Company Quick10K Filing
Quick10K
Southcross Energy Partners
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-09-20 Other Events
8-K 2019-09-17 Enter Agreement, Exhibits
8-K 2019-08-30 Enter Agreement, Exhibits
8-K 2019-08-19 Officers, Exhibits
8-K 2019-03-31 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-03-18 Officers, Exhibits
8-K 2019-02-28 Regulation FD, Exhibits
8-K 2019-02-01 Officers, Exhibits
8-K 2018-12-20 Officers, Regulation FD, Exhibits
8-K 2018-12-19 Officers
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-09-18 Enter Agreement, Officers, Exhibits
8-K 2018-09-12 Officers, Exhibits
8-K 2018-08-31 Regulation FD, Exhibits
8-K 2018-08-20 Leave Agreement, Officers, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-08-02 Officers
8-K 2018-07-30 Leave Agreement, Regulation FD, Exhibits
8-K 2018-06-01 Enter Agreement, Other Events, Exhibits
8-K 2018-03-27 Shareholder Vote, Other Events, Exhibits
8-K 2018-03-05 Officers, Other Events
8-K 2018-02-05 Regulation FD, Other Events, Exhibits
8-K 2018-02-01 Regulation FD, Other Events, Exhibits
8-K 2018-01-22 Enter Agreement, Off-BS Arrangement, Exhibits
NGG National Grid 192,081
KMI Kinder Morgan 46,180
VVC Vectren 5,935
ENLC EnLink Midstream 3,854
DM Dominion Energy Midstream Partners 1,716
AM Antero Midstream Partners 1,349
TLP Transmontaigne Partners 625
CLNE Clean Energy Fuels 415
MPLX MPLX 0
BPMP BP Midstream Partners 0
SXE 2019-06-30
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.1 a2019q210-qex101.htm
EX-10.2 a2019q210-qex102.htm
EX-10.3 a2019q210-qex103.htm
EX-31.1 a2019q210-qex311.htm
EX-31.2 a2019q210-qex312.htm
EX-32.1 a2019q210-qex321.htm

Southcross Energy Partners Earnings 2019-06-30

SXE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019q210-qdoc.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One) 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
 
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to             
 
Commission File Number: 001-35719
 
Southcross Energy Partners, L.P.
(Exact name of registrant as specified in its charter) 
DELAWARE
 
45-5045230
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1717 Main Street, Suite 5200
Dallas, TX
 
75201
(Address of principal executive offices)
 
(Zip Code)
 
(214) 979-3700
(Registrant’s telephone number, including area code) 
 
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

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 ý No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer x
 
Smaller reporting company x
 
 
 
Emerging Growth Company o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý 

Indicate by check mark whether registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o

As of August 9, 2019, the registrant has 48,694,891 common units outstanding, 12,213,713 subordinated units outstanding and 19,996,781 Class B Convertible Units outstanding. Our common units trade on the OTC Pink under the symbol “SXEEQ.”



Commonly Used Terms
 
As generally used in the energy industry and in this Quarterly Report on Form 10-Q, the following terms have the following meanings:
 
/d: Per day

/gal: Per gallon
 
Bbls: Barrels
 
Condensate: Hydrocarbons that are produced from natural gas reservoirs but remain liquid at normal temperature and pressure

MMBtu: One million British thermal units

Mcf: One thousand cubic feet

MMcf: One million cubic feet
 
NGLs: Natural gas liquids, which consist primarily of ethane, propane, isobutane, normal butane, natural gasoline and stabilized condensate
 
Residue gas: Pipeline quality natural gas remaining after natural gas is processed and NGLs and other matters are removed
 
Rich gas: Natural gas that is high in NGL content
 
Throughput: The volume of natural gas and NGLs transported or passing through a pipeline, plant, terminal or other facility
 
Y-grade: Commingled mix of NGL components extracted via natural gas processing normally consisting of ethane, propane, isobutane, normal butane and natural gasoline

2


FORM 10-Q
TABLE OF CONTENTS
Southcross Energy Partners, L.P.
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018
 
 
 
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018
 
 
 
 
Condensed Consolidated Statements of Changes in Partners’ Capital for the Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3


PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
SOUTHCROSS ENERGY PARTNERS, L.P.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,557

 
$
11,707

Restricted cash
55,000

 

Trade accounts receivable
40,279

 
53,941

Accounts receivable - affiliates

 
5,980

Prepaid expenses
3,183

 
3,521

Other current assets
22,278

 
8,212

Total current assets
150,297

 
83,361

 
 
 
 
Property, plant and equipment, net
381,162

 
427,021

Investments in joint ventures
92,237

 
96,980

Other assets
8,128

 
3,090

Total assets
$
631,824

 
$
610,452

 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
32,367

 
$
60,825

Accounts payable - affiliates
1,010

 
288

Current portion of long-term debt
254,231

 
521,123

Other current liabilities
3,902

 
15,309

Total current liabilities
291,510

 
597,545

 
 
 
 
Other non-current liabilities
153

 
16,715

Total liabilities not subject to compromise
291,663

 
614,260

     Liabilities subject to compromise (Note 2)
443,118

 

     Total liabilities
734,781

 
614,260

 
 
 
 
Commitments and contingencies (Note 7)
 
 
 
 
 
 
 
Partners' capital (deficit):
 
 
 
Common units (48,694,891 and 48,686,215 units outstanding as of June 30, 2019 and December 31, 2018, respectively)

 

Class B Convertible units (19,996,781 and 19,652,831 units issued and outstanding as of June 30, 2019 and December 31, 2018, respectively)

 
9,393

Subordinated units (12,213,713 units issued and outstanding as of June 30, 2019 and December 31, 2018, respectively)

 

General partner interest
(102,957
)
 
(13,201
)
Total partners' deficit
(102,957
)
 
(3,808
)
Total liabilities and partners' deficit
$
631,824

 
$
610,452

 
See accompanying notes.

4


SOUTHCROSS ENERGY PARTNERS, L.P.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per unit data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019

2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Revenues
$
85,134

 
$
78,343

 
$
195,338

 
$
182,204

Revenues - affiliates
11,401

 
58,429

 
23,125

 
109,805

Total revenues (Note 11)
96,535

 
136,772

 
218,463

 
292,009

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 

 
 

Cost of natural gas and liquids sold
67,275

 
104,411

 
159,807

 
227,928

Operations and maintenance
16,239

 
14,376

 
31,057

 
28,349

Depreciation and amortization
8,512

 
17,906

 
20,750

 
35,762

General and administrative
12,392

 
4,941

 
28,312

 
9,916

Impairment of assets
26,619

 

 
26,619

 

Gain on sale of assets

 
(553
)
 

 
(553
)
Total expenses
131,037

 
141,081

 
266,545

 
301,402

 
 
 
 
 
 
 
 
Loss from operations
(34,502
)
 
(4,309
)
 
(48,082
)
 
(9,393
)
Other expense:


 


 


 


Equity in losses of joint venture investments
(2,514
)
 
(3,152
)
 
(5,171
)
 
(6,288
)
Interest expense
(15,933
)
 
(11,095
)
 
(27,402
)
 
(21,105
)
Total other expense
(18,447
)
 
(14,247
)
 
(32,573
)
 
(27,393
)
Loss before reorganization items
(52,949
)
 
(18,556
)
 
(80,655
)
 
(36,786
)
Reorganization items (Note 2)
(18,490
)
 

 
(18,490
)
 

Loss before income tax expense
(71,439
)
 
(18,556
)
 
(99,145
)
 
(36,786
)
Income tax expense
(4
)
 

 
(4
)
 

Net loss
$
(71,443
)
 
$
(18,556
)
 
$
(99,149
)
 
$
(36,786
)
General partner unit in-kind distribution

 
(11
)
 

 
(22
)
Net loss attributable to partners
$
(71,443
)
 
$
(18,567
)
 
$
(99,149
)
 
$
(36,808
)
 
 
 
 
 
 
 
 
Earnings per unit:
 
 
 
 
 
 
 
Net loss allocated to limited partner common units
$

 
$
(11,101
)
 
$

 
$
(22,050
)
Weighted average number of limited partner common units outstanding
48,682

 
48,637

 
48,682

 
48,632

Basic and diluted loss per common unit
$

 
$
(0.23
)
 
$

 
$
(0.45
)
 
 
 
 
 
 
 
 
Net loss allocated to limited partner subordinated units
$

 
$
(1,369
)
 
$

 
$
(4,118
)
Weighted average number of limited partner subordinated units outstanding
12,214

 
12,214

 
12,214

 
12,214

Basic and diluted loss per subordinated unit
$

 
$
(0.11
)
 
$

 
$
(0.34
)
 
See accompanying notes.

5


SOUTHCROSS ENERGY PARTNERS, L.P.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(99,149
)
 
$
(36,786
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

Depreciation and amortization
20,750

 
35,762

Unit-based compensation

 
170

Amortization of deferred financing costs, original issuance discount and PIK interest
2,902

 
2,770

Gain on sale of assets

 
(553
)
Unrealized loss (gain) on financial instruments
11

 
(1
)
Equity in losses of joint venture investments
5,171

 
6,288

Impairment of assets
26,619

 

Non-cash reorganization items (Note 2)
8,893

 

Other, net
(126
)
 
(126
)
Changes in operating assets and liabilities:


 


Trade accounts receivable, including affiliates
19,641

 
7,545

Prepaid expenses and other current assets
(19,020
)
 
(7,123
)
Other non-current assets
3

 
535

Accounts payable and accrued liabilities, including affiliates
(17,258
)
 
(10,352
)
Other liabilities
4,386

 
4,664

Net cash provided by (used in) operating activities
(47,177
)
 
2,793

Cash flows from investing activities:


 


Capital expenditures
(4,546
)
 
(7,619
)
Aid in construction receipts
1,475

 
(7
)
Net proceeds from sales of assets
1,065

 
108

Investment contributions to joint venture investments
(428
)
 
(222
)
Net cash used in investing activities
(2,434
)
 
(7,740
)
Cash flows from financing activities:


 


Borrowings under our senior unsecured note

 
15,000

Borrowings under our DIP financing facility (Note 6)
127,500

 

Borrowings under our DIP roll-up loans (Note 6)
127,500

 

Repayments under our credit facility

 
(11,431
)
Repayments under our term loan agreement
(127,500
)
 
(2,128
)
Repayments under our DIP financing facility
(938
)
 

Payments on finance and capital lease obligations
(342
)
 
(293
)
Financing costs
(3,758
)
 
(256
)
Tax withholdings on unit-based compensation vested units
(1
)
 
(8
)
Net cash provided by financing activities
122,461

 
884

 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
72,850

 
(4,063
)
Cash, cash equivalents and restricted cash — Beginning of period
11,707

 
5,218

Cash, cash equivalents and restricted cash — End of period
$
84,557

 
$
1,155

 
See accompanying notes.

6


SOUTHCROSS ENERGY PARTNERS, L.P.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (DEFICIT)
(In thousands)
(Unaudited)
 

Partners' Capital (Deficit)

Limited Partners


 
 

Common

Class B Convertible
 
Subordinated

General Partner
 
Total
BALANCE - December 31, 2018
$

 
$
9,393

 
$

 
$
(13,201
)
 
$
(3,808
)
Net loss

 
(9,393
)
 

 
(18,313
)
 
(27,706
)
BALANCE - March 31, 2019
$

 
$

 
$

 
$
(31,514
)
 
$
(31,514
)
Net loss

 

 

 
(71,443
)
 
(71,443
)
BALANCE - June 30, 2019
$

 
$

 
$

 
$
(102,957
)
 
$
(102,957
)


 
Partners' Capital
 
Limited Partners
 
 
 
 
 
Common
 
Class B Convertible
 
Subordinated
 
General Partner
 
Total
BALANCE - December 31, 2017
$
215,146

 
$
266,725

 
$
8,302

 
$
9,393

 
$
499,566

Net loss
(10,949
)
 
(4,167
)
 
(2,749
)
 
(365
)
 
(18,230
)
Unit-based compensation on long-term incentive plan
65

 

 

 

 
65

Tax withholdings on unit-based compensation vested units
(8
)
 

 

 

 
(8
)
Contributions from general partner

 

 

 
2

 
2

General partner unit in-kind distribution
(7
)
 
(2
)
 
(2
)
 
11

 

Class B Convertible unit in-kind distribution
(422
)
 
542

 
(106
)
 
(14
)
 

BALANCE - March 31, 2018
$
203,825

 
$
263,098

 
$
5,445

 
$
9,027

 
$
481,395

Net loss
(11,101
)
 
(5,716
)
 
(1,369
)
 
(370
)
 
(18,556
)
Unit-based compensation on long-term incentive plan
105

 

 

 

 
105

General partner unit in-kind distribution
(6
)
 
(4
)
 
(1
)
 
11

 

Class B Convertible unit in-kind distribution
(415
)
 
533

 
(104
)
 
(14
)
 

BALANCE - June 30, 2018
$
192,408

 
$
257,911

 
$
3,971

 
$
8,654

 
$
462,944


See accompanying notes.

