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Southcross Energy Partners, L.P. Reports Fourth Quarter and Full-Year 2014 Financial and Operating Results

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Southcross Energy Partners, L.P. (NYSE:SXE) (“Southcross” or the “Partnership”) today announced fourth quarter and full-year 2014 financial and operating results.

Fourth Quarter 2014 Highlights

  • Adjusted EBITDA of $20.6 million, an 82% increase from the third quarter of 2014
  • Processed natural gas volumes averaged 515,046 million MMBtu/d, an increase of 35% from the third quarter of 2014
  • Natural gas liquids (“NGL”) fractionated averaged 22,394 barrels per day, an increase of 23% from the third quarter of 2014

CEO Commentary

“2014 was a landmark year of growth and positive momentum for Southcross,” said John Bonn, Chief Executive Officer of Southcross’ general partner. “During the course of 2014, we completed a significant acquisition of gathering and processing assets in the active Eagle Ford Shale area and successfully completed several organic projects that resulted in significant growth of rich gas volumes on our system. Southcross today has increased stability, scale and growth potential across the Eagle Ford.”

“We believe Southcross is well-positioned to manage the current commodity price environment,” added Mr. Bonn. “Growing portions of our revenue streams are fixed-fee in nature. We have meaningful growth opportunities which include filling our existing processing capacity, organic growth projects and the opportunity to execute drop-down transactions that we anticipate will support distribution growth for our unit holders.”

Fourth Quarter Results

Southcross’ Adjusted EBITDA (as defined below) was $20.6 million for the three month period ended December 31, 2014, compared to $14.0 million for the same period in the prior year, and $11.3 million for the three month period ended September 30, 2014.

Gross operating margin (as defined below) totaled $37.2 million for the three month period ended December 31, 2014, compared to $28.2 million for the same period in the prior year. Net income/(loss) was ($2.3) million for the three month period ended December 31, 2014, compared to $0.7 million for the same period in the prior year. Results in the fourth quarter 2014 benefited from expense reductions, including an adjustment to incentive compensation accruals in response to performance results and the lower commodity price environment.

Processed gas volumes averaged 515,046 MMBtu/d during the three month period ended December 31, 2014, an increase of 91% compared to 268,957 MMBtu/d during the same period in the prior year. Fractionated NGLs during the three month period ended December 31, 2014 averaged 22,394 barrels per day, an increase of 36% compared to 16,407 barrels per day for the same period in the prior year.

Full-Year 2014 Results

Southcross’ Adjusted EBITDA was $54.5 million for the year ended December 31, 2014, compared to $34.5 million for the year ended December 31, 2013.

Gross operating margin totaled $121.6 million for the year ended December 31, 2014, compared to $93.5 million for the year ended December 31, 2013. Net loss was ($31.3) million for the year ended December 31, 2014, compared to ($16.0) million for the year ended December 31, 2013. Results for full-year 2014 were impacted by transaction and other expenses related to the August 2014 TexStar transactions.

Capital Expenditures

Growth capital expenditures for the three month period ended December 31, 2014 totaled $33.1 million, compared to $6.4 million for the same period in the prior year. For the year ended December 31, 2014, growth capital expenditures were $115.0 million, which included spending for the construction of the Webb Pipeline, compared to $90.5 million for the year ended December 31, 2013.

Capital and Liquidity

As of December 31, 2014, Southcross had total outstanding debt of $475.6 million including $30.0 million under its revolving credit facility. Based on the terms of its credit facilities, Southcross’ total leverage ratio (as generally defined as debt divided by credit agreement EBITDA) was 5.3 to 1 as of December 31, 2014 compared to its credit facility covenant of 5.75 to 1.

Cash Distributions and Distributable Cash Flow

On February 13, 2015, Southcross paid to all unit holders of record on February 9, 2015, a cash distribution of $0.40 per common unit for the three month period ended December 31, 2014 and also paid to all Class B convertible unit holders of record on February 9, 2015 a distribution of $0.3257 per unit, paid in-kind in the form of additional Class B convertible units. Cash distributions on February 13, 2015 totaled $10.0 million.

As previously announced, to support the Partnership’s acquisition of gathering and processing assets completed in August 2014, Southcross Holdings LP, the owner of the Partnership’s general partner and all of the Partnership’s subordinated units, elected to forgo distributions on any subordinated units that would cause the Partnership’s cash distributions to exceed its distributable cash flow for any quarterly period. This election will continue until the Partnership has distributable cash flow in excess of total cash distributions on the Partnership’s common and subordinated units. Southcross Holdings LP also elected to defer any distribution payable on the subordinated units for the fourth quarter of 2014 until the Partnership filed its Form 10-K for its fiscal year ended December 31, 2014. Southcross intends to make a cash distribution with respect to its subordinated units for the fourth quarter of 2014 of approximately $3.4 million in conjunction with the filing of its Form 10-K such that the total of the Partnership’s cash distributions is equal to the Partnership’s distributable cash flow for such period.

