10-K 1 t1700191_10k.htm FORM 10-K

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

 

Form 10-K

 

 

 

(Mark One)

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

 

For the year ended December 31, 2016

 

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

 

For the transition period from ___________ to ___________

 

Commission file number 0001551390

 

 

 

MDS ENERGY PUBLIC 2013–A LP

(Name of small business issuer in its charter)

 

 

 

Delaware   90-0852601
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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 ¨

 

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 December 31, 2016, this Partnership had 1,508.53 units of limited partnership interest outstanding and no units of additional general partnership interest outstanding.

 

 

 

 

 

MDS ENERGY PUBLIC 2013 - A LP

(A Delaware Limited Partnership)

INDEX TO ANNUAL REPORT

ON FORM 10-K

 

Implications of Being an Emerging Growth Company

 

    PAGE
     
Forward- Looking Statement  
     
PART I
     
Item 1: Business 3
     
Item 2: Properties 6
     
Item 3: Legal Proceedings 6
     
Item 4: (Removed and Reserved) 7
     
PART II
     
Item 5: Market for Registrant’s Common Equity and related Unit holder Matters 7
     
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 7
     
Item 8: Financial Statements 12
     
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22
     
Item 9A: Controls and Procedures 22
     
PART III
     
Item 10: Directors, Executive Officers and Corporate Governance 23
     
Item 11: Executive Compensation 25
     
Item 12: Security Ownership of Certain Beneficial Owners and Management 25
     
Item 13: Certain Relationships and Related Transactions 25
     
Item 14: Principal Accountant Fees and Services 26
     
PART IV
     
Item 15: Exhibits 26
     
SIGNATURES 27

 

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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 will continue to be an “emerging growth company” until the earliest of:

 

i.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;

 

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.

 

FORWARD-LOOKING STATEMENTS

 

The matters discussed within this report include forward-looking statements. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report are forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates, and projections. While we believe these expectations, assumptions, estimates, and projections are reasonable, such forward- looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.

 

PART I

 

ITEM 1:BUSINESS

 

Overview

 

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 vertical dry 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, as the sole limited partner. 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.

 

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As of December 31, 2016, the Partnership had completed fourteen vertical gas wells and all fourteen were revenue producing for a portion of 2016.

 

Business Strategy

 

We do not plan to sell any of our wells and will continue production until they are depleted or become uneconomical to produce, at which time they will be plugged and abandoned or sold. No other wells will be drilled and no additional funds will be required for drilling.

 

Our operating cash flows will be generated from the production and sale of dry natural gas from these wells. The produced dry natural gas will be delivered to market through gas gathering systems operated by MDS Energy LTD. (MDS Energy), and Snyder Brother’s Inc. (SBI). SBI Gas Marketing will act as the gas marketer for the Partnership. It is our intention to operate the wells in a profitable manner to generate operating cash flows for distributions to investors.

 

Our ongoing operating and maintenance costs are expected to be fulfilled through revenues from the sale of our natural gas production. We will pay our MGP a well supervision fee of $800 per well per month as outlined in our drilling and operating agreement. The MGP from time to time may elect to waive the well supervision fee when revenues from the sale of natural gas do not exceed the fee, this is not necessary of the MGP but done in good faith to the investors.

 

This well supervision fee covers all normal and regularly recurring operating expenses for the production and sale of natural gas such as:

 

well tending and routine maintenance;

 

reading meters, recording production, pumping, maintaining appropriate books and records; and

 

preparation of reports for government agencies and internal use.

 

The well supervision fees, however, do not include costs and expenses related to the purchase of certain equipment and materials and brine disposal. If these expenses are incurred, we pay the costs for third-party services, materials, and a competitive charge for services performed directly by our MGP or its affiliates. Also, beginning one year after each of our wells has been placed into production, our MGP, as operator, may retain $200 per month per well to cover the estimated future plugging and abandonment cost of the well. As of December 31, 2016 our MGP had not withheld any funds for this purpose.

 

Natural Gas Gathering Agreements

 

Virtually all natural gas produced will be gathered through one or more pipeline systems before sale or delivery to an end user, a marketer, or an interstate pipeline. A gathering fee will be charged for each gathering activity that is utilized by each separate gatherer providing the service. Fees will vary depending on the distance the gas travels and whether additional services such as compression, blending, or contaminant removal are provided.

 

The MGP’s primary gathering agreements are with SBI, Furnace Run Pipeline, LP, Mushroom Farm Pipeline, LP, and MDS Energy. Under the gathering agreements, we dedicate our natural gas production for transportation to interstate pipeline systems, local distribution companies, and/or end users in the area, subject to certain exceptions.

 

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Seasonal Nature of Business

 

Generally, but not always the demand for natural gas decreases during the summer months and increases during the winter months. Seasonal anomalies such as mild winters or hot summers sometimes lessen this fluctuation. In addition, certain natural gas users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer. This can also lessen seasonal demand fluctuations. These seasonal anomalies may pose challenges and increase competition for equipment, supplies and personnel, which could lead to shortages and increase costs or delay our operations.

 

COMPETITION, MARKETS AND REGULATION

 

Competition and Markets

 

The Partnership operates in a highly competitive environment for acquiring leases, contracting for drilling services, marketing natural gas production from its wells and pricing for the product. It is anticipated that the wells drilled will produce mostly “dry gas,” such as the natural gas generally produced from wells situated in the Marcellus Shale primary area. Product availability and price are the principal means of competing in selling dry natural gas. Price obtained is determined by various factors beyond our control including domestic production, market demand, competition from other energy sources, and capacity of the gathering systems, political climate and weather. Many companies engage in natural gas drilling operations and most of our competitors in the areas where we will drill our wells will have financial resources and staffs larger than those available to us.

 

We do not consider our position in the industry to be significant and as such, we have little ability to significantly influence the price for our product.

 

Governmental Regulation

 

Governmental agencies, both Federal and State, regulate the production and transportation of natural gas. The Federal Energy Regulatory Commission regulates the interstate transportation of natural gas.

