10-Q 1 t1600356_10q.htm FORM 10-Q

 

 

 

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 March  31, 2016
   
¨ 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
(State or other jurisdiction of
incorporation or organization)
  90-0852601
(I.R.S. Employer
Identification No.)
     
409 Butler Road
Suite A
   
Kittanning, PA
(Address of principal executive offices)
  16201
(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 ¨

 

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 ¨

 

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 ¨   Accelerated filer ¨
         
Non-accelerated filer ¨   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 ¨ No x

 

As of March 31, 2016 this Partnership had 1,508.53 units of limited partnership interest outstanding.

 

 

 

 

 

 

MDS ENERGY PUBLIC 2013 – A LP
(A Delaware Limited Partnership)
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 

        PAGE
           
    PART I. FINANCIAL INFORMATION      
           
Item 1:   Financial Statements (Unaudited)   1  
    Condensed Balance Sheets   1  
    Condensed Statement of Operations   2  
    Condensed Statement of Partners’ Deficit   3  
    Condensed Statement of Cash Flow   4  
    Notes to Unaudited Condensed Financial Statements   5  
           
Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)   9  
           
Item 4:   Controls and Procedures   11  
           
    PART II. OTHER INFORMATION      
           
Item 1:   Legal Proceedings   12  
Item 2:   Unregistered Sales of Equity Securities and Use of Proceeds   12  
Item 3:   Defaults Upon Senior Securities   12  
Item 4.   Mine Safety Disclosures   12  
Item 5:   Other Information   12  
Item 6:   Exhibits   13  
           
SIGNATURES   14  
           
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.

 

 

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements:

 

MDS ENERGY PUBLIC 2013-A LP
Condensed Balance Sheets

 

   March 31, 2016
(Unaudited)
   December 31, 2015
Derived from Audited
Statements
 
Assets          
Current Assets          
Cash and Cash Equivalents  $25,558   $23,707 
Accounts Receivable Related Party   69,739    78,760 
Accounts Receivable Managing General Partner   25,992    19,510 
Total Current Assets   121,289    121,977 
           
Natural Gas Properties, net   348,201    396,715 
           
Total Assets  $469,490   $518,692 
           
Liabilities and Partners’ Deficit          
Accrued Expenses  $83,278   $82,235 
Due to Managing General Partner   28,000    28,000 
Accrued Expenses -  Related Party   55,494    28,800 
Total Current Liabilities   166,772    139,035 
           
Long-term Asset Retirement Obligations   653,087    651,870 
           
Partners’ Deficit   (350,368)   (272,213)
           
Total Liabilities and Partners’ Deficit  $469,490   $518,692 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

1 

 

 

MDS ENERGY PUBLIC 2013-A LP
Condensed Statements of Operations
(Unaudited)

 

   For the Three Months Ended
March 31
 
   2016   2015 
         
Natural Gas Revenue, net  $115,247   $206,689 
           
Expenses          
Gathering Expense   41,299    37,942 
Well Maintenance   39,214    47,293 
Depreciation, Depletion and Amortization   49,730    167,286 
Impact Fee   26,041    51,373 
Professional Fees   26,697    25,000 
           
Total Expenses   182,981    328,894 
Net Loss  $(67,734)  $(122,205)

 

The accompanying notes are an integral part of these unaudited financial statements.

 

2 

 

 

MDS ENERGY PUBLIC 2013-A LP
Condensed Statements of Partners’ Deficit
(Unaudited)

 

   Investor
Partners
   Managing General
Partner
   Total 
Balance at December 31, 2014  $7,529,923   $(1,094,385)  $6,435,538 
                
(Distributions) Subordination   (130,277)   1,902*   (128,375)
                
Net Loss   (102,506)   (19,699)   (122,205)
                
Balance at March 31,2015  $7,297,140   $(1,112,182)  $6,184,958 
                
*due to subordination               

 

   Investor
Partners
   Managing General
Partner
   Total 
Balance at December 31, 2015  $1,848,004   $(2,120,217)  $(272,213)
                
(Distributions) Subordination   (16,903)   6,482*   (10,421)
                
Net Loss   (56,883)   (10,851)   (67,734)
                
Balance at March 31,2016  $1,774,218   $(2,124,586)  $(350,368)
                