7


SOUTHCROSS ENERGY PARTNERS, L.P.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
 
Organization
 
Southcross Energy Partners, L.P. (the "Partnership," "Southcross," "we," "our" or "us") is a Delaware limited partnership formed in April 2012. We are a master limited partnership, headquartered in Dallas, Texas, that provides natural gas gathering, processing, treating, compression and transportation services and access to NGL fractionation and transportation services. We also source, purchase, transport and sell natural gas and NGLs. Our assets are located in South Texas, Mississippi and Alabama and include two gas processing plants, one fractionation facility, one treating facility and gathering and transportation pipelines.

As of March 31, 2019, Southcross Holdings LP, a Delaware limited partnership (“Holdings”), indirectly owned 100% of Southcross Energy Partners GP, LLC, a Delaware limited liability company and our General Partner (“General Partner”) (and therefore controlled us), all of our subordinated and Class B convertible units and 54.4% of our common units. Our General Partner owns an approximate 2.0% interest in us and all of our incentive distribution rights. EIG Global Energy Partners, LLC (“EIG”) and Tailwater Capital LLC (“Tailwater”) (collectively, the “Sponsors”) each indirectly own approximately one-third of Holdings, and a group of consolidated lenders under Holdings' term loan (the "Lenders") own the remaining one-third of Holdings. However, as a result of the Chapter 11 Cases (defined below), Holdings lost control over the Partnership’s operations when the Debtors (defined below) submitted to the jurisdiction of the Bankruptcy Court on April 1, 2019. See Note 2.

Chapter 11 Cases and Going Concern Assessment

On April 1, 2019 (the "Petition Date"), the Partnership, our General Partner, and certain of the Partnership’s subsidiaries, including, Southcross Energy Finance Corp., Southcross Energy Operating, LLC, Southcross Energy GP LLC, Southcross Energy LP LLC, Southcross Gathering Ltd., Southcross CCNG Gathering Ltd., Southcross CCNG Transmission Ltd., Southcross Marketing Company Ltd., Southcross NGL Pipeline Ltd., Southcross Midstream Services, L.P., Southcross Mississippi Industrial Gas Sales, L.P., Southcross Mississippi Pipeline, L.P., Southcross Gulf Coast Transmission Ltd., Southcross Mississippi Gathering, L.P., Southcross Delta Pipeline LLC, Southcross Alabama Pipeline LLC, Southcross Nueces Pipelines LLC, Southcross Processing LLC, FL Rich Gas Services GP, LLC, FL Rich Gas Services, LP, FL Rich Gas Utility GP, LLC, FL Rich Gas Utility, LP, Southcross Transmission, LP, T2 EF Cogeneration Holdings, LLC, and T2 EF Cogeneration LLC (collectively the “Filing Subsidiaries” and, together with the Partnership and General Partner, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors’ Chapter 11 cases are being jointly administered under the caption In re Southcross Energy Partners, L.P., Case No. 19-10702 (the “Chapter 11 Cases”) pursuant to Rule1015(b) of the Federal Rules of Bankruptcy Procedure and the Order Directing Joint Administration of Chapter 11 Cases entered by the Bankruptcy Court on April 2, 2019. We will continue to operate our businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Bankruptcy Court entered orders approving a variety of first-day relief designed primarily to minimize the impact of the Chapter 11 Cases on our operations, customers and employees, including authorizing post-petition financing. We expect to continue our operations without interruption during the pendency of the Chapter 11 Cases.

For the duration of the of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to significant risks and uncertainties associated with Chapter 11 Cases. As a result of these significant risks and uncertainties, we expect our assets, liabilities, partners’ capital (deficit), officers and/or directors will be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this quarterly report on Form 10-Q may not accurately reflect our operations, properties and capital plans following the Chapter 11 Cases.

We have not reached an agreement with our creditors for a plan of reorganization and continue to engage in discussions regarding the terms of a financial restructuring plan. In conjunction with this process, we are exploring potential strategic alternatives to maximize value for the benefit of our stakeholders, which include a sale of certain or substantially all of our assets under Section 363 of the Bankruptcy Code, a plan of reorganization to equitize certain indebtedness as an alternative to the sale process, or a combination thereof. Therefore, the outcome of the Chapter 11 Cases is subject to a high degree of uncertainty and is dependent upon numerous factors, some of which are outside of our control (including actions of the Bankruptcy Court and our creditors). The significant risks and uncertainties related to our liquidity and the Chapter 11 Cases

8


described above raise substantial doubt about our ability to continue as a going concern. These condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. The accompanying condensed financial statements do not include any adjustments to reflect the possible future effects of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.

Chapter 11 Filing Impact on Creditors and Unitholders
We have filed schedules and statements of financial affairs with the Bankruptcy Court setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements of financial affairs may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the July 19, 2019 deadline for general claims. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated, reconciled and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently asserted.

Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition and post-petition liabilities to creditors must be satisfied in full before the holders of our existing common units are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery for creditors, if any, will not be determined until confirmation and implementation of a plan of reorganization. The outcome of the Chapter 11 Cases remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors may receive. We believe it is highly likely that our existing common units will be canceled at the conclusion of our Chapter 11 Cases and the holders of our existing common units will be entitled to little recovery, if any.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Partnership and the Filing Subsidiaries as well as efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from us or any of the Filing Subsidiaries, or to create, perfect or enforce any lien against our property or any of the Filing Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.
Impact on Indebtedness
As of the Petition Date, we had approximately $527.6 million in principal amount of indebtedness, including approximately: (i) $429.1 million related to our term loan and $81.1 million (excluding outstanding letters of credit) related to our revolving credit facility and $17.4 million related to the Investment Notes (defined below). The commencement of the Chapter 11 Cases described above constituted an event of default that accelerated our obligations under the following debt instruments (the “Debt Instruments”):
Third Amended and Restated Revolving Credit Agreement, dated as of August 4, 2014, by and among Southcross Energy Partners, L.P., Wilmington Trust, National Association (successor to Wells Fargo Bank, N.A.), as Administrative Agent, UBS Securities LLC and Barclays Bank PLC, as Co-Syndication Agents, JPMorgan Chase Bank, N.A., as Documentation Agent, and the lenders party thereto, as amended; (the “Third A&R Revolving Credit Agreement”)
Term Loan Credit Agreement, dated as of August 4, 2014, by and among Southcross Energy Partners, L.P., Wilmington Trust, National Association (successor to Wells Fargo Bank, N.A.), as Administrative Agent, UBS Securities LLC and Barclays Bank PLC, as Co-Syndication Agents, and the lenders party thereto (the “Term Loan Agreement”); and
$15.0 million aggregate principal amount of Qualifying Notes dated January 22, 2018, issued by the Partnership to each of certain funds or accounts managed or advised by EIG and certain funds or accounts managed or advised by Tailwater.




9


On August 19, 2019, the Successor Agent Agreement and Seventh Amendment to the Third Amended and Restated Revolving Credit Agreement (the "Seventh Amendment") became effective, pursuant to which Wells Fargo Bank, N.A. resigned as administrative agent under the Third A&R Revolving Credit Agreement and was succeeded by Wilmington Trust, National Association.

These debt instruments provide that, as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code.
On the Petition Date, the Debtors filed a motion with the Bankruptcy Court seeking approval of term loan and letter of credit facilities (the “DIP Facilities”) in the aggregate principal amount of $255.0 million, consisting of (i) a senior secured priming superpriority term loan in the aggregate principal amount of $72.5 million (the “DIP New Money Loan”), (ii) a senior secured priming superpriority term loan in the aggregate principal amount of $55.0 million (the “DIP LC Loans” and, together with the DIP New Money Loans, the “DIP Term Loans”) to cash collateralize a letter of credit sub-facility for the issuance of letters of credit (including the deemed issuance of existing letters of credit) by certain issuing banks party to the DIP Credit Agreement (as defined below) in an aggregate face amount of $52,597,087.38, and (iii) a senior secured priming superpriority term loan in the aggregate principal amount of $127.5 million, which would be subordinate to the DIP Term Loans, to refinance term loans (the “Rolled-Up Loans”) outstanding under the Term Loan Agreement owed to the DIP Lenders (as defined below) on a dollar-for-dollar basis to the DIP Term Loans provided by the DIP Lenders (the “DIP Roll-Up Loans” and, together with the DIP Term Loans, the “DIP Loans”). On April 2, 2019, the Bankruptcy Court entered an interim order (the “Interim Order”) authorizing the Debtors (the “DIP Loan Parties”) to enter into the DIP Facilities. The Interim Order allowed the DIP Loan Parties to access immediately up to $85.0 million of DIP Term Loans and refinance their obligations outstanding under prepetition letters of credit (the “Existing Letters of Credit”). However, both the DIP Facilities and the refinancing of such letters of credit and of certain term loans outstanding under the Term Loan Agreement remained subject to entry of a final order by the Bankruptcy Court (the “Final Order” and, together with the Interim Order, the “DIP Orders”).
Pursuant to the Interim Order, on April 3, 2019, the Loan Parties entered into a Senior Secured Superpriority Priming Debtor-In-Possession Credit Agreement as amended by that certain First Amendment to Senior Secured Superpriority Priming Debtor-in-Possession Credit Agreement, dated as of May 20, 2019, and as further amended by that certain Second Amendment to Senior Secured Superpriority Priming Debtor-in-Possession Credit Agreement, dated as of June 12, 2019 (the “DIP Credit Agreement”) governing the terms of the DIP Facilities with the lenders party thereto (the “DIP Lenders”), Wells Fargo Bank, N.A., Royal Bank of Canada and UBS AG as issuing banks (the “DIP L/C Issuers”) and Wilmington Trust, National Association, as the administrative agent and the collateral agent thereunder (the “DIP Agent”). On April 3, 2019, the conditions precedent to closing were satisfied and the Partnership made an initial borrowing of $30.0 million of DIP New Money Loans and $55.0 million of DIP LC Loans and the Existing Letters of Credit were deemed issued under the DIP Credit Agreement. Subsequent borrowings and issuances of new letters of credit under the DIP Credit Agreement are also subject to the satisfaction of additional specified conditions precedent. The $55.0 million of the proceeds from the DIP LC Loans is considered restricted cash and is included in the restricted cash line items within our consolidated balance sheet as of June 30, 2019.
On May 7, 2019, the Bankruptcy Court entered the Final Order approving the DIP Facilities and allowing the Borrower to draw down on the remaining commitments with respect to the DIP Term Loans and to refinance the Rolled-Up Loans with the DIP Roll-Up Loans. On May 9, 2019, we borrowed the remaining $42.5 million of DIP New Money Loans and made a payment of $127.5 million to our term loans outstanding under the Term Loan Agreement.
Sale of Assets
Since the Debtors formally retained Evercore Group L.L.C. (“Evercore”) on March 12, 2019, Evercore and the Debtors have run an extensive marketing process for the potential sale (the “Sale”) of all or substantially all of the Debtors’ assets (the “Assets”) under Section 363 of the Bankruptcy Code. To effectuate the Sale, Evercore and the Debtors have contacted numerous potential purchasers, the Debtors have executed non-disclosure agreements with a significant number of such parties, and Evercore has provided additional details to these parties, including access to confidential diligence materials.
On May 22, 2019, the Debtors filed with the Bankruptcy Court the Motion of Debtors for Entry of Orders (i)(a) Approving Bidding Procedures for Sale of Debtors’ Assets, (b) Authorizing the Selection of a Stalking Horse Bidder, the initial Bidder selected by the Partnership to make the first Bid on the Partnership’s remaining assets (the “Stalking Horse Bidder”), (c) Approving Bid Protections, (d) Scheduling Auction for, and Hearing To Approve, Sale of Debtors’ Assets, (e) Approving Form and Manner of Notices of Sale, Auction, and Sale Hearing, (f) Approving Assumption and Assignment Procedures, and (g)

10


Granting Related Relief and (ii)(a) Approving Sale of Debtors’ Assets Free and Clear of Liens, Claims, Interests, and Encumbrances, (b) Authorizing Assumption and Assignment of Executory Contracts and Unexpired Leases, and (c) Granting Related Relief [D.I. 225] (the “Bidding Procedures Motion”).
On June 13, 2019, the Bankruptcy Court entered an order approving the Bidding Procedures Motion [D.I. 324] (the“Bidding Procedures Order”). Pursuant to the Bidding Procedures Order, the Debtors intend to sell all of their right, title and interest in and to the Assets free and clear of any pledges, liens, security interests, encumbrances, claims, charges, options, and interests thereon (collectively, the “Interests”) to the maximum extent permitted by section 363 of the Bankruptcy Code, with such Interests to attach to the net proceeds of the sale of the Assets with the same validity and priority as such Interests applied against the Assets. The deadline for the submission of bids that satisfy the requirements of the Bidding Procedures Order (each a “Qualified Bid,” and those parties who submit a Qualified Bid, each a “Qualified Bidder”) was July 24, 2019 at 6:00 p.m. (prevailing Eastern Time) (the “Bid Deadline”).
In the event that the Debtors timely receive more than one Qualified Bid, the Debtors shall conduct an auction (the “Auction”) for the Assets. The Auction shall be in accordance with the procedures outlined in the Bidding Procedures Order and upon notice to all Qualified Bidders that have submitted Qualified Bids. The Auction shall be conducted on September 3, 2019 at 10:00 a.m. (prevailing Eastern Time) or such later time as the Debtors shall notify all relevant parties. If (a) no Qualified Bids are submitted by the Bid Deadline other than a Qualified Bid that shall serve as the minimum bid for the Assets or any lot thereof (a “Stalking Horse Bid”), (b) only one Qualified Bid that is not a Stalking Horse Bid is submitted by the Bid Deadline, or (c) only one or more bids for less than all or substantially all of the Debtors’ assets (each a “Partial Bid”) are submitted by the Bid Deadline for non-overlapping lots of the Assets, the Debtors may in their discretion (in consultation with certain parties) elect to cancel the Auction and seek approval of the transactions contemplated in the Stalking Horse Bid, the Qualified Bid which is not a Stalking Horse Bid, or the transactions in respect of the Partial Bids at the hearing to consider and approve the Sale (the “Sale Hearing”).