 

Natural gas operations in Pennsylvania are regulated by the Department of Environmental Protection, Division of Oil and Gas states, which include the Department of Environmental Resources for wells to be drilled in Pennsylvania. In this regard, the states impose a comprehensive statutory and regulatory scheme for natural gas operations, including supervising natural gas production activities and the transportation of natural gas sold in intrastate markets, which creates additional financial and operational burdens. The states also have broad regulatory and enforcement powers including those associated with pollution and the environment as discussed below.

 

Failure to comply with regulatory requirements can result in substantial fines and other penalties.

 

Environmental Regulation

 

The MGP will drill and complete the wells and supervise the producing operations. Those activities will be subject to various federal, state, and local laws covering the discharge of materials into the environment, or otherwise relating to the protection of the environment. The United States Environmental Protection Agency (the “EPA”) and state and local agencies will require obtaining permits and taking other measures with respect to:

 

(i)the discharge of treated brine into navigable waters;

 

(ii)the disposal, recycling or treatment of wastewater; and

 

(iii)air pollutant emissions.

 

If these requirements or permits are violated there can be substantial civil and criminal penalties that will increase if there was negligence or misconduct. In addition, we may be subject to fines, penalties and unlimited liability for cleanup costs under various federal laws such as the Federal Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Oil Pollution Act of 1990, the Toxic Substance Control Act and the Comprehensive Environmental Response, Compensation and Liability Act of 1980 for oil and/or hazardous substance contamination or other pollution caused by our drilling activities or our wells and our production activities.

 

We and our investor general partners may incur environmental costs and liabilities due to the nature of our business and substances from our wells. Moreover, the possibility exists that stricter laws, regulations or enforcement policies may be enacted or adopted in the future which could significantly increase our compliance costs and the cost of any remediation that may become necessary in the future.

 

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Employees

 

We do not directly employ any of the persons responsible for its management or operation. Rather, the personnel of the MGP and affiliates manage and operate our business, and they will also spend a substantial amount of time managing their own business and affairs as well as the business and affairs of our MGP’s other affiliates, which creates a conflict regarding the allocation of their time between our MGP’s business and affairs and their other business interests.

 

Available Information

 

We make our periodic reports under the Securities Exchange Act of 1934, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports, available through our MGP’s website at www.mdsenergydev.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). To view these reports, click on “Investment Programs”, then “Drilling Program SEC Filings” and finally our reports.

 

You may also receive, without charge, a paper copy of any such filings by request to us at telephone number 724-548-2501. A complete list of our filings is available on the SEC’s website at www.sec.gov. Any of our filings are also available at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The Public Reference Room may be contacted at telephone number (800) 732-0330 for further information.

 

ITEM 2: PROPERTIES

 

Productive Wells

 

Productive wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries to production facilities. As of December 31, 2016, we had completed fourteen wells, and all are revenue producing. No additional wells will be drilled for the Partnership.

 

Developed Acreage

 

The leases for our wells generally have terms that extend for the life of the wells. We believe that we hold good and indefeasible title to our properties in accordance with standards generally accepted in the natural gas industry, subject to exceptions stated in the leases and titles us in the various areas in which we conduct our activities. We do not believe that these exceptions detract substantially from our use of any property. As is customary in the natural gas industry, we conduct only a perfunctory title examination at the time we acquire a property. Before we commenced drilling operations, we conducted an extensive title examination and we performed curative work on defects that we deemed significant.

 

Our properties are subject to royalty, overriding royalty and other outstanding interests customary in the industry. Our properties are also subject to burdens such as liens incident to operating agreements, taxes, development obligations under natural gas leases, farm-out arrangements and other encumbrances, easements and restrictions. We do not believe that any of these burdens will materially interfere with our use of our properties.

 

Natural Gas Reserves

 

Proved reserves are the estimated quantities of natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. An independent third- party reserve engineer will estimate the natural gas reserves in the future.

 

The Partnerships reserves are all located in the Marcellus shale formation and all are natural gas. As of December 31, 2016, the Partnership’s net proved reserves of natural gas were 1,283 (MMCF).

 

Impairment of Natural Gas Properties

 

The Partnership assesses its producing natural gas properties for possible impairment, upon a triggering event or at least annually, 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 independent third-party reserve engineer reasonably estimates the commodities to be sold.  During the year the market continues to experience depressed commodity prices, which the Company viewed as a triggering event and, therefore, a possible impairment of the Partnership’s proved natural gas properties.  At December 31, 2016 upon the receipt of a year-end reserve report, the Partnership reviewed the proven natural gas properties for possible impairment. The net capitalized costs of the wells in the Partnership were less than the undiscounted future net cash flows from well production. As a result, no impairment of the properties was recorded as of December 31, 2016. To date as of December 31st 2016 the Partnership has impaired the natural gas properties in total by $11,810,658, and during 2015 an impairment of $5,182,000 was recorded which is included in the total.

 

ITEM 3: LEGAL PROCEEDINGS

 

The MGP is not aware of any legal proceedings filed against us.

 

Affiliates of the MGP are party to various routine legal proceedings arising in the ordinary course of their collective businesses. 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 our financial condition or results of operations.

 

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ITEM 4:REMOVED AND RESERVED

 

PART II

 

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

There is no established public trading market for our units and we do not anticipate that a market for our units will develop. Our units may be transferred only in accordance with the provisions of our Partnership Agreement which requires:

 

the MGP may require an opinion of counsel that registration under applicable federal and state law is not required;
the transfer will not result in materially adverse tax consequences to us; and
the transfer will not contravene any terms of our 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 us all costs and expenses incurred in connection with the substitution; and
the assignee executes and delivers the instruments which our MGP requires to effect the substitution and to confirm the assignee’s agreement to be bound by the terms of our Partnership Agreement.

 

A substitute partner is entitled to all of the rights of full ownership of the assigned units, including the right to vote. As of December 31, 2016 we had 358 unit holders.