*due to subordination               

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

3 

 

 

MDS ENERGY PUBLIC 2013-A LP
Condensed Statements of Cash Flows
(Unaudited)

 

   For the Three Months Ended
March 31
 
   2016   2015 
Cash flows from Operating activities          
Net Loss  $(67,734)  $(122,205)
Adjustments to reconcile net loss to cash provided by operating activities          
Depreciation, Depletion and Amortization   49,730    167,286 
Total adjustments to net loss to reconcile to net cash provided by operating activities   (18,004)   45,081 
Changes in assets and liabilities          
Accounts Receivable and Due from Managing General Partner   9,021    55,214 
Accrued Expenses – Related Party   27,737    10,248 
Net cash provided by operating activities   36,758    110,543 
           
Cash flows from financing activities          
Distributions   (16,903)   (128,375)
           
Net change in cash and cash equivalents   1,851    (17,832)
Cash and cash equivalents at beginning of period   23,707    18,264 
           
Cash and cash equivalents at end of period  $25,558   $432 
           
Supplemental Schedule of Non-Cash Financing Activities:          
During the three months ended March 31, 2016, the MGP subordinated its distributions          

 

The accompanying notes are an integral part of these unaudited financial statements.

 

4 

 

 

MDS ENERGY PUBLIC 2013-A LP

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

March 31, 2016

 

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 Managing General Partner (MGP) and M/D Gas, Inc. (M/D), a related party. In accordance with the terms of the limited partnership agreement, the MGP is authorized to manage all activities of the Partnership and initiates and completes substantially all transactions.

 

In our opinion, the accompanying condensed financial statements contain all 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 financial statements and notes thereto included in its 2014 Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Proved Property Impairment - The Partnership assesses its producing natural gas properties for possible impairment, upon a triggering event, by comparing net capitalized costs to estimated undiscounted future net cash flows on a well by well basis using estimated production based upon prices at which the Partnership reasonably estimates the commodities to be sold.  The estimates of future prices may differ from current market prices of natural gas.  Certain events, including but not limited to, downward revisions in estimates to the Partnership’s reserve quantities, expectations of falling commodity prices or rising operating costs, could result in a triggering event and, therefore, a possible impairment of the Partnership’s proved natural gas properties.  If net capitalized costs exceed undiscounted future net cash flows, the measurement of impairment is based on estimated fair value utilizing a future discounted cash flows analysis, which is predominantly unobservable data or inputs, and is measured by the amount by which the net capitalized costs exceed their fair value.  Estimated undiscounted future net cash flows are determined using prices from the forward price curve at the measurement date.  Estimated discounted future net cash flows are determined utilizing a risk adjusted discount rate that is based on rates utilized by market participants that are commensurate with the risks inherent in the development of the underlying natural gas reserves.  Due to the decrease in natural gas prices, as further discussed in Note 4, the Partnership reviewed its proved natural gas properties for impairment at March 31, 2016 and did not recognize an impairment charge for the first quarter 2016.  The Partnership has an accumulated impairment charge of proved natural gas properties of approximately $11,810,658 as of December 31, 2015.

 

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.

 

Recent Accounting Pronouncements - In May 2014, the FASB and the International Accounting Standards Board issued their converged standard on revenue recognition that provides a single, comprehensive model that entities will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard outlines a five-step approach to apply the underlying principle: (a) identify the contract with the customer, (b) identify the separate performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to separate performance obligations and (e) recognize revenue when (or as) each performance obligation is satisfied. The revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and can be adopted under the full retrospective method or simplified transition method. Early adoption is not permitted. The Partnership plans to adopt the revenue standard beginning January 1, 2018 and is currently evaluating the impact that these changes will have on our condensed financial statements.

 

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In August 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern, new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adopting is permitted.

 

NOTE 3 - CONCENTRATION OF RISK

 

Accounts Receivable - This Partnership’s accounts receivable are from purchasers of natural gas production. The Partnership sells substantially all of its gas production to a customer who purchases from other Partnerships managed by the Partnership’s MGP. Inherent to the Partnership’s industry is the concentration of natural gas sales to a limited number of customers. This industry concentration has the potential to impact the Partnership’s overall exposure to credit risk in that its customers may be similarly affected by the changes in economic and financial condition, commodity prices and other conditions.

