United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 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 September 30, 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)
		Condensed Balance Sheets		1
		Condensed Statements of Operations		2
		Condensed Statements of Partners’ Equity (Deficit)		3
		Condensed Statements 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		12
		PART II. OTHER INFORMATION
Item 1:		Legal Proceedings		13
Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds		13
Item 3:		Defaults Upon Senior Securities		13
Item 4.		Mine Safety Disclosures		13
Item 5:		Other Information		13
Item 6:		Exhibits		14
SIGNATURES				15
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:

 

(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 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

 

		September 30, 2016 (Unaudited)				December 31, 2015 Derived from Audited Statements
Assets
Current Assets
Cash and Cash Equivalents		$	75,525			$	23,707
Accounts Receivable Related Party			61,235				78,760
Accounts Receivable Managing General Partner			37,692				19,510
Total Current Assets			174,452				121,977
Natural Gas Properties, net			291,575				396,715
Total Assets		$	466,027			$	518,692
Liabilities and Partners’ Deficit
Accrued Expenses		$	96,531			$	82,235
Due to Managing General Partner			28,000				28,000
Accrued Expenses -  Related Party			85,884				28,800
Total Current Liabilities			210,415				139,035
Long-term Asset Retirement Obligations			676,595				651,870
Partners’ Deficit			(420,983	)			(272,213	)
Total Liabilities and Partners’ Deficit		$	466,027			$	518,692

 

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

 

 

MDS ENERGY PUBLIC 2013-A LP

Condensed Statements of Operations

(Unaudited)

 

		For the Nine Months Ended September 30								For the Three Months Ended September 30
		2016				2015				2016				2015
Natural Gas Revenue, net		$	344,574			$	520,033			$	111,063			$	123,944
Expenses
Gathering Expense			112,997				132,734				30,973				45,120
Well Maintenance			105,320				118,526				29,665				34,857
Depreciation, Depletion and Amortization Expense			129,865				487,040				51,084				141,399
Impact Fee			35,280				103,455				2,925				26,041
Professional Fees			76,202				75,000				20,450				25,000
Impairment Charge			-				3,734,978				-				3,734,978
Total Expenses			459,664				4,651,733				135,097				4,007,395
Net Loss		$	(115,090	)		$	(4,131,700	)		$	(24,034	)		$	(126,044	)

 

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

 

 

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

(Unaudited)

 

		Investor Partners				Managing General Partner				Total
Balance at December 31, 2014		$	7,529,923			$	(1,094,385	)		$	6,435,538
(Distributions) Subordination			(229,281	)			14,109	*			(215,172	)
Net Loss			(3,465,685	)			(666,015	)			(4,131,700	)
Balance at September 30, 2015		$	3,834,957			$	(1,746,291	)		$	2,088,666
*due to subordination

 

		Investor Partners				Managing General Partner				Total
Balance at December 31, 2015		$	1,848,004			$	(2,120,217	)		$	(272,213	)
(Distributions) Subordination			(51,862	)			18,182	*			(33,680	)
Net Loss			(96,624	)			(18,466	)			(115,090	)
Balance at September 30, 2016		$	1,699,518			$	(2,120,501	)		$	(420,983	)
*due to subordination

 

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

 

 

MDS ENERGY PUBLIC 2013-A LP

Condensed Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended September 30
		2016				2015
Cash flows from Operating activities
Net Loss		$	(115,090	)		$	(4,131,700	)
Adjustments to reconcile net loss to cash provided by operating activities
Impairment Charge			-				3,734,978
Depreciation, Depletion and Amortization			129,865				487,040
Total adjustments to net loss to reconcile to net cash provided by operating activities			14,775				90,318
Changes in assets and liabilities
Accounts Receivable and Due from Managing General Partner			17,525				140,358
Accrued Expenses			71,380				4,443
Net cash provided by operating activities			103,680				235,119
Cash flows from financing activities
Due from the Managing General Partner			-				-
Distributions			(51,862	)			(229,281	)
Net cash used in financing activities			(51,862	)			(229,281	)
Net change in cash and cash equivalents			51,818				5,838
Cash and cash equivalents at beginning of period			23,707				18,264
Cash and cash equivalents at end of period		$	75,525			$	24,102
Supplemental Schedule of Non-Cash Financing Activities:
During the nine months ended September 30, 2016 and 2015, the MGP subordinated it’s distributions of $18,182 and $14,109 respectively.

 

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

 

 

MDS ENERGY PUBLIC 2013-A LP

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

September 30, 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 2015 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.

 

The MGP on behalf of the Partnership intends to apply for deregistration of the Partnership with the SEC upon issuance of the 2016 Form 10-K. This is described more here within the accompanying notes.