 

Our investor partners may request that our MGP repurchase their units at any time beginning with the fifth anniversary after December 31, 2013, provided that certain conditions of our Partnership Agreement are met. The repurchase price is set at (i) predominantly 70% of the 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 our debts or (ii) an amount equal to three times the total amount of distributions paid by the Partnership to the participants as a group during the previous twelve months. Our 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 our MGP on a first-come, first- served basis and may not exceed 5% of the total units outstanding.

 

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)

 

The discussion and analysis presented below provides information to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with Item 8: Financial Statements and Supplemental Data, which contains our financial statements.

 

Overview

 

Business of the Partnership, the Managing General Partner and Certain Relationships

 

As of December 31, 2016, the partnership had completed fourteen vertical wells of which all are revenue producing during year ended 2016. All wells were drilled in the Marcellus shale formation.

 

During year ended 2016 and 2015, the MGP had subordinated a total of $ 21,597 and $19,510 respectively for a cumulative amount of $41,107 as of December 31, 2016. The subordinated receivable was classified as contra equity in the current year.

 

Our MGP is MDS, a Pennsylvania limited liability company. The MGP’s affiliates, MDS Energy and M/D Gas, Inc., have previously sponsored and serve as managing general partner of ten private drilling partnerships, in the aggregate. Also, MDS sponsored its first private drilling partnership in 2012 and has sponsored an additional private drilling partnership in each year since 2014.

 

First Class Energy, LLC (First Class), an affiliate of our MGP, has provided the necessary services to drill the wells on our behalf under our drilling and operating agreement with our MGP. Our MGP will serve as our drilling contractor and operator (“driller/operator”) and has supervised the drilling, completing, and operating (administrative, gathering, transportation, well services) of the wells that were drilled by us and it and its affiliates were paid at competitive rates for their services. The gas marketing will be handled by SBI Gas Marketing, which may also gather, transport and purchase our natural gas production at competitive rates in the area. The personnel of the driller/operator’s affiliates’ (MDS and First Class) manage and operate the MGP’s business. These affiliates (MDS and First Class) have limited information with respect to the ultimate recoverable reserves and production decline rates of vertical wells drilled in the Marcellus Shale primary area. Our MGP and its affiliates will receive substantial fees and profits in connection with this business.

 

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Governance

 

The Partnership has no executive officers and currently do not have any directors. Because the Partnership itself does not employ any persons, our MGP has determined that we will on a Code of Business Conduct and Ethics adopted by MDS that applies to the executive officers, employees and other persons performing services for our MGP. Our MGP has determined that it will not establish an independent Board of Directors with an Audit Committee for us at this time.

 

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 our MGP and its affiliates may be inconsistent in some respects, and our 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 MDS Energy and MDS manage and operate our MGP’s business, and spend a substantial amount of time managing their own business and affairs as well as the business and affairs of our MGP’s other affiliates, which creates a conflict regarding the allocation of their time between us and our 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 our MGP are set forth in the partnership agreement.

 

Liquidity and Capital Resources

 

During 2016 and 2015, the low commodity prices continued to negatively affect our revenues, earnings and cash flows for the Partnership. In response to the continued low commodity price environment, the MGP is evaluating hedge opportunities available at this time, also is reviewing the fixed operating costs of the wells the Partnership owns. The MGP is willing to place hedges for the production in the Partnership and also is considering reducing the monthly well tending and administration fees which the MGP receives as compensation. Another factor that will be discussed later is the MGP’s commitment to reducing the direct costs general and administrative (G&A) expenses of the Partnership. A major factor that will reduce the G&A expenses will be if the Partnership can deregister with the SEC. This will be explained in more detail in the G&A section.

 

As discussed above the MGP has been evaluating a fixed price or hedged scenario which will sustain positive cash flows to the Partnerhship. During it’s research the MGP has determined that based on the current volumes at which the wells are producing at a price of $2.00 or greater will sustain positive cash flows for the Partnership to be able to continue distributions. Also taking into to consideration the fixed costs associated with the production of the natural gas produced from the wells, the MGP is discussing internally reducing the well tending and administrative fee of the Partnership to a lower costs per well. This coupled with the placing of hedges on the natural gas will ensure future positive cash flows of the Partnership which will also ensure distributions continue to the investors. These changes will occur after year ended December 31, 2016 and sometime in the 1st quarter of 2017.

 

The MGP is also evaluating the possibility of having to plug some of the Partnership wells in the near future based off of the recent reserve reports, currently the expected life on average of the Partnerships wells is 8.66 year with a total potential liability of $636,000. The MGP has no plans to plug any of the Partnership wells in the immediate future, and has the intent to market the existing wells to future operators whom are developing horizontal programs. Should the need arise in the immediate future the MGP will fund the plugging of any wells from its lines of credit, but the MGP does not see this being necessary as all wells are currently producing marketable volumes of natural gas.

 

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 under contracts with monthly pricing provisions, based on a differential to the average monthly NYMEX (“NYMEX”) 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 December 31, 2016, all of the aggregate capital of the units had been expended, and fourteen wells had been completed and revenue producing. As of December 31, 2016, approximately $394,000 of gross revenue from the sale of natural gas had been received for approximately 298,000 MCF of production with an average realized price of $1.32 per MCF. In addition, approximately $80,000 of net 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 these amounts are recorded as accounts receivable. The average realizable price per MCF for this estimated revenue is $1.75 per MCF for the estimated production of 45,500 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 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.

 

Natural Gas Production Costs

 

Generally, natural gas production costs vary with changes in total natural gas production volumes. Transportation charges totaled approximately $135,000 or $0.39 per MCF. 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 and well maintenance costs for the year ended December 31, 2016 were approximately $142,000 or $0.41 cents per MCF.