 

As of March 31, 2016 and December 31, 2015, the Partnership did not record an allowance for doubtful accounts. In making the estimate for receivables that are uncollectible, the MGP considers, among other things, subsequent collections, historical write-offs and overall creditworthiness of the Partnership’s customers. It is reasonably possible the estimate for uncollectable receivables will change periodically. Historically neither MDS nor any of the other Partnerships managed by the Partnership’s MGP, have experienced uncollectable accounts receivable. The Partnership did not incur any losses on accounts receivable for the three months ended March 31, 2016 or 2015.

 

NOTE 4 - PARTICIPATION IN COSTS AND REVENUES

 

For the three months ended March 31, 2016, approximately $128,000 of gross revenue from the sale of natural gas had been received or estimated for approximately 102,800 MCF at an average price of $1.24 per MCF. Royalties for this period were approximately $13,000. In addition approximately $77,000 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 64,800 MCF at an average price of $1.18. These amounts are recorded as accounts receivable net of royalties approximating $7,500. The total estimate of expenses to be deducted from those amounts is approximately $62,900, which are typically transportation, well maintenance and lease operating expense.

 

For the three months ended March 31, 2015, approximately $234,700 of gross revenue from the sale of natural gas had been received or estimated for approximately 109,800 MCF at an average price of $2.13 per MCF. Royalties for this period were approximately $28,000. In addition approximately $153,000 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 86,600 MCF at an average price of $1.77. These amounts are recorded as accounts receivable net of royalties approximating $17,500. The total estimate of expenses to be deducted from those amounts is approximately $80,000, which are typically transportation, well maintenance and lease operating expenses.

 

NOTE 5 - PARTNERS’ CAPITAL

 

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 gross production revenues. As a result of the trend of lower revenue per MCF that the industry is currently experiencing, the MGP has subordinated 60% of it revenue interest beginning in August 2014 and continuing through March 2016. During the three months ended March 31, 2016 and for the year ended December 31, 2015, MGP subordinated $6,482 and $51,002, respectively, which was distributed to investors. The MGP’s share of expenses exceeds its share of revenue, due to the subordination, thus, the MGP is not currently receiving distributions and owes the Partnership approximately $26,000 and $19,500 which is included with Accounts Receivable from Managing General Partner at March 31, 2016 and December 31, 2015 respectively.

 

6 

 

 

NOTE 6 - TRANSFERS AND PRESENTATIONS

 

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. As of March 31, 2016 the MGP has not repurchased any limited partnership units.

 

NOTE 7 - NATURAL GAS PROPERTIES

 

The Partnership is engaged solely in natural gas activities, all of which are located in Armstrong County, Pennsylvania. Costs capitalized for these activities are as follows:

 

   March 31, 2016   December 31, 2015 
Leasehold Costs  $124,987   $124,987 
Asset Retirement Obligation Asset   642,503    642,503 
Development Costs   2,210,505    2,210,505 
Natural Gas Properties, successful efforts method   2,977,995    2,977,995 
Less: Accumulated Depreciation, Depletion and Amortization   2,629,792    2,581,280 
Natural Gas Properties,  net  $348,201   $396,715 

 

As of March 31, 2016, all fourteen wells are completed and are revenue producing.

 

NOTE 8 - ASSET RETIREMENT OBLIGATIONS

 

Changes in carrying amount of asset retirement obligations associated with natural gas properties are as follows:

 

December 31, 2015  $651,870 
Accretion expense   1,217 
March 31, 2016  $653,087 

 

During the three months ended March 31, 2015 the Partnership had not yet incurred any asset retirement obligations.

 

The above accretion expense is included in depreciation, depletion and amortization in the Partnership’s statement of operations.