Distributable cash flow (as defined below) for the three month period ended December 31, 2014 was $13.4 million, compared to $9.3 million for the same period in the prior year. Distributable cash flow for the three month period ended December 31, 2014 corresponds to distribution coverage of 1.0 times, including the distributions to be paid on the subordinated units.

Updated Financial Guidance

Southcross expects that its Adjusted EBITDA for the first quarter of 2015 will be approximately $17.5 million to $19.5 million, which reflects an approximate $2.0 million impact related to the Gregory fire that temporarily reduced processed gas volumes and increased operating expenses during January and February 2015. Southcross anticipates that its growth capital expenditures for the full year 2015 will be in the range of $25 million to $30 million.

The guidance above sets forth management’s best estimate based on current and anticipated market conditions and other factors. While we believe that these estimates and assumptions are reasonable, they are inherently uncertain and are subject to, among other things, significant business, economic, regulatory, environmental and competitive risks and uncertainties that could cause actual results to differ materially from those that we anticipate, as set forth under “Forward-Looking Statements.”

Conference Call Information

Southcross will hold a conference call on Friday, March 6, 2015, at 10:00 a.m. Central Time (11:00 a.m. Eastern Time) to discuss its fourth quarter and full-year 2014 financial and operating results. The call can be accessed live over the telephone by dialing (877) 705-6003 or, for international callers, (201) 493-6725. The replay of the call will be available shortly after the call and can be accessed by dialing (877) 870-5176 or, for international callers, (858) 384-5517. The passcode for the replay is 13600597. The replay of the conference call will be available for approximately two weeks following the call.

Interested parties may also listen to a simultaneous webcast of the call on Southcross’ website at www.southcrossenergy.com under the “Investors” section. A replay of the webcast will also be available for approximately two weeks following the call.

About Southcross Energy Partners, L.P.

Southcross Energy Partners, L.P. is a master limited partnership that provides natural gas gathering, processing, treating, compression and transportation services and NGL fractionation and transportation services. It also sources, purchases, transports and sells natural gas and NGLs. Its assets are located in South Texas, Mississippi and Alabama and include four gas processing plants, two fractionation plants and approximately 3,000 miles of pipeline. The South Texas assets are located in or near the Eagle Ford shale region. Southcross is headquartered in Dallas, Texas. Visit www.southcrossenergy.com for more information.

Forward-Looking Statements

This press release includes certain statements concerning expectations for the future that are forward-looking within the meaning of the federal securities laws. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions, or future conditional verbs such as “may,” “will,” “should,” “would” and “could.” Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include the expectations, plans, strategies, objectives and growth of Southcross, including its ability to manage the current commodity price environment; filling its processing capacity; guidance regarding Adjusted EBITDA; acquisition activity, including Southcross’ ability to complete any potential future drop-down transaction; projected capital expenditures and sources of funds for capital expenditures; and liquidity and financing requirements, including funding sources for a drop-down transaction. Although Southcross believes the expectations and forecasts reflected in these and other forward-looking statements are reasonable, Southcross can give no assurance they will prove to be correct. Forward-looking statements contain known and unknown risks and uncertainties (many of which are difficult to predict and beyond management’s control) that may cause Southcross’ actual results in future periods to differ materially from anticipated or projected results. An extensive list of specific material risks and uncertainties affecting Southcross is contained in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2014 and in other documents and reports filed from time to time with the SEC. Any forward-looking statements in this press release are made as of the date hereof and Southcross undertakes no obligation to update or revise any forward-looking statements to reflect new information or events.

Use of Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States, or GAAP. We also present the non-GAAP financial measures of Adjusted EBITDA, gross operating margin and distributable cash flow.

We define Adjusted EBITDA as net income/loss, plus interest expense, income tax expense, depreciation and amortization expense, equity in losses of joint venture investments, certain non-cash charges (such as non-cash unit-based compensation, impairments, loss on extinguishment of debt and unrealized losses on derivative contracts), major litigation costs net of recoveries, transaction-related costs, revenue deferral adjustment, loss on sale of assets and selected charges that are unusual or non-recurring; less interest income, income tax benefit, unrealized gains on derivative contracts, equity in earnings of joint venture investments and selected gains that are unusual or non-recurring. Adjusted EBITDA should not be considered an alternative to net income, operating cash flow or any other measure of financial performance presented in accordance with GAAP.