 

The MGP has the discretion of waiving or suspending the fees it receives for well maintenance when it is deemed necessary to provide the Partnership with additional income to make distributions to investors. During the year ended December 31, 2016, the MGP has not collected from the Partnership the suspended fees of $28,800, these fees can be collected at any time, once cash flows allow. These have been accrued by the Partnership as of December 31, 2016.

 

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Depreciation, Depletion and Amortization (DD&A)

 

DD&A expense for operations was approximately $59,000 for the year ended December 31, 2016 as a result of actual production of 343,500 MCFs during 2016. Also during 2016, due to the Partnership using accrual method of accounting we had a reversal of 1,800 MCF, which represented the difference between the accrual at the end of 2015 and actual production for that period of 2015. The DD&A expense rate was approximately $0.17 per MCF for the year ended December 31, 2016.

  

At December 31, 2016 upon the receipt of a year-end reserve report, the Partnership reviewed the proven natural gas properties for possible impairment. The net capitalized costs of the wells in the Partnership were less than the undiscounted future net cash flows from well production, as a result, there was no need for an impairment of the properties. Total capitalized costs as of December 31, 2016 are $289,147.

 

Direct Costs – General and Administrative

 

Direct costs for year ending December 31, 2016 were $128,000 of which $38,000 represent impact fees and $90,000 of professional fees during the year.

 

The MGP, on behalf of the investor members, and after evaluating the SEC regulations and guidance, has decided to deregister the Partnership as it believes the Partnership fits all requirements per the SEC to deregister this entity. The MGP on behalf of the Partnership filed the Form 15 with the SEC to deregister this entity on January 6, 2017. The MGP determined that such deregistration and suspension of reporting obligations is in the best interests of this Partnership and its non-affiliated investor partners. The MGP believes deregistration and suspension of reporting obligations will decrease the costs related to the preparation and filing of SEC reports and compliance with the Sarbanes-Oxley Act obligations, and such benefits will outweigh any advantages of this Partnership continuing as an SEC-reporting company. We believe the obligation of filing SEC reports and complying with the Sarbanes-Oxley Act has become too burdensome and expensive for this Partnership. This Partnership is eligible to deregister under the Exchange Act because its equity securities are held of record by fewer than 500 persons and its assets have not exceeded $10 million on the last day of each of its three most recent fiscal years. Upon filing of the Form 15, this Partnership’s obligations to file periodic reports with the SEC, including Forms 10-K, 10-Q and 8-K, will be immediately suspended. The MGP expects that the deregistration of this Partnership’s equity securities under the Exchange Act will become effective 90 days after the date on which the Form 15 is filed.

 

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, G&A, 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.

 

The MGP in efforts to ensure the financial condition and liquidity of the Partnership is evaluating selling natural gas production at fixed pricing for certain period or by placing hedges to help ensure the liquidity of the Partnership and it’s abilities to continue distributions to investors. As well as looking at hedging opportunities the MGP is trying to lessen it’s fixed costs for well tending to the Partnership, lessening expenses to the wells will also help ensure liquidity and that the distributions will continue to the investors.

 

The MGP is also strengthening the financial condition of the Partnership by deregistering with the SEC which will increase cash flow by reducing direct costs of the Partnership.

 

Working Capital

 

As of December 31, 2016 this Partnership had working capital deficit of $79,000 as compared to deficit of $17,000 at December 31, 2015. The MGP in lieu of this deficit is evaluating placing hedges, decreasing or suspending direct cost and deregistering of the Partnership. All of these items above will directly help the future cash flow of the Partnership.

 

Cash Flows

 

Operating Activities

 

The Partnership’s cash flows from operating activities in 2016 were primarily impacted by commodity prices, operating costs, professional fees and declining production. Net cash flow from operating activities for the year ended December 31, 2016 was approximately $44,000.

 

Financing Activities

 

The Partnership during year ended December 31, 2016 made distributions to investors that totaled $61,500.

 

 9 

 

 

Critical Accounting Policies

 

The discussion and analysis of the Partnership’s financial condition is based upon the Partnership’s balance sheet, 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 annual report.

 

 10 

 

Report of Independent Registered Public Accounting Firm

 

 

 

To the Managing General Partner and the Limited Partners of the

MDS Energy Public 2013-A LP:

 

 

We have audited the accompanying balance sheets of MDS Energy Public 2013-A LP (Partnership) as of December 31, 2016 and 2015, and the related statements of operations, partners’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. The Partnership’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MDS Energy Public 2013-A LP as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 8 to the financial statements, the Partnership has had significant related-party transactions with its Managing General Partner, MDS Energy Development, LLC.

 

 

/s/ Schneider Downs & Co., Inc.

Pittsburgh, Pennsylvania

March 29, 2017

  

 

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MDS ENERGY PUBLIC 2013-A LP

Balance Sheets

 

   2016   2015 
Assets          
Current Assets          
Cash and Cash Equivalents  $6,026   $23,707 
Accounts Receivable – Managing General Partner, net   -    19,510 
Accounts Receivable – Related Party   70,980    78,760 
Total Current Assets   77,006    121,977 
           
Natural Gas properties, net   289,147    396,715 
           
Total Assets  $366,153   $518,692 
           
Liabilities          
Current Liabilities          
Due to Managing General Partner  $57,847   $28,000 
Accrued Expenses-Related Party   28,800    28,800 
Accrued Expenses   69,104    82,235 
Total Current Liabilities   155,751    139,035 
           
Long - Term Asset Retirement Obligations   635,685    651,870 
           
Partners' Deficit   (425,283)   (272,213)
           
Total Liabilities and Partners’ Equity  $366,153   $518,692 

 

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

 

 12 

 

 

MDS ENERGY PUBLIC 2013-A LP

Statements of Operations

For the Years Ended December 31, 2016 and 2015

 

   2016   2015 
         
Natural Gas Revenue, net  $424,654   $625,770 
           
Expenses          
Gathering Expense   135,247    166,784 
Well Maintenance   142,296    157,427 
DD&A   91,383    1,375,411 
Impact Fees   38,206    129,496 
Professional Fees   89,612    99,999 
Impairment Charge   -    5,181,550 
Total Expenses   496,744    7,110,667 
           