 

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 prices remaining relatively flat from year end 2015 through September 30, 2016, the Partnership did not recognize an impairment charge for the third quarter 2016 to it’s proved natural gas properties.  The Partnership has an impairment charge of proved natural gas properties of approximately $11,810,700 as of September 30, 2016 and 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.

 

 

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, 2016. Early adoption is permitted. The Managing General Partner is evaluating the income and cash flow statements to determine if a going concern needs to be addressed.

 

In August 2016, the FASB issued an accounting update on statements of cash flows to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Managing General Partner of this Partnership is currently evaluating the impact these changes may have on this Partnership's financial statements.

 

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 September 30, 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 nine months ended September 30, 2016 or 2015.

 

NOTE 4 - PARTICIPATION IN COSTS AND REVENUES

 

For the quarter ended September 30, 2016, approximately $129,000 of gross revenue from the sale of natural gas had been received or estimated for approximately 85,000 MCF at an average price of $1.52 per MCF. Royalties for this period were approximately $14,000. In addition approximately $68,000 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 55,000 MCF at an average price of $1.24. These amounts are recorded as accounts receivable net of royalties approximating $61,200. The total estimate of expenses to be deducted from those amounts is approximately $57,000, which are typically transportation, well maintenance and lease operating expense.

 

For the quarter ended September 30, 2015, approximately $137,000 of gross revenue from the sale of natural gas had been received or estimated for approximately 111,300 MCF at an average price of $1.23 per MCF. This includes approximately $89,000 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 73,800 MCF at an average price of $1.21. These amounts are recorded as accounts receivable net of royalties approximating $9,000. The total estimate of expenses to be deducted from those amounts is approximately $66,000, 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 September 2016. During the nine months ended September 30, 2016 and for the year ended December 31, 2015, MGP subordinated $18,200 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 approximately $37,000 and $19,500 which is included with Accounts Receivable from Managing General Partner at September 30, 2016 and December 31, 2015 respectively.

 

 

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 September 30, 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:

 

		September 30, 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			2,686,420				2,581,280
Natural Gas Properties,  net		$	291,575			$	396,715

 

 

NOTE 8 - ASSET RETIREMENT OBLIGATIONS

 

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

 

		September 30, 2016				September 30, 2015
December 31, beginning balance		$	651,870				129,630
Accretion expense			24,725				3,285
September 30, ending balance		$	676,595				132,915

 

Cause for Change in Estimate – In December 2015, the MGP revised its assumptions related to the cash outlay expected to be incurred to plug the Partnership's uneconomic wells. The revision in the asset retirement obligation did not have an immediate effect in the current year statement of operations, as the increase in the revised obligation will be accreted and the offsetting capitalized amount will be depreciated over the useful lives of respective wells.

 

The above accretion expense is included in depreciation, depletion and amortization in the Partnership’s statement of operations. As of September 30, 2016 the Partnership’s estimate of the costs to plug its wells was $60,000, which has increased from its initial assessment at September 30, 2015 of $21,000 due to better data available in regards to plugging of vertical Marcellus wells. The Partnership’s asset retirement obligation is measured using a discount rate of 5.57% and estimated useful lives of 1 to 20 years.

 

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 uncle’s 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 September 30, 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 due to managing general partner account on the balance sheet. The Partnership also has an accrued liability of approximately $96,000 and $82,000 due to the MGP as of September 30, 2016 and December 31, 2015, respectively, which relates to lease operating and general and administrative expenses.

 

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 September 30, 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.

 

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 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.

 

 

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. Shortly following the filing of the 2016 Annual Report on Form 10-K, this Partnership expects that it will file with the SEC a Form 15 to deregister its equity securities under Section 12(g) of the Exchange Act and to suspend its reporting obligations under Sections 13 and 15(d) of the Exchange Act. After careful consideration, the Managing General Partner determined that such deregistration and suspension of reporting obligations is in the best interests of this Partnership and its non-affiliated investor partners. The Managing General Partner 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 Managing General 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.

 

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.

 

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 September 30, 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 September 30, 2016, approximately $312,500 of gross revenue from the sale of natural gas had been received for approximately 230,000 MCF of production with an average realized price of $1.36 per MCF. In addition approximately $68,000 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 $1.24 per MCF for estimated production of 55,000 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 nine month period ended September 30, 2016 compared to the same period for 2015 natural gas production decreased approximately 21% as a result of the Partnership wells depleting inline with normal depletion curves during the nine month period ended September 30, 2016. Additionally, there was a decrease in the average price per MCF for the nine month period ended September 30, 2016. The average price per MCF for the nine months ended September 30, 2016 was approximately $1.34 compared to $1.62 for the nine months ended September 30, 2015.