Prior to the conclusion of the Auction, the Debtors shall (in consultation with certain parties) (a) review and evaluate each bid made at the Auction on the basis of financial and contractual terms and other factors relevant to the sale process, including those factors affecting the speed and certainty of consummating the Sale, (b) determine and identify the highest or otherwise best offer or collection of offers (the “Successful Bid(s)”), (c) determine and identify the next highest or otherwise best offer or collection of offers (the “Alternate Bid(s)”), and (d) notify all Qualified Bidders participating in the Auction, prior to its adjournment, of (i) the identity of the party or parties that submitted the Successful Bid(s) (the “Successful Bidder(s)”), (ii) the amount and other material terms of the Successful Bid(s), (iii) the identity of the party or parties that submitted the Alternate Bid(s), and (iv) the amount and other material terms of the Alternate Bid(s).

The Sale Hearing will be held on September 18, 2019 at 10:30 a.m. (prevailing Eastern Time) before the Honorable Judge Mary F. Walrath, in the United States Bankruptcy Court for the District of Delaware, 824 N. Market St., Wilmington, Delaware 19801. The Sale Hearing may be adjourned by the Debtors (with the consent of the certain parties) by an announcement of the adjourned date at a hearing before the Bankruptcy Court or by filing a notice on the Bankruptcy Court’s docket. At the Sale Hearing, the Debtors will seek the Bankruptcy Court’s approval of the Successful Bid(s) and, at the Debtors’ election (in consultation with certain parties), the Alternate Bid(s).

The Debtors’ presentation to the Bankruptcy Court of the Successful Bid(s) and Alternate Bid(s) will not constitute the Debtors’ acceptance of such bid(s), which acceptance will only occur upon approval of such bid(s) by the Bankruptcy Court. Following the Bankruptcy Court’s entry of the order approving any Sale, the Debtors and the Successful Bidder(s) shall proceed to consummate the transaction(s) contemplated by the Successful Bid(s).

Executory Contracts

Subject to certain exceptions, under the Bankruptcy Code, the Partnership and the Filing Subsidiaries may assume, assume and assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a breach as of the petition date of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Partnership and the Filing Subsidiaries of performing their future obligations under such executory contract or unexpired lease but may give rise to a general unsecured claim against us or the applicable Filing Subsidiaries for damages caused by such rejection. The assumption of an executory contract or unexpired lease generally requires the Partnership and the Filing Subsidiaries to cure existing monetary or other defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Any description of the treatment of an executory contract or unexpired lease with the Partnership or any of the Filing Subsidiaries, including any description of the obligations under any such executory contract or

11


unexpired lease, is qualified by and subject to any rights we have with respect to executory contracts and unexpired leases under the Bankruptcy Code. See further discussion regarding the Chapter 11 Cases in Note 2.

Reorganization Expenses

The Debtors have incurred and will continue to incur significant costs associated with the reorganization throughout 2019, principally professional fees. The amount of these costs, which are being expensed as incurred, are expected to affect our results of operations significantly.

Delisting of Common Units from NYSE

On February 27, 2019, the New York Stock Exchange (“NYSE”) notified the Partnership that the staff of NYSE Regulation, Inc. (the “NYSE Regulation”) had determined to commence proceedings to delist our common units. The NYSE Regulation reached its decision to delist our common units pursuant to Rule 802.01C of the NYSE’s Listed Company Manual, as the Partnership’s unit price had fallen below the NYSE’s continued listing standard with average closing price of less than $1.00 over a consecutive 30 trading-day period and the Partnership failed to cure this non-compliance within the required timeframe. The NYSE suspended trading after the market close on the NYSE on February 27, 2019.

Effective February 28, 2019, our common units commenced trading on the OTCQX Marketplace under the ticker symbol "SXEEQ". On March 20, 2019, the NYSE filed with the SEC a notification of removal from listing and registration on Form 25 to delist our common units and terminate the registration of our common units under Section 12(b) of the Securities Exchange Act of 1934. The delisting became effective on April 1, 2019.

On April 1, 2019, the Partnership was notified by the OTC Markets Group Inc. that our common units, ticker: “SXEEQ”, was being removed from the OTCQX tier of the OTC Marketplace and downgraded to the OTC Pink, effective April 1, 2019. The Partnership was informed that the foregoing decision was made by the OTC Markets Group Inc. in light of the Chapter 11 Cases.

Holdings' Sale of Robstown Facility

On October 4, 2018, EPIC Midstream Holdings, LP (“EPIC”) and EPIC Y-Grade Holdings, LP, a subsidiary of EPIC, entered into a definitive equity purchase agreement (the "Robstown Purchase Agreement") with Holdings and Holdings Borrower to acquire Holdings' Robstown fractionation facility ("Robstown") and related pipelines that enables Robstown to receive natural gas liquids from various supply sources and several short pipelines that allow the delivery of fractionated products to Corpus Christi-area markets. Under the terms of the agreement, EPIC assumed all of the NGL purchase and sale agreements associated with Robstown, including certain natural gas liquids sales and transportation agreements with the Partnership. The sale was completed in November 2018.

Liquidity Consideration and Ability to Continue as a Going Concern
Our liquidity and ability to maintain compliance with debt covenants have been negatively impacted by our level of indebtedness. Our future cash flow may be materially adversely affected if the natural gas and NGL volumes connected to our systems decline. The majority of our revenue is derived from fixed-fee and fixed- spread contracts, which have limited direct exposure to commodity price levels since we are paid based on the volumes of natural gas that we gather, process, treat, compress and transport and the volumes of NGLs we fractionate and transport, rather than being paid based on the value of the underlying natural gas or NGLs. In addition, a portion of our contract portfolio contains minimum volume commitment arrangements. The majority of our volumes are dependent upon the level of producer drilling activity and our success in connecting volumes to our systems.

The accompanying consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, the Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities or any other adjustments that would be required should we be unable to continue as a going concern. See further discussion regarding the Chapter 11 Cases in Note 2.


12


Basis of Presentation
 
We prepared this report under the rules and regulations of the Securities Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Accordingly, these condensed consolidated financial statements do not include all of the disclosures required by GAAP and should be read in conjunction with our 2018 Annual Report on Form 10-K. The condensed consolidated financial statements as of June 30, 2019 and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018, are unaudited and have been prepared on the same basis as the audited financial statements included in our 2018 Annual Report on Form 10-K. However, on January 1, 2019, the Partnership adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), using the modified retrospective method.

Accounting during Bankruptcy

We have applied the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, in the preparation of these condensed consolidated financial statements. For periods subsequent to the Chapter 11 Cases, ASC 852 requires the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings are recorded as “Reorganization items” on the condensed consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process have been classified on the condensed consolidated balance sheet as of June 30, 2019 as “Liabilities subject to compromise”. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, which may differ from the ultimate settlement amounts. Accordingly, our condensed consolidated financial statements for the three and six months ended June 30, 2019 have been prepared in accordance with ASC 852. Adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations and financial position have been included herein. All intercompany accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements were prepared in conformity with GAAP, which requires management to make various estimates and assumptions that may affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from those estimates. Information for interim periods may not be indicative of our operating results for the entire year.
 
We evaluate events that occur after the balance sheet date, but before the financial statements are issued, for potential recognition or disclosure. Based on the evaluation, we determined that there were no material subsequent events for recognition or disclosure other than those disclosed in this report. See Note 14.
Segments
Our chief operating decision-maker is our Chief Executive Officer who reviews financial information presented on a consolidated basis in order to assess our performance and make decisions about resource allocations. There are no segment managers who are held accountable by the chief operating decision-maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level. Accordingly, we have determined that we have one reportable segment.

Significant Accounting Policies
 
During the six months ended June 30, 2019, the Partnership adopted ASC 842 (as described below) and began to apply accounting standards applicable to reorganizations, ASC 852, which are applicable to companies under Chapter 11 bankruptcy protection (see Note 2). As a result, there was a change to our significant accounting policies described in Note 1 of our 2018 Annual Report on Form 10-K.

Adopted Accounting Pronouncements 

In February 2016, the FASB issued updated guidance that sets out revised principles for the recognition, measurement, presentation and disclosure for both lessees and lessors. The pronouncement states that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) are to include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate

13


the lease. Similarly, optional payments to purchase the underlying asset are to be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous lease guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments.
In 2018, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842 and ASU No. 2018-11, Targeted Improvements. Under these updates, optional transition practical expedients are available (1) whereby existing or expired land easements that were not previously accounted for as leases under ASC 840 are not required to be evaluated under Topic 842 and (2) lease and associated non-lease components are not required to be separated within lessor arrangements if certain criteria are met. The FASB also issued ASUs 2018-10 and 2018-20, Codification Improvements to Topic 842 and Narrow Scope Improvements for Lessors, respectively, to alleviate unintended consequences from applying Topic 842. The amendments do not make substantive changes to the core provisions or principles of Topic 842 and did not significantly impact our implementation process. We adopted this standard effective January 1, 2019 using the modified retrospective method of adoption, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during the period. We elected the package of practical expedients permitted under the transition guidance within Topic 842 which, among other things, allows us to carry forward the historical lease classification. As such, we did not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment of right-of-use assets.
Additionally, we elected certain practical expedients on an ongoing basis, including the practical expedient for short-term leases pursuant to which a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize a lease liability and right-of-use asset for leases (1) with a term of 12 months or less and (2) that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. Instead, we will recognize the lease payments for short-term leases within our statement of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Substantially all leases where we are a lessee are classified as operating leases under Topic 842.
Upon adoption of this standard, we recognized right-of-use asset recorded within other assets of approximately $7.7 million and corresponding liabilities recorded within other current and non-current liabilities of approximately $2.3 million and $5.4 million on our condensed consolidated balance sheet at January 1, 2019. See Note 7 for additional information on our lease policies.

Recent Accounting Pronouncements 

Accounting standard-setting organizations frequently issue new or revised accounting pronouncements. We review and evaluate new pronouncements and existing pronouncements to determine their impact, if any, on our condensed consolidated financial statements. We are evaluating the impact of each pronouncement on our condensed consolidated financial statements.





