Net Loss  $(72,090)  $(6,484,897)

 

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

 

 13 

 

 

MDS ENERGY PUBLIC 2013-A LP

Statements of Partner's (Deficit) Equity

 

   Investor   Managing General     
   Partners   Partner   Total 
             
Balance December 31, 2014  $7,529,923   $(1,094,385)  $6,435,538 
                
(Distributions) due from MGP   (242,364)   19,510*   (222,854)
Net Loss   (5,439,555)   (1,045,342)   (6,484,897)
                
Balance at December 31, 2015  $1,848,004   $(2,120,217)  $(272,213)
                
(Distributions) due from MGP   (61,470)   21,597*   (39,873)
Net Loss   (60,469)   (11,621)   (72,090)
Receivable from MGP   -    (41,107)   (41,107)
Balance at December 31, 2016  $1,726,065   $(2,151,348)  $(425,283)

 

*due to subordination

 

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

 

 14 

 

 

The MDS ENERGY PUBLIC 2013-A LP

Statements of Cash Flows

For the Years Ended December 31

 

   2016   2015 
Cash flows from Operating activities          
Net Loss  $(72,090)  $(6,484,897)
Adjustments to reconcile net loss to cash provided by operations          
Depreciation Depletion & Amortization   91,383    1,375,411 
Impairment Charge   -    5,181,550 
Total Adjustments to net loss to reconcile to net cash from operating activities   19,293    72,064 
Changes in assets and liabilities          
Accounts Receivable   7,780    171,337 
Accounts Payable and Accrued Expenses   16,716    4,406 
Net Cash provided by operating activities   43,789    247,807 
           
Cash flows from financing activities          
 Distributions   (61,470)   (242,364)
           
Net change in cash and cash equivalents   (17,681)   5,443 
Cash and cash equivalents at beginning of year   23,707    18,264 
           
Cash and cash equivalents at end of period  $6,026   $23,707 
           
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY          
Subordinated Distributions by the MGP  $21,597   $19,510 
Asset Retirement obligation, change in estimate  $(48,393)  $526,741 

 

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

 

 15 

 

  

MDS ENERGY PUBLIC 2013-A LP

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2016 AND 2015

 

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

 

MDS Energy Public 2013-A LP (Partnership), was organized in 2013, in accordance with the laws of the state of Delaware. The 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, as the sole limited partner. 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.

 

General partner units were converted by the Partnership to limited partners units upon the drilling and completion of all of the Partnership’s wells. In accordance with the terms of the Limited Partnership Agreement (Agreement), MDS manages all activates of the Partnership and acts as the intermediary for substantially all Partnership transactions. The Partnership operates a single business unit.

 

Investor Partners may request that MDS repurchase units at any time beginning with the fifth anniversary after the offering termination date when certain conditions are met. The repurchase price is set at predominantly 70% of the 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 debts of the Partnership or an amount equal to three times the total amount of distributions paid by the Partnership as a group during the previous twelve months. MDS is also permitted to adjust the purchase price under certain conditions for changes occurring after the date of the presentment request. Repurchase requests will be fulfilled by MDS on a first-come, first served basis and may not exceed 5% of the total units outstanding in any calendar year. During December 31, 2016 and 2015, the Partnership did not repurchase any units from limited partners.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of significant accounting policies consistently applied by management in the preparation of the accompanying financial statements follows:

 

Basis of Presentation – the financial statements include only those assets, liabilities and results of operations of the partners which relate to the business of the Partnership. The statements do not include any assets, liabilities, revenues or expenses attributable to any of the partners’ other activities.

 

Management’s Estimates – The preparation of the Partnership’s financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires this Partnership to make estimates and assumptions that affect the amounts reported in this Partnership’s financial statements and accompanying notes. Actual results could differ from those estimates. Estimates which are particularly significant to the financial statements include estimates of natural gas and natural gas liquids (NGL) sales revenue, proved reserves, future cash flows from natural gas and NGL’s properties.

 

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. The balance in the Partnership account is insured by Federal Deposit Insurance Corporations, up to $250,000. The balance in these accounts may at times be in excess of federally insured amounts. The Partnership has not experienced losses in any such accounts to date and limits the Partnership’s exposure to credit loss by placing its cash and cash equivalents with high-quality financial institutions.

 

Accounts Receivable - related party – 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 during 2016 recorded an allowance for doubtful accounts of $41,100 as of December 31st. As of December 31, 2015 there was no allowance for doubtful accounts recorded. It is reasonably possible this allowance may change in the future.

 

 16 

 

  

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Natural 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.

 

The estimates of proved reserves are based on quantities of gas that 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 engages independent petroleum engineers to prepare a reserve and economic evaluation of all our 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 this Partnership’s DD&A expense, a change in this Partnership’s estimated reserves could have an effect on the Partnership’s income or loss.

 

Reclassifications – Certain reclassifications have been made to the December 31, 2016 financial statements in order to conform with the current year presentation.

 

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 crude oil 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 availability of new reserve information, the Partnership reviewed its proved natural gas properties for impairment at December 31, 2016.  The Partnership recognized no impairment charge of proved properties for 2016 and an impairment of approximately $5,182,000 for year ended December 31, 2015.

 

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.

 

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 years ended December 31, 2016 and 2015.

 

 17 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Commitments- In its capacity as MGP, MDS maintains performance bonds for plugging, reclaiming and abandoning of this 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, this Partnership would be obligated to fund any amounts in excess of funds previously withheld by the managing general partner to cover these expenses.

 

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, the MGP has used estimates of production as of December 31, 2016. Gas is sold by MDS to Snyder Brothers Gas Marketing, 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 years ended December 31, 2016 and 2015.

 

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 financial statements.

 

In August 2014, FASB issued ASU No. 2014-15 Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  (ASU No. 2014-15)  ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual reporting periods beginning after December 15, 2016, with early application permitted.  Management has adopted ASU 2014-15 for the year ended December 31, 2016.

