and offering costs (excluding sales commissions) up to 8% of the Partnership’s subscription proceeds and it contributed all of the leases (but the MGP retained the other lease rights) for each well to be drilled by the Partnership..
 
The MGP believes that the Partnership’s liquidity requirements will be satisfied from the proceeds of the offering and the MGP’s capital contributions without additional funds being required for operating costs before the Partnership begins receiving production revenues from its wells.
 
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If the Partnership requires additional funds for cost overruns or additional development or remedial work after a well begins producing, then these funds may be provided by:
 
 
●
subscription proceeds, if available, which will result in the Partnership either drilling fewer wells or acquiring a lesser working interest in one or more wells;
 
 
●
borrowings from the MGP, its affiliates, or third-parties if available on terms deemed reasonable by the MGP; or
 
 
●
retaining Partnership revenues.
 
The amount that may be borrowed by the Partnership from the MGP, its affiliates and third-parties may not at any time exceed 5% of the Partnership’s subscription proceeds and must be without recourse to the other investors. Notwithstanding, this limitation will not affect the Partnership’s ability to enter into agreements and financial instruments relating to hedging up to 50% of the Partnership’s natural gas and oil production and pledging up to 100% of the Partnership’s assets and reserves in connection therewith. The Partnership’s repayment of any borrowings would be from its production revenues and would reduce or delay any cash distributions.
 
Participation in Costs and Revenues and Distributions
 
Please refer to Note 3 – Participation in Costs and Revenues for the details of how the Partnership’s costs and revenues will be charged and credited between the MGP and the investors in the Partnership after deducting from the Partnership’s gross revenues the landowner royalties and any other lease burdens. Some of the percentages will be determined either by the actual costs incurred by the Partnership to drill and complete its wells or by the final amount of the MGP’s capital contribution to the Partnership, which will not be known until after all of the Partnership’s wells have been drilled and completed.
 
Availability of Financing to the Managing General Partner and associated entities
 
In July, 2014, certain of the wholly-owned companies of MDS Associated Companies, Inc., an affiliate of the MGP, agreed to revise their existing line of credit with PNC Bank, National Association. Under the revised terms, $3,000,000 of the existing balance on the line of credit was converted to a term note of 60 month duration with an interest rate of LIBOR plus 2.45%. In addition, there is a line of credit in the amount of $2,000,000 that matures on July 30, 2015 with an interest rate of LIBOR plus 2.45%. Both credit facilities are guaranteed by all the wholly-owned companies of the MDS Associated Companies, Inc. including the MGP. The credit facilities are secured by all of the assets of the borrowers, including the MGP’s, except fixtures used in connection with wells and the production and transportation of natural gas and oil from the wells. The obligations of the borrowers under these facilities have been guaranteed by Michael D. Snyder.
 
In addition, MDS Energy, Ltd., an affiliate of the MGP, is a borrower under two financing arrangements (unsecured line of credit and an unsecured demand note) with David E. Snyder, the father of Michael D. Snyder. As of June 30, 2014 the aggregate principal amount outstanding under these financing arrangements was $2,875,000, which may increase or decrease in the future. The unsecured line credit is for $5,000,000 and borrowings bear interest at the prime lending rate less 1.25%. The outstanding balance as of June 30, 2014 was $1,475,000 and is payable on demand. The unsecured demand note bears interest at the Federal Fund target Rate plus 1% with a 2.5% floor and the outstanding balance was $1,400,000 and is payable on demand with interest payable quarterly. The financing arrangements are subordinated to MDS Associated Companies, Inc.’s obligations to PNC Bank, National Association, under the term note and line of credit described in the preceding paragraph.
 
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Critical Accounting Policies
 
The discussion and analysis of the Partnership’s financial condition is based upon the Partnership’s condensed balance sheets, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The Partnership will base its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, and the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Partnership will evaluate its estimates on an on-going basis.
 
Actual results may differ from these estimates under different assumptions or conditions. A discussion of significant accounting policies the Partnership has adopted and followed in the preparation of its financial statements is included within “Notes to Financial Statements” in Part I, Item 1, “Financial Statements” in this quarterly report and in its Form 10-K dated March 17, 2014.
 
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CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The MGP on behalf of the Partnership, with the participation of the MGP’s management, including the Chief Executive Officer and President and the Chief Financial Officer, evaluated the effectiveness of the Partnership’s disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Partnership’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
 
Under the supervision of the MGP’s Chief Executive Officer and President, and Chief Financial Officer, the MGP has carried out an evaluation of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the MGP’s management, including the Chief Executive Officer and President and the Chief Financial Officer concluded that, at June 30, 2014, the Partnership’s disclosure controls and procedures were effective.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in the Partnership’s internal control over financial reporting for the Partnership during the six months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
 
As an emerging growth company, the Partnership is exempt from the requirement to obtain an attestation report from the Partnership’s independent registered public accounting firm on the assessment of the Partnership’s internal controls pursuant to the Sarbanes-Oxley Act of 2002 until 2018, or such time that the Partnership no longer qualifies as an emerging growth company in accordance with the Jumpstart Our Business Startups Act of 2012.
 
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LEGAL PROCEEDINGS
 
The MGP is not aware of any legal proceedings filed against the Partnership.
 
Affiliates of the MGP are party to various routine legal proceedings arising in the ordinary course of their collective business. The MGP’s management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the MGP’s or Partnership’s financial condition or results of operations.
   
Mine Safety Disclosures.
 
Not applicable.
 
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EXHIBITS
 
EXHIBIT INDEX
                         
       
Incorporated by Reference
    
Exhibit
No.
  
Description
  
Form
  
SEC File
Number
  
Exhibit
  
Filing
Date
  
Filed Herewith
                         
4.2
  
Certificate of Limited Partnership for MDS Energy Public 2013-A LP
  
10-Q
  
333-181993-02
  
4.2
  
6/10/2013
    
                         
31.1
  
Rule 13(a)-14(a) Certification of Principal Executive Officer.
                  
Filed herewith
                         
31.2
  
Rule 13(a)-14(a) Certification of Principal Financial Officer.
                  
Filed herewith
                         
32
  
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
                  
Filed herewith
                         
101.INS
  
XBRL Instance document
                  
Filed herewith
                         
101.SCH
  
XBRL Taxonomy Extension Schema Document
                  
Filed herewith
                         
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
                  
Filed herewith
                         
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
                  
Filed herewith
                         
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
                  
Filed herewith
                         
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
                  
Filed herewith
                         
Incorporate all by reference into the document rather than attach
  
 
17
 

 

 
 
Pursuant to the requirements of the Securities of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
MDS ENERGY PUBLIC 2013 - A LP
 
By:
  
 
MDS Energy Development, LLC, Managing General Partner
     
Date: August 13, 2014
By:
/s/ Michael D. Snyder
   
Michael D. Snyder, Chief Executive Officer and President
 
In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
     
Date: August 13, 2014
By:
/s/ Anthony J. Crisafio
   
Anthony J. Crisafio, Interim Part-Time Chief Financial Officer
 
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MDS ENERGY PUBLIC 2013-A LP Reports