14


Correction of Error

As previously disclosed in our 2018 Annual Report on Form 10-K, subsequent to the issuance of the June 30, 2018 interim financial statements, the Partnership identified an error in the accounts receivable - affiliates and revenues financial statement line items related to the reconciliation of residue imbalances between the Partnership and Holdings. As a result, the Partnership corrected previously reported amounts for the respective periods as indicated in the table below. The correction resulted in a decrease to revenue for the three and six months ended June 30, 2018. The Partnership has assessed this error and determined it to be not material to our financial statements. The following table explains the effects of the error for the three and six months ended June 30, 2018 (in thousands, except unit and per unit data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2018
Revenues, as previously reported
$
137,420

 
$
294,050

Effect of error
(648
)
 
(2,041
)
Revenues, as corrected
136,772

 
292,009

 
 
 
 
Net loss, as previously reported
(17,908
)
 
(34,745
)
Effect of error
(648
)
 
(2,041
)
Net loss, as corrected
(18,556
)
 
(36,786
)
 
 
 
 
Trade accounts receivable, including affiliates, as previously reported on the condensed consolidated statements of cash flows (1)

 
5,504

Effect of error (1)

 
2,041

Trade accounts receivable, including affiliates, as corrected on the condensed consolidated statements of cash flows (1)

 
7,545

 
 
 
 
Basic and diluted net loss per common unit, as originally reported
(0.22
)
 
(0.43
)
Effect of error
(0.01
)
 
(0.02
)
Basic and diluted net loss per common unit, as corrected
(0.23
)
 
(0.45
)
 
 
 
 
Basic and diluted net loss per subordinated unit, as originally reported
(0.22
)
 
(0.43
)
Effect of error
0.11

 
0.09

Basic and diluted net loss per subordinated unit, as corrected
(0.11
)
 
(0.34
)

(1)
The Partnership does not present the condensed consolidated statements of cash flows for the three months Ended June 30, 2018.

2. BANKRUPTCY FILING

Chapter 11 Cases

On April 1, 2019, the Partnership, our General Partner and the Filing Subsidiaries filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. The Debtors’ Chapter 11 Cases are being jointly administered under the caption In re Southcross Energy Partners, L.P., Case No. 19-10702 pursuant to Rule1015(b) of the Federal Rules of Bankruptcy Procedure and the Order Directing Joint Administration of Chapter 11 Cases entered by the Bankruptcy Court on April 2, 2019. The Bankruptcy Court entered orders approving a variety of first-day relief designed primarily to minimize the impact of the Chapter 11 Cases on our operations, customers and employees, including authorizing post-petition financing. We will continue to operate our business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. See Note 1 “Organization and Description of the Business - Chapter 11 Cases” for a detailed description of the Chapter 11 Cases.



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Significant Bankruptcy Court Actions
On April 1, 2019, we filed a motion seeking entry of an order authorizing the Debtors to enter into the DIP Financing to, among other things, provide additional liquidity to fund our operations during the Chapter 11 process.

On April 2, 2019, the Bankruptcy Court entered an interim order authorizing the Debtors to enter into the DIP Facilities. The Interim Order allowed the DIP Loan Parties to access immediately up to $85.0 million under the DIP Facilities and refinance their obligations outstanding under prepetition letters of credit. However, both the DIP Facilities and the refinancing of such letters of credit and of certain term loans outstanding under the Term Loan Agreement remained subject to entry of a final order by the Bankruptcy Court.

Pursuant to the Interim Order, on April 3, 2019, the DIP Loan Parties entered into the DIP Credit Agreement. On April 3, 2019, the conditions precedent to closing were satisfied and the Partnership made an initial borrowing of $30.0 million of DIP New Money Loans and $55.0 million of DIP LC Loans and the Existing Letters of Credit were deemed issued under the DIP Credit Agreement. The $55.0 million of the proceeds from the DIP LC Loans is considered restricted cash and is included in the restricted cash line items within our consolidated balance sheet as of June 30, 2019.

On May 7, 2019, the Bankruptcy Court entered the Final Order approving the DIP Facilities and allowing the Borrower to draw down on the remaining commitments with respect to the DIP Term Loans and to refinance the Rolled-Up Loans with the DIP Roll-Up Loans. On May 9, 2019, we borrowed the remaining $42.5 million of DIP New Money Loans and made a payment of $127.5 million to our term loans outstanding under the Term Loan Agreement.

On May 22, 2019, the Debtors filed with the Bankruptcy Court the Bidding Procedures Motion. On June 13, 2019, the Bankruptcy Court entered an order approving the Bidding Procedures Motion.

Debtor-In-Possession Financing
See Note 6 for further discussion of the DIP Facilities, which provide up to $127.5 million in debtor-in-possession financing.

Impact on Indebtedness

As of the Petition Date, we had approximately $527.6 million in principal amount of indebtedness, including approximately: (i) $429.1 million related to our term loan and $81.1 million (excluding outstanding letters of credit) related to our revolving credit facility and $17.4 million related to the Investment Notes (defined below). The commencement of the Chapter 11 Cases described above constituted an event of default that accelerated our obligations under the following debt instruments (the “Debt Instruments”):
Third Amended and Restated Revolving Credit Agreement, dated as of August 4, 2014, by and among Southcross Energy Partners, L.P., Wilmington Trust, National Association (successor to Wells Fargo Bank, N.A.), as Administrative Agent, UBS Securities LLC and Barclays Bank PLC, as Co-Syndication Agents, JPMorgan Chase Bank, N.A., as Documentation Agent, and the lenders party thereto, as amended; (the “Third A&R Revolving Credit Agreement”)
Term Loan Credit Agreement, dated as of August 4, 2014, by and among Southcross Energy Partners, L.P., Wilmington Trust, National Association (successor to Wells Fargo Bank, N.A.), as Administrative Agent, UBS Securities LLC and Barclays Bank PLC, as Co-Syndication Agents, and the lenders party thereto (the “Term Loan Agreement”); and
$15.0 million aggregate principal amount of Qualifying Notes dated January 22, 2018, issued by the Partnership to each of certain funds or accounts managed or advised by EIG and certain funds or accounts managed or advised by Tailwater.

On August 19, 2019, the Successor Agent Agreement and Seventh Amendment to the Third Amended and Restated Revolving Credit Agreement (the "Seventh Amendment") became effective, pursuant to which Wells Fargo Bank, N.A. resigned as administrative agent under the Third A&R Revolving Credit Agreement and was succeeded by Wilmington Trust, National Association.
These debt instruments provide that, as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt

16


instruments are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code.
Sale Process
Since the Debtors formally retained Evercore Group L.L.C. on March 12, 2019, Evercore and the Debtors have run an extensive marketing process for the potential sale of all or substantially all of the Debtors’ assets under Section 363 of the Bankruptcy Code. To effectuate the Sale, Evercore and the Debtors have contacted numerous potential purchasers, the Debtors have executed non-disclosure agreements with a significant number of such parties, and Evercore has provided additional details to these parties, including access to confidential diligence materials.
On May 22, 2019, the Debtors filed with the Bankruptcy Court the Motion of Debtors for Entry of Orders (i)(a) Approving Bidding Procedures for Sale of Debtors’ Assets, (b) Authorizing the Selection of a Stalking Horse Bidder, (c) Approving Bid Protections, (d) Scheduling Auction for, and Hearing To Approve, Sale of Debtors’ Assets, (e) Approving Form and Manner of Notices of Sale, Auction, and Sale Hearing, (f) Approving Assumption and Assignment Procedures, and (g) Granting Related Relief and (ii)(a) Approving Sale of Debtors’ Assets Free and Clear of Liens, Claims, Interests, and Encumbrances, (b) Authorizing Assumption and Assignment of Executory Contracts and Unexpired Leases, and (c) Granting Related Relief [D.I. 225].
On June 13, 2019, the Bankruptcy Court entered an order approving the Bidding Procedures Motion [D.I. 324]. Pursuant to the Bidding Procedures Order, the Debtors intend to sell all of their right, title and interest in and to the Assets free and clear of any pledges, liens, security interests, encumbrances, claims, charges, options, and interests thereon to the maximum extent permitted by section 363 of the Bankruptcy Code, with such Interests to attach to the net proceeds of the sale of the Assets with the same validity and priority as such Interests applied against the Assets. The deadline for the submission of bids that satisfies the requirements of the Bidding Procedures Order was July 24, 2019 at 6:00 p.m. (prevailing Eastern Time).
In the event that the Debtors timely receive more than one Qualified Bid, the Debtors shall conduct an auction for the Assets. The Auction shall be in accordance with the procedures outlined in the Bidding Procedures Order and upon notice to all Qualified Bidders that have submitted Qualified Bids. The Auction shall be conducted on September 3, 2019 at 10:00 a.m. (prevailing Eastern Time) or such later time as the Debtors shall notify all relevant parties. If (a) no Qualified Bids are submitted by the Bid Deadline other than a Qualified Bid that shall serve as the minimum bid for the Assets or any lot thereof, (b) only one Qualified Bid that is not a Stalking Horse Bid is submitted by the Bid Deadline, or (c) only one or more bids for less than all or substantially all of the Debtors’ assets are submitted by the Bid Deadline for non-overlapping lots of the Assets, the Debtors may in their discretion (in consultation with certain parties) elect to cancel the Auction and seek approval of the transactions contemplated in the Stalking Horse Bid, the Qualified Bid which is not a Stalking Horse Bid, or the transactions in respect of the Partial Bids at the hearing to consider and approve the Sale.

Prior to the conclusion of the Auction, the Debtors shall (in consultation with certain parties) (a) review and evaluate each bid made at the Auction on the basis of financial and contractual terms and other factors relevant to the sale process, including those factors affecting the speed and certainty of consummating the Sale, (b) determine and identify the highest or otherwise best offer or collection of offers, (c) determine and identify the next highest or otherwise best offer or collection of offers, and (d) notify all Qualified Bidders participating in the Auction, prior to its adjournment, of (i) the identity of the party or parties that submitted the Successful Bid(s), (ii) the amount and other material terms of the Successful Bid(s), (iii) the identity of the party or parties that submitted the Alternate Bid(s), and (iv) the amount and other material terms of the Alternate Bid(s).

The Sale Hearing will be held on September 18, 2019 at 10:30 a.m. (prevailing Eastern Time) before the Honorable Judge Mary F. Walrath, in the United States Bankruptcy Court for the District of Delaware, 824 N. Market St., Wilmington, Delaware 19801. The Sale Hearing may be adjourned by the Debtors (with the consent of the certain parties) by an announcement of the adjourned date at a hearing before the Bankruptcy Court or by filing a notice on the Bankruptcy Court’s docket. At the Sale Hearing, the Debtors will seek the Bankruptcy Court’s approval of the Successful Bid(s) and, at the Debtors’ election (in consultation with certain parties), the Alternate Bid(s).

The Debtors’ presentation to the Bankruptcy Court of the Successful Bid(s) and Alternate Bid(s) will not constitute the Debtors’ acceptance of such bid(s), which acceptance will only occur upon approval of such bid(s) by the Bankruptcy Court. Following the Bankruptcy Court’s entry of the order approving any Sale, the Debtors and the Successful Bidder(s) shall proceed to consummate the transaction(s) contemplated by the Successful Bid(s).

Schedules and Statements of Financial Affairs - Claims & Claims Resolution Process


17


To the best of our knowledge, after making reasonable efforts, we have notified all of our known current or potential creditors that the Debtors have filed Chapter 11 cases. On June 12, 2019 each of the Debtors filed their respective Schedules of Assets and Liabilities (the “Schedules”) and Statements of Financial Affairs (the “Statements”) (collectively, the “Schedules and Statements”) with the Bankruptcy Court. These documents set forth, among other things, the assets and liabilities of each of the Debtors, the unexpired leases of the Debtors, including executory contracts to which each of the Debtors is a party, are subject to the qualifications and assumptions included therein, and are subject to amendment or modification as our Chapter 11 Cases proceed. The Schedules and Statements may be subject to further amendment or modification after filing. Many of the claims identified in the Schedules and Statements are listed as disputed, contingent or unliquidated.

Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wish to assert prepetition claims against us and whose claim (i) is not listed in the Schedules and Statements or (ii) is listed in the Schedules and Statements as disputed, contingent, or unliquidated, must file a proof of claim with the Bankruptcy Court prior to the bar date set by the court. The bar dates are July 19, 2019, for non-governmental creditors, and September 30, 2019, for governmental creditors.

As of August 9, 2019, approximately 545 claims totaling $500.6 million have been filed with the Bankruptcy Court against the Debtors by approximately 160 claimants. We expect additional claims to be filed prior to the bar dates. In addition, creditors who have already filed claims may amend or modify their claims in ways we cannot reasonably predict. The amounts of these additional claims and/or amendments or modifications to claims already filed may be material. We anticipate the claims filed against the Debtors in the Chapter 11 Cases will be numerous. We expect the process of resolving claims filed against the Debtors to be complex and lengthy. We plan to investigate and evaluate all filed claims in connection with the Chapter 11 Cases. As part of the process, we will work to resolve differences in amounts scheduled by the Debtors and the amounts claimed by creditors, including through the filing of objections with the Bankruptcy Court where necessary. Accordingly, the ultimate number and amount of claims that will be allowed against the Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated.