 

 18 

 

 

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 related party 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 December 31, 2016 and 2015, the Partnership did not record an allowance for doubtful accounts. It is reasonably possible the estimate for uncollectible receivables will change periodically. Historically neither MDS nor any of the other Partnerships managed by the Partnership’s MGP, have experienced uncollectible accounts receivable. As of December 31, 2016 the Partnership sold 100% of the production to a related party and did not incur any losses on sales for the years ended December 31, 2016 and 2015, respectively.

 

NOTE 4 - PARTICIPATION IN COSTS AND REVENUES

 

For the year ended December 31, 2016, approximately $474,000 of gross revenue from the sale of natural gas had been received or estimated for approximately 343,500 MCF at an average price of $1.38 per MCF. Royalties for this period were approximately $49,500. The estimated amount is further explained below.

 

For the year ended December 31, 2015, approximately $704,000 of gross revenue from the sale of natural gas had been received or estimated for approximately 451,000 MCF at an average price of $1.56 per MCF. Royalties for this period were approximately $78,000. The estimated amount is further explained below.

 

For the year ended December 31, 2016, the estimated amount of approximately $71,000 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 45,500 MCF at an average price per MCF of $1.56. These estimates are recorded as accounts receivable net of royalties approximating $9,000. The total estimate of expenses to be deducted from those amounts is approximately $55,000, which are typically transportation, well maintenance and lease operating expense.

 

For the year ended December 31, 2015, the estimated amount of approximately $88,000 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 64,400 MCF at an average price per MCF of $1.37. These estimates are recorded as accounts receivable net of royalties approximating $9,000. The total estimate of expenses to be deducted from those amounts is approximately $62,000, which are typically transportation, well maintenance and lease operating expense.

 

 19 

 

 

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 its revenue interest beginning August 2014 and continuing through December 2015. During the years ended December 31, 2016 and December 31, 2015, the MGP subordinated $21,600 and $19,500, 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 $41,100 as of December 31, 2016, which was reclassified to contra equity of the MGP.

 

NOTE 6 – 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:

 

   December 31, 2016   December 31, 2015 
Leasehold Costs  $124,987   $124,987 
Asset Retirement Obligation Asset   594,110    642,503 
Development Costs   2,210,505    2,210,505 
Natural gas properties, successful efforts method   2,929,602    2,977,995 
Less: Accumulated Depreciation, Depletion and          
Amortization   2,640,455    2,581,280 
Natural Gas Properties – net  $289,147   $396,715 

 

NOTE 7 – ASSET RETIREMENT OBLIGATIONS

 

Changes in carrying amount of asset retirement obligations associated with natural gas properties for December 31, are as follows:

 

   December 31, 2016   December 31, 2015 
Balance beginning of year:  $651,870   $129,630 
Change in Obligations assumed with development activities   -    - 
Change in Estimate   (48,393)   517,739 
Accretion expense   32,208    4,501 
Balance at end of year:  $635,685   $651,870 

 

Cause for Change in Estimate –  In 2016, the MGP revised its assumptions related to the lives of the assets being extended due to the reserve reports.

 20 

 


NOTE 8-RELATED - PARTY ACTIVITIES

 

MDS will receive a fully accountable reimbursement for actual administrative costs. In its capacity as operator of the wells, MDS will also receive reimbursement for direct costs, well supervision fees and fees for gas gathering services and any other services it provides, at competitive rates.

 

MDS, through entities under common ownership or affiliates, have and will continue to perform drilling, administrative, gathering, transportation, well services and gas marketing for the Partnership and will be paid at competitive rates for these services.

 

Transactions with Managing Partner and Affiliates

 

MDS is reimbursed for certain partnership expenses and receives fees for services as provided for in the Agreement. The Partnership paid MDS approximately $115,200 and $85,600 for well maintenance fees, during 2016 and 2015, respectively. The Partnership also has an Accrued Liability of $28,800 due to the MGP as of December 31, 2016 and 2015.

 

The Partnership also paid a related party SBI $135,250 and $167,000 respectively during 2016 and 2015 for transportation fees.

 

NOTE 9 - 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 or carrying value 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 10 – 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 December 31, 2016 and 2015. 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.

 

NOTE 11 – RESERVE INFORMATION (UNAUDITED)

 

The Partnership utilized the services of an independent petroleum engineer to estimate the Partnership’s proved natural gas reserves. These reserve estimates have been prepared in compliance with professional standards and reserve definitions prescribed by the SEC.

 

Proved reserves estimates may change, either positively or negatively, as additional information becomes available and as contractual, economic and political conditions change. This Partnership's net proved reserve estimates have been adjusted as necessary to reflect all contractual agreements, royalty obligations and interests owned by others at the time of the estimate. Proved developed reserves are the quantities of natural gas expected to be recovered from currently producing zones under the continuation of present operating methods. Proved undeveloped reserves are those reserves expected to be recovered from existing wells where a relatively major expenditure is required for additional reserve development. As of December 31, 2016 there are no proved undeveloped reserves for this Partnership.

 

The price used to estimate the Partnership’s reserves was approximately $ 1.003.

 

The following table presents the Partnership’s proved developed reserves as of December 31, 2016, the last time a reserve report was prepared

 

Proved developed reserves  Gas (MMCF ) 
January 1, 2016   1,516 
Revisions   111 
Production   (344)
December 31, 2016   1,283 

 

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ITEM 9:CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9ACONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and President and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. 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 our Chief Executive Officer and President, and Chief Financial Officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and President and Chief Financial Officer, concluded that, at December 31, 2016, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Partnership’s internal control over financial reporting during our most recent fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

As an emerging growth company, we are exempt from the requirement to obtain an attestation report from our independent registered public accounting firm on the assessment of our internal controls pursuant to the Sarbanes-Oxley Act of 2002 until 2018, or such time that we no longer qualify as an emerging growth company in accordance with the Jumpstart Our Businesses Startups Act of 2012.