 

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NOTE 9 - RELATED-PARTY ACTIVITIES

 

MDS, through entities under common ownership, performs well services for the Partnership and is paid at competitive rates for these services. In addition, gathering, transportation and gas marketing is provided by Snyder Brothers, Inc. (“Snyder Brothers”), a wholly-owned subsidiary of Snyder Associated Companies, Inc. Snyder Associated Companies, Inc. is controlled by the father and uncles of Michael D. Snyder who is Chief Executive Officer and President of the MGP and the sole shareholder of MDS Associated Companies, Inc., the parent company of the MGP. Mr. Snyder is a minority shareholder of Snyder Associated Companies, Inc. The MGP also receives a fully accountable reimbursement for actual administrative costs. As of March 31, 2016 and 2015 the Partnership paid MDS approximately, $28,800 respectively in each period for well maintenance fees related to the revenue producing wells and this amount is included in the accrued expenses on the balance sheet. The Partnership also has an accrued liability of approximately $83,000 and 82,000 due to the MGP as of March 31, 2016 and December 31, 2015, respectively.

 

NOTE 10 - FAIR VALUE MEASUREMENT

 

This Partnership's fair value measurements were estimated pursuant to a fair value hierarchy that requires this Partnership to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The carrying value of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.

 

The MGP utilizes fair value, on a non-recurring basis, to perform impairment testing on this Partnership's natural gas properties by comparing net capitalized costs, or carrying value, to estimated undiscounted future net cash flows. If net capitalized costs exceed undiscounted future net cash flows, the measurement of impairment is based on estimated fair value and is measured by the amount by which the net capitalized costs exceed their fair value, which is generally determined using the discounted cash flows.

 

The fair values were determined using the income approach and were based on the expected present values of the future cash flows from proved reserves. Significant level 3 assumptions associated with the calculation of discounted cash flows used in the impairment analysis included estimates of production costs, development expenditures, anticipated production of reserves, appropriate risk – adjusted discount rates and other relevant data.

 

NOTE 11 - 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.

 

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 March 31, 2016. 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.

 

8 

 

 

ITEM 2.        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 drilled development wells which means a well drilled within the proved area of a natural gas reservoir to the depth of a stratigraphic horizon known to be productive. Only vertical natural gas wells in the Marcellus Shale area in western Pennsylvania were drilled. 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. 1,508.53 units have been sold for an aggregate price of $15,001,000.

 

The MGP of the Partnership is MDS, a Pennsylvania limited liability company which also serves as MGP of ten private drilling partnerships, in the aggregate.

 

The gas marketing is handled by Snyder Brothers. The driller has 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 receives fees and profits in connection with the Partnership’s business.

 

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 Partnership does not directly employ any of the persons responsible for its management or operation. Rather, the personnel of the MGP manage and operate the Partnership’s business, and they will also spend a substantial amount of time managing the business and affairs of the MGP’s other affiliates, which creates a conflict regarding the allocation of their time between the Partnership’s business and affairs and the MGP’s other business interests. In this regard, the Partnership’s policies and procedures for reviewing, approving or ratifying related party transactions with the MGP are set forth in the partnership agreement. Due to the family relationship between Mr. Snyder and the principals and certain executive officers of Snyder Brothers, transactions between Snyder Brothers and its affiliates and the Partnership are subject to similar restrictions and conditions as transactions between the Partnership and affiliates of the MGP.

 

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Natural Gas Sales

 

The Partnership currently uses the “net-back” method of accounting for 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.

 

As of March 31, 2016, all of the aggregate capital from our offering of the units has been expended; fourteen wells have been completed and are producing revenue. As of March 31, 2016, approximately $50,500 of gross revenue from the sale of natural gas had been received for approximately 38,000 MCF of production with an average realized price of $1.36 per MCF. In addition approximately $77,000 of gross revenue from the sale of natural gas had been recorded as revenue as a result of the Partnership estimating revenue from production for which the proceeds of the sale of the natural gas had not yet been received and those amounts are recorded as accounts receivable. The average realizable price per MCF for this estimated revenue is $1.18 per MCF for estimated production of 64,800 MCF of production.

 

Natural gas pricing is predominately driven by the supply and demand in the physical and financial markets. Natural gas is sold under various purchase contracts with monthly pricing provisions based on NYMEX pricing, adjusted for differentials. Natural gas prices vary by locality, depending upon the distance to markets, availability of pipeline capacity and supply and demand relationships in that region. The Marcellus shale region, where this production is derived from, has a negative price differential making the prices we are realizing lesser than NYMEX.