Financial Reporting in Reorganization

Effective on the Petition Date, the Partnership began to apply accounting standards applicable to reorganizations, which are applicable to companies under Chapter 11 bankruptcy protection. The accounting standards require the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings must be recorded separately as a “Reorganization items, net” line item, in the condensed consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process are to be classified on the condensed consolidated balance sheet as “Liabilities subject to compromise”. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, which may differ from the ultimate settlement amounts. Liabilities subject to compromise are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the Chapter 11 Cases, the Partnership has classified the entire amount of the claim as liabilities subject to compromise.

Furthermore, these condensed consolidated financial statements contemplate the uncertainty of the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. While operating as debtors-in-possession, certain claims against the Partnership in existence before the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Partnership continues business operations as debtors-in-possession. These claims are reflected in the condensed consolidated balance sheets at June 30, 2019 as “Liabilities subject to compromise”. Additional claims (which could be liabilities subject to compromise) may arise after the Petition Date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Partnership and the Filing Subsidiaries as well as efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from us or any of the Filing Subsidiaries, or to create, perfect or enforce any lien against our property or any of the Filing Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.

Liabilities Subject to Compromise

As a result of the filing of the Chapter 11 Cases on April 1, 2019, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre petition liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court has

18


entered orders approving a variety of first-day relief designed primarily to minimize the impact of the Chapter 11 Cases on our operations, customers and employees, including authorizing post-petition financing. This relief generally was designed to preserve the value of the Partnership’s business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Partnership to pay certain pre-petition claims relating to employee wages and benefits, taxes, and certain customers.

The accounting standards require pre-petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as liabilities subject to compromise are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.

The following table summarizes the components of “Liabilities subject to compromise” included on the condensed consolidated balance sheet as of June 30, 2019 (in thousands):
 
As of June 30, 2019
Current maturities of long-term debt (Note 6)
$
407,925

Accounts payable and accrued liabilities
3,176

Deferred revenue
12,751

Lease liabilities
10,054

Other liabilities
9,212

     Total liabilities subject to compromise
$
443,118


Reorganization Items

The accounting standards require that the condensed consolidated financial statements, for the periods incurred after the Petition Date as a direct result of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the Chapter 11 Cases from the ongoing operations of the business. Accordingly, certain revenues, expenses (including professional fees), realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases are recorded in reorganization items, net in the condensed consolidated statements of operations. These costs, which are being expensed as incurred, significantly impact our results of operations. The following table summarized the components included in “Reorganization items” in our condensed consolidated statement of operations for the six months ended June 30, 2019 (in thousands):
 
Six Months Ended June 30,
 
2019
 Legal and professional fees
$
7,616

 Write-off of pre-petition deferred financing costs and debt discount (1)
5,136

 DIP financing costs
5,738

     Total reorganization items
18,490


(1)
Includes a non-cash charge to write off of the unamortized pre-petition debt issuance costs and debt discounts of $5.1 million related to the Term Loan, Revolving Credit Facility and Senior Unsecured Note Payable as these debt instruments are expected to be impacted by the Chapter 11 Cases.



19


3. NET LOSS PER LIMITED PARTNER UNIT AND DISTRIBUTIONS
 
Net Loss Per Limited Partner Unit
 
The following is a reconciliation of net loss attributable to limited partners and the limited partner units used in the basic and diluted earnings per unit calculations for the three and six months ended June 30, 2019 and 2018 (in thousands, except unit and per unit data): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(71,443
)
 
$
(18,556
)
 
$
(99,149
)
 
$
(36,786
)
General partner unit in-kind distribution
 

 
(11
)
 

 
(22
)
Net loss attributable to partners
 
$
(71,443
)
 
$
(18,567
)
 
$
(99,149
)
 
$
(36,808
)
 
 
 
 
 
 
 
 
 
General partner's interest(1)
 
$
(71,443
)
 
$
(381
)
 
$
(89,756
)
 
$
(757
)
Class B Convertible limited partner interest(1)
 

 
(5,716
)
 
(9,393
)
 
(9,883
)
Limited partners' interest(1)
 
 
 
 
 
 
 
 
    Common
 
$

 
$
(11,101
)
 
$

 
$
(22,050
)
    Subordinated
 

 
(1,369
)
 

 
(4,118
)

(1)
General Partner's and limited partners’ interests are calculated based on the allocation of net losses for the period, net of the General Partner unit in-kind distributions. The Class B Convertible Unit interest is calculated based on the allocation of only net losses for the period.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Common Units
 
2019
 
2018
 
2019
 
2018
Interest in net loss
 
$

 
$
(11,101
)
 
$

 
$
(22,050
)
Effect of dilutive units - numerator(1)
 

 

 

 

    Dilutive interest in net loss
 
$

 
$
(11,101
)
 
$

 
$
(22,050
)
 
 
 
 
 
 
 
 
 
Weighted-average units - basic
 
48,682,152

 
48,636,517

 
48,682,104

 
48,631,546

Effect of dilutive units - denominator (1)
 

 

 

 

    Weighted-average units - dilutive
 
48,682,152

 
48,636,517

 
48,682,104

 
48,631,546

 
 
 
 
 
 
 
 
 
Basic and diluted net loss per common unit
 
$

 
$
(0.23
)
 
$

 
$
(0.45
)

20


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Subordinated Units
 
2019
 
2018
 
2019
 
2018
Interest in net income (loss)
 
$

 
$
(1,369
)
 
$

 
$
(4,118
)
Effect of dilutive units - numerator(1)
 

 

 

 

    Dilutive interest in net income (loss)
 
$

 
$
(1,369
)
 
$

 
$
(4,118
)
 
 
 
 
 
 
 
 
 
Weighted-average units - basic
 
12,213,713

 
12,213,713

 
12,213,713

 
12,213,713

Effect of dilutive units - denominator(1)
 

 

 

 

    Weighted-average units - dilutive
 
12,213,713

 
12,213,713

 
12,213,713

 
12,213,713

 
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per subordinated unit
 
$

 
$
(0.11
)
 
$

 
$
(0.34
)

(1)
Because we had a net loss for all periods for common units and the subordinated units, the effect of the dilutive units would be anti-dilutive to the per unit calculation. Therefore, the weighted average units outstanding are the same for basic and dilutive net loss per unit for those periods. The weighted average units that were not included in the computation of diluted per unit amounts were 77,572 and 231,525 unvested awards granted under the LTIP for the three and six months ended June 30, 2018. As of January 1, 2019, all awards under the LTIP vested. See Note 10.

Cash Distributions

Our agreement of limited partnership (as amended and restated, the “Partnership Agreement”), requires that within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date, as determined by our General Partner. There is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. Beginning with the third quarter of 2014, until such time that we have a distributable cash flow divided by cash distributions ratio (“Distributable Cash Flow Ratio”) of at least 1.0, Holdings, the indirect holder of all of our subordinated units, waived the right to receive distributions on any subordinated units that would cause the Distributable Cash Flow Ratio to be less than 1.0. More importantly, the First Amendment to our Third A&R Revolving Credit Agreement imposed additional restrictions on our ability to declare and pay quarterly cash distributions with respect to our subordinated units. Additionally, we are restricted under the Fifth Amendment from paying a distribution with respect to our common units until our Consolidated Total Leverage Ratio is below 5.0. See Note 6.

In addition to the above mentioned restrictions imposed by our debt instruments, the Partnership GP Board suspended paying a quarterly distribution with respect to the fourth quarter of 2015, every subsequent quarter of 2016, 2017, 2018 and the first and second quarter of 2019 to conserve any excess cash for the operation of our business. Further, all cash distributions have been stayed by the commencement of the Chapter 11 Cases.

Paid In-Kind Distributions

Class B Convertible Units. As of June 30, 2019, the Class B Convertible Units consisted of 19,996,781 of such units including the additional Class B Convertible Units issued in-kind as a distribution (“Class B PIK Units”). The Class B Convertible Units are not participating securities for purposes of the earnings per unit calculation. Commencing with the quarter ended September 30, 2014 and until converted, as long as certain requirements are met, the holders of the Class B Convertible Units will receive quarterly distributions in an amount equal to $0.3257 per unit. These distributions are to be paid quarterly in Class B PIK Units within 45 days after the end of each quarter. Our General Partner was entitled, and has exercised its right, to retain its 2.0% general partner interest in us in connection with the original issuance of the Class B Convertible Units. In connection with future distributions of Class B PIK Units, the General Partner is entitled to a corresponding distribution to maintain its 2.0% general partner interest in us. The Class B Convertible Units have the same rights, preferences and privileges, and are subject to the same duties and obligations, as our common units, with certain exceptions. See Note 8. However, all PIK distributions have been stayed by the commencement of the Chapter 11 Cases.


21


The following table represents the Class B PIK unit distribution paid on the Class B Convertible Units for the periods ended December 31, 2018 and June 30, 2019 (in thousands, except per unit and in-kind distribution units):
Payment Date
 
Attributable to the Quarter Ended
 
Per Unit Distribution
 
In-Kind Class B Convertible Unit
Distributions to Class B Convertible Holders
 
In-Kind 
Class B Convertible Distributions
Value
(1)
 
In-Kind 
Unit
Distribution
to General 
Partner
 
In-Kind General Partner Distribution Value(1)
2019
 
(2)
 
(2)
 
(2)
 
(2)
 
(2)
 
(2)
2018
 
 
 
 
 
 
 
 
 
 
 
 
February 7, 2019
 
December 31, 2018
 
$
0.3257

 
343,950

 
$
76

 
7,019

 
$
2

November 12, 2018
 
September 30, 2018
 
0.3257

 
338,034

 
196

 
6,899

 
4

August 13, 2018
 
June 30, 2018
 
0.3257

 
332,220

 
515

 
6,780

 
11

May 3, 2018
 
March 31, 2018
 
0.3257

 
326,506

 
532

 
6,663

 
11

 
(1)
The fair-value was calculated as required, based on the common unit price at the quarter end date for the period attributable to the distribution, multiplied by the number of units distributed.
(2)
The issuance of the Class B distributions has been stayed by the commencement of the Chapter 11 Cases. See Note 1.

4. FINANCIAL INSTRUMENTS

Fair-Value Measurements

We apply recurring fair-value measurements to our financial assets and liabilities. In estimating fair-value, we generally use a market approach and incorporate assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation techniques. The fair-value measurement inputs we use vary from readily observable inputs that represent market data obtained from independent sources to unobservable inputs that reflect our own market assumptions that cannot be validated through external pricing sources. Based on the observability of the inputs used in the valuation techniques, the financial assets and liabilities carried at fair-value in the financial statements are classified as follows:
Level 1—Represents unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. This category primarily includes our cash and cash equivalents.
Level 2—Represents quoted market prices for similar assets or liabilities in active markets, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data. This category primarily includes variable rate debt, over-the-counter swap contracts based upon natural gas price indices and interest rate derivative transactions.
Level 3—Represents derivative instruments whose fair-value is estimated based on internally developed models and methodologies utilizing significant inputs that are generally less readily observable from market sources. During the fourth quarter of 2018 and second quarter of 2019, we had a non-recurring Level 3 fair-value measurement associated with the impairment of our fixed assets. See Note 5. In certain cases, the inputs used to measure fair-value may fall into different levels of the fair-value hierarchy.
In such cases, the level in the fair-value hierarchy must be determined based on the lowest level input that is significant to the fair-value measurement. An assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable represent fair-values based on the short-term nature of these instruments. The fair-value of our Credit Facility (defined in Note 6) approximates its carrying amount due primarily to the variable nature of the interest rate of the instrument and is considered a Level 2 fair-value measurement. As of June 30, 2019, the fair-value of our term loan was $223.8 million and the fair-value of the Investment Notes was $12.6 million, based on recent trading levels and are considered Level 2 fair-value instruments.


22


Derivative Financial Instruments
Interest Rate Derivative Transactions
We entered into interest rate cap contracts to limit our London Interbank Offered Rate (“LIBOR”) based interest rate risk on the portion of debt hedged at the contracted cap rate. As of June 30, 2019, we have no active interest rate cap contracts. Our interest rate cap position is as follows (in thousands):
 
 
 
 
 
 
 
 
 Estimated Fair Value
Notional Amount
 
Cap Rate
 
 Effective Date
 
 Maturity Date
 
June 30, 2019
40,000

 
2.575
%
 
December 31, 2018
 
June 30, 2019
 

60,000

 
3.000
%
 
June 30, 2017
 
June 30, 2019
 

175,000

 
4.000
%
 
June 30, 2018
 
June 30, 2019
 

 
 
 
 
 
 
 
 
$


These interest rate derivatives were not designated as cash flow hedging instruments for accounting purposes and as a result, changes in the fair-value are recognized in interest expense immediately.