 

PART III

 

ITEM 10:DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Our MGP manages our activities. Unit holders do not directly or indirectly participate in our management or operation or have actual or apparent authority to enter into contracts on our behalf or to otherwise bind us.

 

The following table sets forth information as of March 29, 2017 with respect to those persons who serve as the officers of our MGP:

 

NAME   POSITION OR OFFICE
     
Michael D. Snyder   Chief Executive Officer and President
     
Randall L. Morris, Jr.   Vice President of Operations
     
Mark H. Axel   Chief Financial Officer
     
Michael S. Knapp   Vice President of Land & Public Relations
     
Adam W. Zellman   Vice President of Natural Gas Operations
     
Jason C. Knapp   Vice President of Partnership Administration and Secretary

 

With respect to the biographical information set forth below, the approximate amount of an individual’s professional time devoted to the business and affairs of the MGP and its affiliates, including MDS Energy, M/D Gas, Inc., and First Class Energy, have been aggregated.

 

Michael D. Snyder, age 32, has served as the Chief Executive Officer and President of the MGP since its formation in February 2011. Mr. Snyder has over ten years of experience in all phases of natural gas exploration and development in western Pennsylvania. He also serves as the Chief Executive Officer and President of M/D Gas, Inc. since March 2008 and as the sole Director of M/D Gas, Inc. since January 2011. Mr. Snyder previously served as Vice President of M/D Gas, Inc. from its formation in May 2006 until March 2008 and as a director of M/D Gas, Inc. from May 2006 to January 2011. He further serves as President and Chief Executive Officer of First Class since its formation in December 2007, and President of MDS Associated Companies, Inc. since its formation in January 2008 and sole Director of MDS Associated Companies, Inc. since January 2011. Mr. Snyder is a son of David E. Snyder, the Chairman, Chief Executive Officer and President of Snyder Brothers, Inc., the brother of Bryan K. Snyder, a Vice President of Snyder Brothers, Inc., a nephew of Mark A. Snyder, the corporate Secretary of Snyder Brothers, Inc.. Mr. Michael Snyder is also an indirect minority shareholder of Snyder Brothers, Inc. There is no minimum amount of time that Mr. Snyder devotes exclusively to the business of MDS Energy Public 2013-A LP. Mr. Snyder devotes approximately 95% of his professional time to the business and affairs of the MGP and its affiliates.

 

Randall L. Morris, Jr., age 35, has served as the Vice President of Operations of the MGP since July 2012. Mr. Morris also serves as the Vice President of Operations of M/D Gas, Inc. and MDS Associated Companies, Inc. since July 2012. Previously, Mr. Morris served as the Vice President and Chief Engineer of the MGP from February 2011 to July 2012. Mr. Morris also previously served as the Vice President and Chief Engineer of M/D Gas, Inc. and MDS Associated Companies, Inc. from July 2008 to July 2012. Before that he was an Engineer for General Electric from May 2005 until April 2007 and he was a Field Engineer Specialist for Northrop Grumman from July 2004 until May 2005. Mr. Morris received a Bachelor of Science degree in Mechanical Engineering from The Pennsylvania State University in 2004. There is no minimum amount of time that Mr. Morris devotes exclusively to the business of MDS Energy Public 2013-A LP. Mr. Morris devotes approximately 100% of his professional time to the business and affairs of the MGP and its affiliates.

 

Mark H. Axel, age 39, has served as the Chief Financial Officer of the MGP since January 2016. Prior to January 2016 Mr. Axel served as the Controller of the MGP from April 2015 until January 2016. Mr. Axel was employed as a Controller by Stonehaven Energy, LLC and Mid Atlantic Capital Group, Inc for 11 years prior to joining the MGP. He was responsible for the day to day accounting functions and reported directly to the CEO, CFO and Board of Directors. Mr. Axel received a Bachelor degree in Accounting with a minor in Management from Waynesburg University in 2000. There is no minimum amount of time that Mr. Axel will devote exclusively to the business of MDS Energy Public 2013-A LP. Mr. Axel devotes approximately 100% of his professional time to the business and affairs of the MGP and its affiliates.

 

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Michael S. Knapp, age 34, has served as the Vice President of Land & Public Relations for the MGP since July 2012. Mr. Knapp also serves as the Vice President of Land & Public Relations for M/D Gas, Inc. and MDS Associated Companies, Inc. since July 2012. Previously he served as founder and President of Knapp Acquisitions & Production, LLC from December 2009 to July 2012, land acquisition agent for MDS Energy from October 2007 to August 2009 and founder and President of OC Pool Management, Inc. from March 2005 to October 2008. Michael S. Knapp is a brother of Jason C. Knapp, the President and Chief Executive Officer of MDS Securities, LLC., which serves as the dealer-manager of this offering. There is no minimum amount of time that Mr. Knapp will devote exclusively to the business of MDS Energy Public 2013-A LP. Mr. Knapp devotes approximately 100% of his professional time to the business and affairs of the MGP and its affiliates.

 

Adam W. Zellman, age 35, has served as the Vice President of Natural Gas Operations for the MGP since July 2012. Mr. Zellman also serves as the Vice President of Natural Gas Operations for M/D Gas, Inc. and MDS Associated Companies, Inc. since July 2012. Mr. Zellman previously served as the Production Manager for MDS Energy since October 2007. Mr. Zellman supervises and coordinates the maintenance and production of natural gas from vertical Marcellus Shale wells, in addition to shallower wells drilled to other zones or formations in the Appalachian Basin. Mr. Zellman received a Bachelor of Science degree in Environmental Geography from Indiana University of Pennsylvania in 2005. There is no minimum amount of time that Mr. Zellman will devote exclusively to the business of MDS Energy Public 2013-A LP. Mr. Zellman devotes approximately 100% of his professional time to the business and affairs of the MGP and its affiliates.