 

For the three month period ended September 30, 2016 compared to the same period for 2015 natural gas production decreased approximately 25%, due to the normal decline associated with these wells. Additionally, there was a slight increase in the average price per MCF for the three month period ended September 30, 2016. The average price per MCF for the three months ended September 30, 2016 was approximately $1.51 compared to $1.22 for the same period in 2015.

 

During the three months ended September 30, 2016, the Partnership recognized approximately $129,000 of gross revenue from the sale of approximately 85,000 MCF’s as compared to approximately $137,000 of gross revenue from the production of 111,300 MCF’s of production in the three month period ended September 30, 2015. The three month gross revenues from September 30, 2016 compared to the same period in 2015 decreased approximately 6% while the average price per MCF increased 19%.

 

 

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 September 30, 2016 were approximately $64,300, compared to the same period in 2015 natural gas production costs decreased approximately $16,000. A factor in the decrease of natural gas production cost was associated with some of the wells being classified as stripper wells and thus the impact fees that were being paid on said wells has stopped being assessed during 2016.

 

Natural gas production costs for the nine months ended September 30, 2016 compared to the same period in 2015 decreased approximately $2,000. A factor in this decrease is similar as to what is discussed above and in a direct result of these wells being classified as stripper wells and not being required to submit impact fee payments and less brine water hauling and disposal as the wells are now older and producing less water.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization (DD&A) expense was approximately $130,000 for the nine months ended September 30, 2016 from production of 285,000 MCFs, compared to the same period in 2015 which has an expense of $487,000 from production of 384,000 MCFs. The DD&A expense rate per MCF is estimated to be $0.46 for 2016 as compared to $1.26 for 2015. The decrease is due to the impairment charge recognized during the third and fourth quarters of 2015.

 

DD&A expense related to natural gas properties is directly related to proven reserves and production volumes. DD&A expense decreased approximately $90,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to a decrease in production volumes, and the decreased DD&A rate.

 

Direct costs - general and administrative

 

Direct costs slightly decreased for the three month period ended September 30, 2016 compared to the same period in 2015. Direct cost for the three month period ended September 30, 2016 was approximately $20,500. Direct costs are professional fees and other miscellaneous administrative expenses of the Partnership.

 

Direct costs for the nine month period ended September 30, 2016 compared to the same period in 2015 increased $1,000 due to an increase in professional fees and other miscellaneous administrative expenses of the Partnership.

 

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 September 30, 2016, the Partnership had a working capital deficit of $(36,000), compared to a working capital deficit of $(17,000) at December 31, 2015. The increase of $19,000 between September 30, 2016 and December 31, 2015 was primarily due the decrease of production volumes, and also an increase in general and administrative expenses. At the current time, the MGP has permitted the Partnership to not reimburse the MGP for certain expenses until market conditions become more favorable that amounted approximately $114,000 and $57,000 at September 30, 2016 and December 31, 2015 respectively. Should the MGP require immediate payment the Partnership may be unable to meet this request. In addition, the MGP has informed the Partnership that it may be able to borrow funds from the MGP on a limited basis to sustain its operating activities.

 

The MGP has subordinated distributions thus creating and accounts receivable balance on the balance sheet, this accounts receivable balance will be relieved once the subordination period ends pursuant to the Private Placement Memorandum or an increase in pricing is recognized.

 

 

Cash Flows

 

Operating Activities

 

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

 

Net cash flows from operating activities were $104,000 for the nine months ended September 30, 2016 compared to $235,000 for the comparable period in 2015. The decrease in cash from operating activities was primarily due to a decrease production volumes, as in 2015 the Partnership turned some wells in line during the 2015 period.

 

The MGP is reviewing operating costs, and the feasibility of these costs, in effort to lower the cash flow impact to the partnership. As mentioned previously, the Partnership deregistering will increase cash flow to the partnership in the form of reducing the fixed overhead costs.

 

Financing Activities

 

The Partnership distributed $51,862 for the nine months ended September 30, 2016 for the comparable period in 2015 the Partnership distributed $229,281. During the nine months ended September 30, 2016 and 2015, the MGP subordinated $18,182 and $14,109, respectively, which was distributed to investors.

 

The MGP is evaluating placing short terms hedges for set quantities of natural gas flow to ensure the Partnership remains cash flowing and distributions being able to be met. There is no guarantee that distributions will continue you to occur, but the MGP feels that by receiving a fixed price for the natural gas produced, greatly mitigates the possibility of distributions being ceased or suspended.

 

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, 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.

 

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 September 30, 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 September 30, 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.

 

 

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 attached.

 

 

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: November 14, 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: November 14, 2016	By:	/s/ Mark H. Axel
		Mark H. Axel, Chief Financial Officer and Treasurer