The fair-value of our interest rate derivative transactions is determined based on a discounted cash flow method using contractual terms of the transactions. The floating coupon rate is based on observable rates consistent with the frequency of the interest cash flows. We have elected to present our interest rate derivatives net in the balance sheets. There was no effect of offsetting in the balance sheets as of June 30, 2019 or December 31, 2018.

The fair-values of our interest rate derivative transactions were as follows (in thousands):
 
Significant Other Observable Inputs (Level 2)
 
Fair-Value Measurement as of
 
June 30, 2019
 
December 31, 2018
Current interest rate derivative assets
$

 
$
11

Total interest rate derivatives
$

 
$
11


The realized and unrealized amounts recognized in interest expense associated with derivatives were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,

2019
 
2018
 
2019
 
2018
Realized loss (gain) on interest rate derivatives
$
1

 
$
4

 
$
11

 
$
(1
)


23


5. LONG-LIVED ASSETS
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
 
Estimated
Useful Life (yrs)
 
June 30, 2019
 
December 31, 2018
Pipelines
15-30
 
$
202,500

 
$
224,752

Gas processing, treating and other plants
15
 
152,962

 
169,899

Compressors
5-15
 
14,283

 
16,058

Rights of way and easements
15
 
12,646

 
13,968

Furniture, fixtures and equipment
5
 
2,357

 
2,577

Finance lease vehicles
3-5
 
2,838

 
2,944

    Total property, plant and equipment
 
 
387,586

 
430,198

Accumulated depreciation and amortization
 
 
(17,905
)
 
(17,726
)
    Total
 
 
369,681

 
412,472

 
 
 
 
 
 
Construction in progress
 
 
5,987

 
8,234

Land and other
 
 
5,494

 
6,315

    Property, plant and equipment, net
 
 
$
381,162

 
$
427,021


Depreciation is provided using the straight-line method based on the estimated useful life of each asset. Depreciation expense for the three and six months ended June 30, 2019 was $8.5 million and $20.8 million, respectively, and $17.9 million and $35.8 million for the three and six months ended June 30, 2018, respectively.

In an effort to further our cost-saving initiatives, management elected to idle the Bonnie View fractionation facility (“Bonnie View”) in the second quarter of 2017. As a result, all of our Y-grade product was being sold to Holdings in accordance with our affiliate Y-grade sales agreement and was being fractionated at the Robstown fractionation facility. However, during the fourth quarter of 2018, Holdings and Holdings Borrower completed the sale to EPIC and EPIC Y-Grade Holdings, LP, a subsidiary of EPIC of the Robstown facility and related pipelines, that enables the Robstown facility to receive natural gas liquids from various supply sources and several short pipelines that allow the delivery of fractionated products to Corpus Christi-area markets. Under the terms of the Robstown Purchase Agreement, EPIC assumed all of the NGL purchase and sale agreements associated with Robstown, including those with the Partnership through December 31, 2019. In addition, during the second quarter of 2019, we entered into an operating agreement with EPIC to restart Bonnie View and fractionate the Y-Grade product delivered by EPIC through December 31, 2019. Under the terms of the operating agreement, EPIC will pay a $0.01 per gallon operating expense, reimburse the Partnership all operating and maintenance expenses, and pay a general and administrative expense equal to 15% of total Bonnie View operating and maintenance expense.

Impairment of Long-Lived Assets
We evaluate our long-lived assets by asset group, which include finite-lived intangible assets, for impairment when events or circumstances indicate that the asset group's carrying values may not be recoverable. These events include, but are not limited to, market declines that are believed to be other than temporary, changes in the manner in which we intend to use a long-lived asset or group, decisions to sell an asset and adverse changes in the legal or business environment such as adverse actions by regulators. We continually monitor our operations, the market, and business environment to identify indicators that could suggest an asset or asset group may not be recoverable. If an event occurs, we evaluate the recoverability of our carrying value based on the long-lived asset group's ability to generate future cash flows on an undiscounted basis. If the undiscounted cash flows are not sufficient to recover the long-lived asset group's carrying value, or if we decide to sell a long-lived asset or group of assets, we adjust the carrying values of the asset downward, if necessary, to their estimated fair-value. Our fair-value estimates are based generally on assumptions market participants would use, including market data obtained through the sales process or an analysis of expected discounted cash flows.
Following the consummation of the transactions contemplated by the Robstown Purchase Agreement, Holdings performed recoverability testing of its assets, including the consolidated assets of the Partnership. As a result of such testing, we received evidence that indicated we may not be able to recover the carrying values of our assets. We performed a separate recoverability test of our assets and concluded that the carrying amounts of our long-lived asset groups exceeded the expected future

24


probability-weighted undiscounted cash inflows. We then determined the estimated fair-values of our South Texas, Mississippi, and Alabama asset groups. During the fourth quarter of 2018, as part of a non-recurring valuation of our long-lived assets, we determined that the fair value of our South Texas and Mississippi assets groups was a combined $501.7 million as of October 2018. Therefore, we recorded asset impairment charges of $430.3 million to our South Texas and Mississippi asset groups. Of the $430.3 million impairment charge to our property, plant and equipment, $379.5 million related to our South Texas asset group and $50.8 million to our Mississippi asset group. This related impairment charge is a non-recurring Level 3 fair-value measurement.
Following the commencement of the Chapter 11 Cases (as described in Note 1 and Note 2), the Partnership performed recoverability testing of its assets. As a result of such testing, we received evidence that indicated we may not be able to recover the carrying values of our assets. We performed a separate recoverability test of our assets and concluded that the carrying amounts of our long-lived asset groups exceeded the expected future probability-weighted undiscounted cash inflows. We then determined the estimated fair-values of our South Texas, Mississippi, and Alabama asset groups. During the second quarter of 2019, as part of a non-recurring valuation of our long-lived assets, we determined that the fair value of our South Texas asset group was $433.1 million. Therefore, we recorded an asset impairment charge of $26.6 million to our South Texas asset group. This related impairment charge is a non-recurring Level 3 fair-value measurement.
Intangible Assets
Intangible assets of $1.3 million as of June 30, 2019 and December 31, 2018, respectively, represent the unamortized value assigned to long-term supply and gathering contracts. These intangible assets are amortized on a straight-line basis over the 30-year expected useful lives of the contracts through 2041. Amortization expense over the next five years related to intangible assets is not significant.

6. LONG-TERM DEBT

Our outstanding debt and related information at June 30, 2019 and December 31, 2018 are as follows (in thousands):

June 30, 2019
 
December 31, 2018
DIP credit facility due 2019 (1)
$
126,562

 
$

DIP roll-up loans due 2019 (1)
127,500

 

Revolving credit facility due 2019 (2)
81,293

 
81,124

Term loans due 2021 (2)
309,418

 
429,141

Senior unsecured notes payable due 2019 (2)
17,383

 
16,867

Original issuance discount on term loans due 2021

 
(814
)
Total long-term debt (including current portion)
662,156

 
526,318

Liabilities subject to compromise (Note 2) (2)
(407,925
)
 

Current portion of long-term debt (1) (3)(4)
(254,231
)
 
(521,123
)
Deferred financing costs

 
(5,195
)
Total long-term debt
$

 
$


 
 


Outstanding letters of credit
$
21,663

 
$
27,738

Remaining unused borrowings
$
33,337

 
$
6,138


(1)
The DIP Credit Agreement and DIP Roll-Up Loans mature on the date that is the earliest to occur of: (i) October 1, 2019 (provided that such date may be extended with the consent of DIP Lenders holding a majority of DIP Loans and unused commitments by an additional ninety days subject to certain conditions, including the payment of an extension premium of 1.00% of then outstanding DIP Loans of the consenting DIP Lenders); (ii) the effective date of any chapter 11 plan of the Debtors; (iii) the date on which all or substantially all of the assets of the Debtors are sold in a sale under a chapter 11 plan or pursuant to Section 363 of the Bankruptcy Code; and (iv) the acceleration of the maturity of the DIP Loans upon the occurrence of any event of default. As a result, we have classified our DIP Credit Agreement and DIP Roll-Up Loans as current at June 30, 2019.
(2)
Under ASC Topic 852, Reorganizations, as a result of our Chapter 11 Cases, we classified our Term Loan, Revolving Credit Facility and Senior Unsecured Notes Payable as liabilities subject to compromise as of April 1, 2019.

25


(3)
Under ASC Topic 470, Debt, as a result of our debt covenant violations, we classified our debt under our Term Loan, Revolving Credit Facility and Senior Unsecured Notes Payable, as current at December 31, 2018 and March 31, 2019, respectively. However, as a result of the Chapter 11 Cases, we classified our Term Loan, Revolving Credit Facility and Senior Unsecured Notes Payable as liabilities subject to compromise as of April 1, 2019.
(4)
Includes $126.6 million related to the DIP Credit Agreement, $127.5 million related to the DIP Roll-Up Loans and $0.2 million of PIK interest related to the Revolving Credit Facility.
 
Three Months Ended June 30,
 
Six Months Ended June 30,

2019

2018

2019

2018
Weighted average interest rate
11.89
%
 
7.27
%
 
10.03
%
 
6.94
%
Average outstanding borrowings
$
643,239

 
$
530,793

 
$
585,515

 
$
530,793

Maximum borrowings
$
662,367

 
$
530,806

 
$
662,367

 
$
532,952


Senior Credit Facilities

Prior to the commencement of the Chapter 11 Cases, our long-term debt arrangements consisted of (i) the Third A&R Revolving Credit Agreement and (ii) the Term Loan Agreement. Substantially all of our assets are pledged as collateral under the Senior Credit Facilities, with the obligations thereunder being secured on a pari passu basis. Our bankruptcy filing triggered an event of default under our Senior Credit Facilities.

DIP Credit Agreement

On April 2, 2019, the Bankruptcy Court entered an interim order authorizing the Debtors to enter into the DIP Facilities. The Interim Order allowed the DIP Loan Parties to access immediately up to $85.0 million under the DIP Facilities and refinance their obligations outstanding under prepetition letters of credit. However, both the DIP Facilities and the refinancing of such letters of credit and of certain term loans outstanding under the Term Loan Agreement remained subject to entry of a final order by the Bankruptcy Court. Pursuant to the Interim Order, on April 3, 2019, the DIP Loan Parties entered into the DIP Credit Agreement. On April 3, 2019, the conditions precedent to closing were satisfied and the Partnership made an initial borrowing of $30.0 million of DIP New Money Loans and $55.0 million of DIP LC Loans and the Existing Letters of Credit were deemed issued under the DIP Credit Agreement. The proceeds of the DIP Loans may be used in accordance with the DIP Credit Agreement to (i) finance working capital and general corporate purposes of the Partnership and its subsidiaries (including to conduct a sale process pursuant to Section 363 of the Bankruptcy Code and to pay professional fees approved by the Bankruptcy Court) in accordance with a budget approved by the Required DIP Lenders (subject to permitted variances); (ii) deem to cancel and reissue the Existing Letters of Credit and the Rolled-Up Loans; (iii) pay for certain transaction costs, fees and expenses of the DIP Agent and the DIP Lenders; (iv) make adequate protection payments pursuant to the Interim Order and the Final Order; and (v) pay for certain other costs and expenses of administering the Chapter 11 Cases. The $55.0 million of the proceeds from the DIP LC Loans is considered restricted cash and is included in the restricted cash line item within our consolidated balance sheet as of June 30, 2019.

On May 7, 2019, the Bankruptcy Court entered the Final Order approving the DIP Facilities and allowed the Borrower to draw down on the remaining commitments with respect to the DIP Term Loans and to refinance the Rolled-Up Loans with the DIP Roll-Up Loans. On May 9, 2019, we borrowed the remaining $42.5 million of DIP New Money Loans and made a payment of $127.5 million to our term loans outstanding under the Term Loan Agreement.

Borrowings of DIP New Money Loans bear interest, at the option of the Partnership, at a rate per annum equal to the Alternate Base Rate (as defined in the DIP Credit Agreement) plus 9.00% or the Adjusted LIBO Rate (as defined in the DIP Credit Agreement) plus 10.00%. DIP LC Loans bear interest at the Alternate Base Rate plus 9.00%, and DIP Roll-Up Loans bear interest at the Alternate Base Rate plus 5.25%. Upon the occurrence and continuation of an event of default under the DIP Credit Agreement, the interest rate will increase by 2.00% per annum.