 

Jason C. Knapp, age 30, has served as the Vice President of Partnership Administration and Secretary for the MGP since January 2013. Mr. Knapp also serves as the Vice President of Partnership Administration and Secretary of MDS Associated Companies, Inc. and M/D Gas, Inc. since January 2013. Mr. Knapp also serves as the Secretary of First Class. Previously he served as a land acquisition agent for MDS Energy from July 2010 to April 2012. Mr. Knapp continues to serve as a land manager for MDS Energy Mr. Knapp is also President and Chief Executive Officer of MDS Securities, LLC, which serves as the dealer-manager of this offering. Mr. Knapp received a Bachelor of Arts degree in Philosophy from the University of Maryland, College Park in May 2010. There is no minimum amount of time that Mr. Knapp will devote exclusively to the business of MDS Energy Public 2013-A LP. Mr. Knapp devotes approximately 100% of his professional time to the business and affairs of the MGP and its affiliates. Jason C. Knapp is a brother of Michael S. Knapp, the Vice President of Land & Public Relations for the MGP.

 

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ITEM 11:EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Introduction

 

We do not directly employ any persons to manage or operate our businesses. Instead, all of the persons (including executive officers of our MGP and other personnel) necessary for the management of our business are employed and compensated by MDS Associated Companies, Inc. Pursuant to our partnership agreement, our MGP manages our operations and activities through its affiliates’ employees (including employees of the MGP and MDS Energy). No officer or director of our MGP receives any direct enumeration or other compensation from us. (see “Item 13: Certain Relationships and Related Transactions” for a discussion of compensation paid by us to our MGP).

 

ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

As of December 31, 2016, we had 1,508.57 units outstanding. No officer or director of our MGP owns any units, with the exception of the CEO and President owns 28.4 units. Although, subject to certain conditions, investor partners may present their units to us beginning with the fifth calendar year after the partnership closes for purchase, our MGP is not obligated by the Partnership Agreement to purchase more than 5% of our total outstanding units in any calendar year. Our MGP is owned 100% by MDS Associated Companies, Inc.

 

ITEM 13:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Natural Gas Revenues - Our MGP is allocated approximately 16.1% of our oil and gas revenues in return for its payment and/or contribution of services towards our syndication and offering costs equal to 8% of our subscriptions, and its contributions to us of all of the oil and gas leases for a total capital contribution of $1,325,067. During the years ended December 31, 2016 and 2015, the MGP subordinated 60% of its net revenue interest resulting in a receivable due to the MGP’s portion of expenses exceeding the remaining portion of the MGP’s net revenue interest received.

 

Well Charges - Our MGP, as operator of our wells, is reimbursed at actual cost for all direct expenses incurred on our behalf and receives well supervision fees for operating and maintaining the wells during producing operations in the amounts of $800 per well per month. The well supervision fees are proportionately reduced to the extent we acquire less than 100% of the working interest in a well. For the year ended December 31, 2016 and 2015, our MGP received $115,200 and $85,600, respectively, for well supervision fees.

 

Transportation Fee - We will pay gathering fees to our MGP, and other related party companies including SBI, MDS Energy, Furnace Run Pipeline, LP, and Mushroom Farm Pipeline, LP at a competitive rates for each MCF of our natural gas transported. For the years ended December 31, 2016 and 2015, gathering fees of approximately $135,250 and $167,000 respectively, were paid to our MGP or to affiliated companies.

 

Accounting Fee – The Partnership pays the costs associated with filing the tax returns and audits directly to their outside independent audit firm. During year ended December 31, 2016 and December 31, 2015 the Partnership paid $83,000 and $63,000 respectively, for accounting fees. During the year ended December 31, 2016 and 2015, the company incurred other professional fees of $6,600 and $37,000, respectively.

 

Subordination – The MGP during year ended 2016, was still subordinating revenues to the Partnership per the offering documents. After subordination, the MGP’s remaining share of the net revenue interest was less than its share of expense during 2016 and 2015.

 

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Other Compensation - For the year ended December 31, 2016 our MGP did advance funds to us, and the funds advanced have not been repaid as of  March 29, 2017

 

ITEM 14:PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

For the years ended December 31, 2016 and 2015, the accounting fees and services charged by our independent registered auditors, Schneider Downs & Co., Inc. were as follows:

 

   Years Ended December 31, 
   2016   2015 
Audit fees  $83,000   $63,000 

 

Audit Committee Pre-Approval Policies and Procedures

 

We do not have an Audit Committee nor does our MGP. On at least an annual basis, our MGP’s CEO and President and Chief Financial Officer will review audit and non-audit services performed by Schneider Downs & Co., Inc. as well as the fees charged by Schneider Downs & Co., Inc. for such services. Our policy is that all audit and non-audit services must be pre-approved by our MGP’s CEO and President and Chief Financial Officer. All of such services and fees were pre- approved during 2016 and 2015.

 

PART IV

 

ITEM 15:EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

Description   Location
     
Certificate of Limited Partnership for MDS Energy Public 2013-A, LP (1)   Previously filed on our Form S-1
     
Amended and Restated Certificate and Agreement of Limited Partnership for MDS Energy Public 2013-A, LP (1)   Previously filed on our Form S-1
     
Drilling and Operating Agreement for MDS Energy Public 2013-A, LP (1)   Previously filed on our Form S-1

 

(1)Filed on (June 8, 2012) in the Form S-1 Registration Statement dated (June 8, 2012), File No. ###-##-####

 

EXHIBIT INDEX

 

Exhibit No.   Description  
       
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 Filed herewith
32   Section 1350 Certification of Principal Executive Officer and Principal Financial Officer. Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MDS ENERGY PUBLIC 2013 - A LP    
     
  MDS Energy Development, LLC, its Managing General Partner
     
Date: March 29, 2017   /s/ Michael D. Snyder
    Michael D. Snyder, Chief Executive Officer and President
     
Date: March 29, 2017   /s/ Mark H Axel
    Mark H Axel, Chief Financial Officer

 

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