 

For the three month period ended March 31, 2016 compared to the same period for 2015 natural gas production decreased approximately 6%, due to the normal decline associated with these wells. Additionally, there was a significant decrease in the average price per MCF for the three month period ended March 31, 2016. The average price per MCF for the three months ended March 31, 2016 was approximately $1.24 compared to $2.14 per MCF for the same period in 2015.

 

During the three months ended March 31, 2016, the Partnership recognized approximately $128,000 of gross revenue from the sale of approximately 101,000 MCF’s as compared to approximately $234,000 of gross revenue from the production of 132,000 MCF’s of production in the three month period ended March 31, 2015. The three month gross revenues from March 31, 2016 compared to the same period in 2015 decreased approximately 45% while the average price per MCF decreased 28%.

 

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 March 31, 2016 were approximately $107,000, compared to the same period in 2015 natural gas production costs decreased approximately $22,000. A factor in the decrease of natural gas production cost was associated with some of the well being classified as stripper wells and thus the impact fees that were being paid on said wells has stopped being charged.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization (DD&A) expense was approximately $50,000 for the three months ended March 31, 2016 from production of 101,000 MCFs, compared to the same period in 2015 which has an expense of $167,000 from production of 132,000 MCFs. The DD&A expense rate per MCF is estimated to be $0.50 for 2016 as compared to $1.26 for 2015. The decrease is due to the impairment charge recognized during the year ended 2015.

 

DD&A expense related to natural gas properties is directly related to proven reserves and production volumes. DD&A expense decreased approximately $117,000 for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to a decrease in production volumes, and the decreased DD&A rate.

 

Direct costs - general and administrative

 

Direct costs remained flat for the three month period ended March 31, 2016 compared to the same period in 2016. Direct cost for the three month period ended March 31, 2016 was approximately $26,000. Direct costs are associated to professional fees and other miscellaneous administrative expenses of the Partnership.

 

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Financial Condition, Liquidity and Capital Resources

 

The Partnership’s primary source of liquidity has been cash flows from operating activities. Fluctuations in this Partnership’s operating cash flows are substantially driven by changes in commodity prices and sales volumes. This source of cash has been primarily used to fund this Partnership’s operating costs, direct cost-general and administrative, capital program and distributions to the investors and the MGP.

 

The Partnership’s future operations are expected to be conducted with available funds and revenues generated from natural gas production activities. Natural gas production from existing properties is generally expected to continue a gradual decline in the rate of production over the remaining life of the wells. Any additional funds, if required, will be obtained from production revenues, advances or waiving/suspending of fees from the MGP.

 

Working Deficit

 

At March 31, 2016, the Partnership had working deficit of $(45,000), compared to working deficit of $(17,000) at December 31, 2015. The decrease of $28,000 between March 31, 2016 and December 31, 2015 was primarily due to an increase of professional fees and direct expenses of the Partnership.

 

Cash Flows

 

Operating Activities

 

The Partnership's cash flows from operating activities in the first quarter of 2016 were primarily impacted by commodity prices, operating costs, professional fees and reduced production.

 

Net cash flows from operating activities were $36,758 for the three months ended March 31, 2016 compared to $110,543 for the comparable period in 2015. The decrease in cash from operating activities was primarily due to a decrease in natural gas pricing and production.

 

Financing Activities

 

The Partnership distributed $10,422 for the three months ended March 31, 2016 for the comparable period in 2015 the Partnership distributed $128,375. During the three months ended March 31, 2016 and 2015, the MGP subordinated $6,482 and $1,902, respectively, which was distributed to investors.

 

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 U.S. GAAP. 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 14, 2016.

 

ITEM 4.        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 September 30, 2015. 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.

 

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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 March 31, 2016, 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 three months ended March 31, 2016 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.

 

PART II OTHER INFORMATION

 

ITEM 1.        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.

 

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.        MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.        OTHER INFORMATION

 

None.

 

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ITEM 6.        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 and Principal Accounting Officer.                   Filed herewith
                         
32   Section 1350 Certification of Principal Executive Officer and Principal Financial Officer and Principal Accounting 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

 

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SIGNATURES

 

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, its Managing General Partner
     
Date: May 20, 2016 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: May 20, 2016 By: /s/ Mark H. Axel
    Mark H. Axel, Chief Financial Officer and Treasurer

 

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