All borrowings under the DIP Facilities will mature on the date that is the earliest to occur of: (i) October 1, 2019 (provided that such date may be extended with the consent of DIP Lenders holding a majority of DIP Loans and unused commitments by an additional ninety days subject to certain conditions, including the payment of an extension premium of 1.00% of then outstanding DIP Loans of the consenting DIP Lenders); (ii) the effective date of any chapter 11 plan of the Debtors; (iii) the date on which all or substantially all of the assets of the Debtors are sold in a sale under a chapter 11 plan or pursuant to Section 363 of the Bankruptcy Code; and (iv) the acceleration of the maturity of the DIP Loans upon the occurrence

26


of any event of default. The obligations under the DIP Facilities are secured by a superpriority lien on substantially all of the assets of each DIP Loan Party pursuant to the Guaranty and Collateral Agreement and the DIP Orders, having the priorities set forth in the Final Order.

The DIP Credit Agreement provides for certain affirmative and negative covenants applicable to the DIP Loan Parties that are customary for debtor-in-possession facilities of this type, including affirmative covenants requiring reporting by the Partnership in the form of rolling 13-week cash flow forecasts, together with a reasonably detailed written explanation of all material variances from the budget, and negative covenants restricting the ability of the Debtors to incur additional indebtedness, grant liens, dispose of assets, pay dividends or take certain other actions.

As of June 30, 2019, we were in compliance with all of the covenants under the DIP Credit Agreement. The DIP Credit Agreement contains certain events of default that are customary for debtor-in-possession facilities of this type, including: (i) non-payment of principal, interest or other amounts when due; (ii) breaches of representations and warranties; (iii) breaches of covenants in the DIP Credit Agreement or other loan documents; (iv) cross-defaults under other post-petition indebtedness; (v) conversion of the Chapter 11 Cases to a Chapter 7 case; (vi) appointment of a trustee, examiner or receiver in the Chapter 11 Cases; and (vii) the Final Order is not entered by the Bankruptcy Court within 40 days of the Petition Date.

Term Loan Agreement

The Term Loan Agreement is a $450 million senior secured term loan facility that was scheduled to mature on August 4, 2021. Immediately prior to the commencement of the Chapter 11 Cases, borrowings under our Term Loan Agreement bore interest at LIBOR plus 4.25% or a base rate as defined in the respective credit agreement with a LIBOR floor of 1.00%. The facility also amortized in equal quarterly installments in an aggregate amount equal to 1% of the original principal amount, less any mandatory prepayments (as defined in the Term Loan Agreement), such as the $1.064 million, with the remainder due on the maturity date. The Term Loan Agreement payable included $7.8 million of PIK interest as of June 30, 2019. As a result of the commencement of the Chapter 11 Cases, interest will accrue on all outstanding obligations at the applicable default rate in accordance with the Term Loan Agreement.

In connection with the execution of the DIP Facilities, certain of the Debtors entered into that certain Second Amendment to Term Loan Credit Agreement, dated as of March 31, 2019 (the “Term Loan Amendment”), among such Debtors and the lenders party thereto, in order to clarify the treatment of the “roll up” of certain loans held by the lenders party thereto or affiliates of such lenders. Pursuant to the Term Loan Amendment, among other things, 100% of the proceeds from DIP Roll-Up Loans shall be required to be used by the Debtors to prepay certain of the loans under the Term Loan Agreement (or be deemed to cancel and refinance such loans). On May 9, 2019, we borrowed the $42.5 million of DIP Roll-Up Loans and made a payment of $127.5 million to our term loans outstanding under the Term Loan Agreement.

Senior Unsecured Note

On January 2, 2018, Holdings delivered a Backstop Demand (as defined in the Investment Agreement) for each Sponsor to fund their respective pro rata portions of the Sponsor Shortfall Amount (as defined in the Investment Agreement) of $15.0 million in accordance with the Backstop Agreement. As consideration for the amount contributed directly to us by a Sponsor pursuant to the Backstop Agreement, we issued to the Sponsors senior unsecured notes of the Partnership in an aggregate principal amount of $15.0 million. Prior to the commencement of the Chapter 11 Cases, the Investment Notes were scheduled to mature on November 5, 2019 and bore interest at a rate of 12.5% per annum. Interest on the Investment Note was to be paid-in-kind (“PIK”) (other than with respect to interest payable (i) on or after the maturity date, (ii) in connection with prepayment, or (iii) upon acceleration of the Investment Note, which shall be payable in cash); provided that all interest was to be payable in cash on or after December 31, 2018. The Investment Notes are the unsecured obligation of the Partnership subordinate in right of payment to any of our secured obligations under the Third A&R Revolving Credit Agreement. The senior unsecured note payable included $2.4 million of PIK interest as of June 30, 2019.

The filing of the Chapter 11 Cases described in Notes 1 and 2 constituted an event of default that accelerated our obligations under the Third A&R Revolving Credit Agreement, the Term Loan Agreement and the Investments Notes.
These debt instruments provide that as a result of the commencement of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. However, we are making adequate protection payments to the lenders under the Third A&R Revolving Credit Agreement and the Term Loan

27


Agreement, in each case in an amount equal to all accrued post-petition unpaid interest accruing on all outstanding principal, interest, fees and other amounts under the applicable facility on a monthly basis at the applicable default rate.
Deferred Financing Costs

Deferred financing costs are capitalized and amortized as interest expense under the effective interest method over the term of the related debt. The unamortized balance of deferred financing costs is included in long-term debt in the balance sheet. Changes in deferred financing costs are as follows (in thousands):
 
2019
 
2018
Deferred financing costs, January 1
$
5,195

 
$
8,295

Capitalization of deferred financing costs

 
256

Amortization of deferred financing costs
(794
)
 
(1,777
)
Write-off of deferred financing costs (1)
(4,401
)
 

Deferred financing costs, June 30
$

 
$
6,774


(1)
The Partnership incurred a write-off of $4.4 million of deferred financing costs as a result of the Chapter 11 Cases. See Note 2.

7. COMMITMENTS AND CONTINGENCIES
 
Legal Matters
 
From time to time, we are party to certain legal or administrative proceedings that arise in the ordinary course and are incidental to our business. For example, during periods when we are expanding our operations through the development of new pipelines or the construction of new plants, we may become involved in disputes with landowners that are in close proximity to our activities. While we are involved currently in several such proceedings and disputes, our management believes that none of such proceedings or disputes will have a material adverse effect on our results of operations, cash flows or financial condition. However, future events or circumstances, currently unknown to management, will determine whether the resolution of any litigation or claims ultimately will have a material effect on our results of operations, cash flows or financial condition in any future reporting periods.

For a discussion about the Chapter 11 Cases, see Notes 1 and 2.

Woodsboro. Our General Partner has been named as a defendant in a lawsuit filed on April 29, 2016 in Duval County, Texas styled Victor Henneke, Jr., et al. v. Southcross Energy Partners GP, LLC, et al., Cause No. DC-16-139, 229th Judicial District, Duval County, Texas (the “Henneke Case”). The Henneke Case involves claims by two employees of a third-party contractor for personal injury and wrongful death resulting from the alleged negligence of the Partnership related to a pipeline construction project located at our Woodsboro processing facility in 2016. No trial date has been set for the contractual liability claims in the case. On April 25, 2018, a judgment was entered against Southcross in the amount of approximately $7.7 million which has been appealed to the Texas Court of Appeals. We believe we have adequate insurance coverage to cover this matter and have recorded a $7.7 million liability and receivable from our insurance carrier. In April 2018 the plaintiffs filed two new lawsuits against Southcross CCNG Transmission Ltd. that allege the same or similar causes of actions for which we previously received a judgement in Duval County. The cases are styled as Ivy Gonzalez on behalf of M.R. Gonzalez and M.N. Gonzalez Minor Children vs. Southcross CCNG Transmission Ltd.; Gene Henneke as independent administrator of the estate of Dennis Henneke; Galbreath Contracting, Inc. and Severo Sepulveda, Jr. Cause no. DE-18-82 and Amy Gonzalez as co-personal representative of the estate of Jesus Gonzalez, Jr. under the Texas Survival Act and for and on behalf of wrongful death beneficiaries M.R. Gonzalez and M.N. Gonzalez Minor Children and Amy Gonzalez and Jesus Gonzalez, Sr. vs. Southcross CCNG Transmission Ltd.; Gene Henneke as independent administrator of the estate of Dennis Henneke; Galbreath Contracting, Inc. and Severo Sepulveda, Jr. Cause no. DE-18-83.


28


Additionally, in 2016, Lisa Bueno Martinez filed claims against Debtors Southcross Energy Partners, GP, LLC, Southcross Energy Partners, LP, and Southcross NGL Pipeline Ltd., as well as Furmanite Corporation (now known as Furmanite LLC) and certain of its affiliates, Galbraith Contracting, Inc., and other defendants, asserting claims for the death of her alleged common law husband, Jesus Gonzalez, Jr., in connection with the same 2016 pipeline construction project at the Woodsboro facility. The trial court granted summary judgment in the defendants’ favor, but the decision was reversed by the San Antonio Court of Appeal, and the Texas Supreme Court denied review. The case is currently pending and abated in the Texas Supreme Court, in Furmanite America, Inc. et al. v. Lisa Bueno Martinez, Case No. 18-0957.

Southcross Energy Partners GP, LLC and other Debtor affiliates filed claims against Furmanite and Galbraith, seeking defense and indemnity for the claims filed against Southcross, including the above described judgment presently pending appeal, pursuant to respective contracts with Furmanite and Galbraith. Furmanite responded to this claim with its own claim for defense and indemnity for amounts it paid to settle with Henneke, a Southcross employee. The indemnity action was stayed, pending completion of the personal injury claims. Southcross also has been notified by Galbraith Contracting, Inc. that it intends to pursue indemnification claims against Southcross Debtor entities for claims filed against Southcross by a different Southcross employee in the same action as well.

We intend to vigorously pursue indemnity from Galbraith and Furmanite, and otherwise defend vigorously these pending matters and believe we have adequate insurance coverage with respect to these matters.

On May 6, 2019, June 10, 2019, and August 8, 2019, the Bankruptcy Court approved stipulations between the Debtors and all of the parties asserting pending claims against the Debtors, as well as Galbraith Contracting, Inc., in connection with the 2016 pipeline construction project at Woodsboro. The stipulations fully release these parties’ claims against the Debtors and various related entities and individuals, except to the extent of any available insurance coverage, and modify the automatic stay to allow these parties to pursue their asserted claims against the Debtor entities named in their respective actions only to the extent of the available coverage.

Regulatory Compliance
 
In the ordinary course of our business, we are subject to various laws and regulations. In the opinion of our management, compliance with current laws and regulations will not have a material effect on our results of operations, cash flows or financial condition. 

Leases

Prior to January 1, 2019, we classified our leases as either capital or operating leases under ASC Topic 840, Leases (Topic 840). We recognized leased vehicle assets (included in property, plant and equipment) and liabilities (included in other current liabilities and other long-term liabilities) related to our capital leases on our consolidated balance sheets. We also recognized depreciation expense and interest expense related to our capital leases on our consolidated statements of operations. The majority of our lease arrangements were classified as operating leases, under which we did not recognize assets or liabilities on our condensed consolidated balance sheets, but rather recognized leases on our condensed consolidated statements of operations (included in operating and maintenance expenses and general and administrative expenses).

On January 1, 2019, we adopted the provisions of ASC Topic 842, Leases (Topic 842), which requires us to determine if an arrangement is or contains a lease at inception. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period and (3) whether we have the right to direct the use of the asset. When a lease exists, we record a right-of use asset that represents our right to use the asset over the lease term and a lease liability that represents our obligation to make payments over the lease term. Lease liabilities are recorded at the sum of future lease payments discounted by the discount rate established at the commencement date or that we could obtain to lease a similar asset over a similar period, and right-of-use assets and corresponding lease liabilities are recorded. The estimation of our right-of-use assets and lease liabilities requires us to make significant assumptions and judgments about the term of the lease, variable payments, and discount rates. When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. In such cases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement. Our operating leases have remaining terms that vary from one year to eight years and certain of those leases have renewal options to extend the leases, or terminate the leases at our sole discretion. The termination dates of the lease agreements vary from 2019 to 2026. We adopted the standard using the modified retrospective method. Based on the practical expedients allowed for in the standard, we did not reassess the current GAAP classification of leases, easements and rights of way that existed as of January 1, 2019, and we did not utilize the

29


hindsight method in determining the assets and liabilities to be recorded for our existing leases on January 1, 2019. The majority of our leases are for the following types of assets:

Office space - Our primary offices are in Dallas, Houston, and San Antonio, with smaller offices in other locations near our operating assets. Our office leases are long-term in nature and represent $6.5 million of our lease liability and $5.4 million of our right-of-use asset as of June 30, 2019. A rental reimbursement included in our lease agreement associated with the office space we leased in June 2015 of $1.7 million, net of amortization, has been recorded as a deferred liability in our condensed consolidated balance sheets as of June 30, 2019. This amount will continue to be amortized against the lease payments over the length of the lease term. Our San Antonio office includes income related to subleases of $0.1 million and $0.1 million for the three and six months ended June 30, 2019. Our office space operating leases do not contain any residual value guarantees. Many of our leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the right-of-use asset and associated lease liability. These common area maintenance and other miscellaneous expense are immaterial.

Compression and other field equipment - We pay third parties to provide compressors or other field equipment for our assets. Under these agreements, a third party installs and operates compressor units based on specifications set by us to meet our compression needs at specific locations. While the third party determines which compressors to install and operates and maintains the units, we have the right to control the use of the compressors and are the sole economic beneficiary of the identified assets. These agreements are typically for an initial term of one to three years but will automatically renew from month to month until canceled by us or the lessor. Compression and other field equipment rentals represent $0.5 million of our lease liability and $0.5 million of our right-of-use asset as of June 30, 2019. Our compression operating leases do not contain any residual value guarantees. Some of our compression leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.

Land and land easements - We make periodic payments to lease land or to have access to our assets. Land leases and easements are typically long-term to match the expected useful life of the corresponding asset. During the first and second quarter of 2019, we did not make any payments to lease land.

Supplemental balance sheet information included in other current assets, other assets, other current liabilities and other long-term liabilities related to operating leases was as follows (in thousands, except for lease term and discount rate):
 
June 30, 2019
Other assets:
 
   Other lease right-of-use assets
$
5,868

 
 
Liabilities subject to compromise:
 
   Other current operating lease liabilities
$
1,522

Liabilities subject to compromise:
 
   Other long-term operating lease liabilities
$
5,481

   Total operating lease liabilities
$
7,003

 
 
Weighted average discount rate
10%
 
 
Weighted average lease term (years)
6.0
 
 


30


Finance Leases
 
We have finance lease obligations related to vehicle leases that are classified as finance leases. The termination dates of the lease agreements vary from 2019 to 2023. We recorded accretion expense related to the finance leases of $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2018, respectively. Finance leases entered into during the three and six months ended June 30, 2019, were each $0.2 million, respectively, and for the three and six months ended June 30, 2018, were $1.0 million and $1.3 million, respectively . The finance lease obligation amounts included in the balance sheets were as follows (in thousands):
 
June 30, 2019
Finance lease vehicles
$
2,838

Less: accumulated depreciation
(1,294
)
   Finance lease vehicles, net of accumulated depreciation
$
1,544

 
June 30, 2019
 
December 31, 2018
Other current liabilities
$
623

 
$
646

Other non-current liabilities
886

 
1,054

   Total finance lease liabilities
$
1,509

 
$
1,700


Future Minimum Lease Payments

Prior to January 1, 2019, we classified our leases as either capital or operating leases under ASC 840, Leases. Future minimum annual rental commitments under ASC 840 for our capital and operating leases at December 31, 2018 were as follows (in thousands):
Year Ending December 31,
Capital Leases
 
Operating Leases
2019
$
646

 
$
2,912

2020
523

 
1,148

2021
414

 
922

2022
117

 
941

2023

 
953

Thereafter

 
1,956

Total future payments
$
1,700

 
$
8,832

Less: Imputed interest
$
(53
)
 
 
Future lease payments
$
1,647

 
 

Future minimum annual rental commitments under ASC 842 for our finance and operating leases as of June 30, 2019 were as follows (in thousands):
Year Ending June 30,
Finance Leases
 
Operating Leases
2019(1)
$
325

 
$
1,381

2020
553

 
1,481

2021
453

 
1,211

2022
160

 
1,238

2023
18

 
1,264

Thereafter

 
3,273

Total future lease payments
$
1,509

 
$
9,848

Less: imputed interest
(43
)
 
(2,845
)
Total lease obligations
$
1,466

 
$
7,003

Less: current lease obligations
(623
)
 
(1,522
)
Long-term lease obligations
$
843

 
$
5,481


31



(1)
For the six months remaining in the 2019 fiscal year.

The components of lease expense for the three and six months ended June 30, 2019 is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2019
 
 
 
 
Operating lease costs(1)
$
873

 
$
1,764

 
 
 
 
Finance lease costs:
 
 
 
Amortization of assets
$
159

 
$
315

Interest on lease liabilities
7

 
16

   Total finance lease costs
$
166

 
$
331


(1)
Any common area maintenance and other miscellaneous expenses and operating leases less than one year are immaterial and not included in operating lease costs.

Southcross Assets Considered Leases to Third Parties

We have pipelines that transport natural gas to two power plants in Nueces County, Texas under fixed-fee contracts. The contracts have a primary term through 2029 and an option to extend the agreements by an additional term of up to ten years. These contracts are considered operating leases.
  
Future minimum annual demand payment receipts under these agreements as of June 30, 2019 were as follows: $1.1 million for the remainder of 2019; $2.2 million in 2020; $1.5 million in 2021; $1.5 million in 2022; $1.5 million in 2023 and $8.8 million thereafter. The revenue for the demand payments is recognized on a straight-line basis over the term of the contract. The demand fee revenues under the contracts were each $0.7 million and $1.3 million for the three and six months ended June 30, 2019 and 2018, respectively, and have been included within transportation, gathering and processing fees within Note 11. These amounts do not include variable fees based on the actual gas volumes delivered under the contracts. Variable fees recognized in revenues within transportation, gathering and processing fees within Note 11 were $0.2 million and $0.3 million for the three and six months ended June 30, 2019, and $0.3 million and $0.5 million for the three and six months ended June 30, 2018, respectively. Deferred lease revenue associated with these agreements was $11.0 million and $11.1 million at June 30, 2019, and December 31, 2018, respectively.         

San Antonio Sublease

We sublet a portion of our capitalized property to a third party. The rental agreement has a primary term through July 2020. This lease is considered an operating lease. Future annual payment receipts under this agreement as of June 30, 2019 were as follows: $0.1 million for the remainder of 2019; and $0.1 million in 2020.

Southcross Assets Leases to Related Parties

We own compressors that we lease to an affiliate of Holdings. The contracts have a primary term through 2023 and an option to continue on a month-to-month basis. These contracts are considered operating leases. Future annual payment receipts under these agreements as of June 30, 2019 were as follows: $5.2 million for the remainder of 2019; $10.5 million in 2020, 2021, and 2022 respectively; and $3.5 million in 2023. The revenue for the payments is recognized on a straight-line basis over the term of the contract. The revenues under the contracts were $2.6 million and $5.2 million for the three and six months ended June 30, 2019 and $2.6 million and $5.2 million for the three and six months ended June 30, 2018, respectively, and have been included within affiliate revenue within the consolidated statement of operations.





32





Total property, plant and equipment which we are the lessor consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Pipelines
$
14,843

 
$
14,843

Compressors
2,768

 
2,768

Total lease property, plant and equipment
$
17,611

 
$
17,611

Less: accumulated depreciation
(448
)
 

Total
$
17,163

 
$
17,611


Total lease revenues consisted of the following for the three and six months ended June 30, 2019 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2019
Revenue:
 
 
 
San Antonio sublease
$
38

 
$
76

Pipelines
651

 
1,302

Total revenue
$
689

 
$
1,378

 
 
 
 
Revenue - affiliate:
 
 
 
Related party compressors
$
2,622

 
$
5,244

Total revenue - affiliate
$
2,622

 
$
5,244


8. PARTNERS’ CAPITAL
 
Ownership

Our units outstanding as of June 30, 2019 are as follows (in units):
 
 
Partners’ Capital
 
 
 
 
Owned by Parent
 
 
Public
 
Holdings
 
Class B
 
 
 
General
 
 
Common
 
Common
 
Convertible
 
Subordinated
 
Partner
Units outstanding as of December 31, 2018
 
22,194,141

 
26,492,074

 
19,652,831

 
12,213,713

 
1,643,934

Vesting of LTIP units, net
 
8,676

 

 

 

 

In-kind distributions and issuances to general partner to maintain 2.0% ownership
 

 

 
343,950

 

 
7,196

Units outstanding as of June 30, 2019
 
22,202,817

 
26,492,074

 
19,996,781

 
12,213,713

 
1,651,130


Common Units
Our common units represent limited partner interests in us. The holders of our common units are entitled to participate in our distributions (to the extent distributions are made) and are entitled to exercise the rights and privileges available to limited partners under our Partnership Agreement.
Class B Convertible Units
As of June 30, 2019, the Class B Convertible Units consist of 19,996,781 units, inclusive of any Class B PIK Units issued. The Class B Convertible Units have the same rights, preferences and privileges, and are subject to the same duties and obligations, as our common units, with certain exceptions as noted below.


33


Our Partnership Agreement does not allow additional Class B Convertible Units (other than Class B PIK Units) to be issued without the prior approval of our General Partner and the holders of a majority of the outstanding Class B Convertible Units. As of June 30, 2019, all of our outstanding Class B Convertible Units were indirectly owned by Holdings.

Distribution Rights: The holders of the Class B Convertible Units receive quarterly distributions in an amount equal to $0.3257 per unit paid in Class B PIK Units (based on a unit issuance price of $18.61) within 45 days after the end of each quarter. Our General Partner was entitled, and has exercised its right, to retain its 2.0% general partner interest in us in connection with the original issuance of Class B Convertible Units. In connection with future distributions of Class B PIK Units, the General Partner is entitled to a corresponding distribution to maintain its 2.0% general partner interest in us.

Conversion Rights: The Class B Convertible Units are convertible into common units on a one-for-one basis and, once converted, will participate in cash distributions pari passu with all other common units. The conversion of Class B Convertible Units will occur on the date we (i) make a quarterly distribution equal to or greater than $0.44 per common unit, (ii) generate Class B Distributable Cash Flow (as defined in our Partnership Agreement) in an amount sufficient to pay the declared distribution on all units for the two quarters immediately preceding the date of conversion (the “measurement period”) and (iii) forecast paying a distribution equal to or greater than $0.44 per unit from forecasted Class B Distributable Cash Flow on all outstanding common units for the two quarters immediately following the measurement period.

Voting Rights: The Class B Convertible Units generally have the same voting rights as common units, and have one vote for each common unit into which such units are convertible.

Subordinated Units
 
Subordinated units represent limited partner interests in us and convert to common units at the end of the Subordination Period (as defined in our Partnership Agreement). The principal difference between our common units and our subordinated units is that in any quarter during the Subordination Period, holders of the subordinated units are not entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units do not accrue arrearages. Beginning with the third quarter of 2014, until such time we have a Distributable Cash Flow Ratio of at least 1.0, Holdings, the indirect holder of the subordinated units, has waived the right to receive distributions on any subordinated units that would cause the Distributable Cash Flow Ratio to be less than 1.0. In addition, the Fifth Amendment imposed additional restrictions on our ability to declare and pay quarterly cash distributions with respect to our subordinated units. See Note 6.

General Partner Interests
 
As defined by our Partnership Agreement, general partner units are not considered to be units (common or subordinated), but are representative of our General Partner’s 2.0% ownership interest in us. Our General Partner has received general partner unit PIK distributions in connection with the Class B Convertible Units. In connection with other equity issuances, our General Partner has made capital contributions in exchange for additional general partner units to maintain its 2.0% ownership interest in us.


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9. TRANSACTIONS WITH RELATED PARTIES
 
Affiliated Directors

As of August 13, 2019, the Partnership GP Board was comprised of two directors designated by EIG (one of which must be independent), two directors designated by Tailwater (one of which must be independent), two directors designated by a group of Holdings’ former term loan lenders (one of which must be independent) and one director by majority. On August 14, 2019, two affiliated directors resigned from the Partnership GP Board, leaving a total of five directors.

Our non-employee directors are reimbursed for certain expenses incurred for their services to us. The director services fees and expenses are included in general and administrative expenses in our statements of operations. We incurred fees and expenses related to the services from our affiliated directors as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
EIG
37

 
36

 
91

 
72

Tailwater
40

 
38

 
95

 
76

Total fees and expenses paid for director services to affiliated entities
$
77

 
$
74

 
$
186

 
$
148


Southcross Energy Partners GP, LLC (our General Partner)

Our General Partner does not receive a management fee or other compensation for its management of us. However, our General Partner and its affiliates are entitled to reimbursements for all expenses incurred on our behalf, including, among other items, compensation expense for all employees required to manage and operate our business. We incurred expenses related to these reimbursements as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Reimbursements included in general and administrative expenses
$
2,272

 
$
1,556

 
$
6,946

 
$
3,229

Reimbursements included in operations and maintenance expenses
4,368

 
3,619

 
9,127

 
6,997

Total reimbursements to our General Partner and its affiliates
$
6,640

 
$
5,175

 
$
16,073

 
$
10,226