Adjusted EBITDA is used as a supplemental measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; the ability of our assets to generate cash sufficient to support our indebtedness and make future cash distributions; operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing or capital structure; and the attractiveness of capital projects and acquisitions and the overall rates of return on investment opportunities.

We define gross operating margin as the sum of revenues less the cost of natural gas and NGLs sold. For our fixed-fee contracts, we record the fee as revenue and there is no offsetting cost of natural gas and NGLs sold. For our fixed-spread and commodity-sensitive arrangements, we record as revenue all of our proceeds from the sale of the natural gas and NGLs and record as an expense the associated cost of natural gas and NGLs sold.

We define distributable cash flow as Adjusted EBITDA, plus interest income and income tax benefit, less cash paid for interest (net of capitalized costs), income tax expense and maintenance capital expenditures. We use distributable cash flow to analyze our performance and liquidity. Distributable cash flow does not reflect changes in working capital balances. Distributable cash flow is used to assess the ability of our assets to generate cash sufficient to support our indebtedness and make future cash distributions to our unit holders; and the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.

We believe that the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition, results of operations and cash flows from operations. Reconciliations of Adjusted EBITDA, gross operating margin and distributable cash flow to their most directly comparable GAAP measure are included in this press release. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool because each excludes some but not all items that affect the most directly comparable GAAP financial measure. You should not consider any of Adjusted EBITDA, gross operating margin or distributable cash flow in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA, gross operating margin and distributable cash flow may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

SOUTHCROSS ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per unit data)
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
2014 2013 2014 2013
Revenues:
Revenues $ 215,603 $ 175,139 $ 829,460 $ 634,722
Revenues – affiliates 6,977 13,267
Total revenues 222,580 175,139 842,727 634,722
Expenses:
Cost of natural gas and liquids sold 185,342 146,964 721,132 541,176
Operations and maintenance 12,408 10,186 51,902 41,254
Depreciation and amortization 13,071 8,590 42,206 33,548
General and administrative 4,662 4,914 32,385 21,764
Impairment of assets 1,556

Loss (gain) on sale of assets

73 (25 ) 365 (25 )
Total expenses 215,556 170,629 849,546 637,717

Income (loss) from operations

7,024 4,510 (6,819 ) (2,995 )
Other (expense) income:
Equity in losses of joint venture investments (3,188 ) (6,496 )
Interest expense (6,222 ) (3,855 ) (15,562 ) (12,590 )
Loss on extinguishment of debt (2,316 )

Other income (expense)

9 (77 )
Total other expense (9,401 ) (3,855 ) (24,451 ) (12,590 )

(Loss) income before income tax expense

(2,377 ) 655 (31,270 ) (15,585 )
Income tax benefit (expense) 81 19 (52 ) (385 )
Net (loss) income $ (2,296 ) $ 674 $ (31,322 ) $ (15,970 )
Series A Preferred fair value adjustment (414 ) (4,596 ) (1,670 )

Series A Preferred unit in-kind distribution

(534 )

General partner unit in-kind distribution

(84 ) (207 )

Net (loss) income attributable to partners

$ (2,380 ) $ 260 $ (36,659 ) $ (17,640 )
Earnings per unit:

Net (loss) income allocated to limited partner common units

(1,091 ) 104 (20,175 ) (8,683 )
Weighted average number of limited partner common units outstanding 23,808,317 12,240,719 21,641,635 12,224,997

Basic and diluted (loss) income per common unit

(0.05 ) 0.01 (0.93 ) (0.71 )
Distributions declared per common unit 0.40 0.40 1.60 1.60

Net (loss) income allocated to limited partner subordinated units

(560 ) 141 (8,355 ) (8,638 )
Weighted average number of limited partner subordinated units outstanding 12,213,713 12,213,713 12,213,713 12,213,713

Basic and diluted (loss) income per subordinated unit

(0.05 ) 0.01 (0.68 ) (0.71 )
Distributions declared per subordinated unit 0.28 0.40 1.08 1.60
SOUTHCROSS ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 31, 2014 December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents $ 1,649 $ 3,349
Trade accounts receivable 71,159 57,669
Accounts receivable – affiliates 11,325
Prepaid expenses 3,073 3,061
Other current assets 1,813 5,105
Total current assets 89,019 69,184
Property, plant and equipment, net 968,810 575,795
Intangible assets, net 1,511 1,568
Investments in joint ventures 147,098
Other assets 17,189 5,768
Total assets $ 1,223,627 $ 652,315
LIABILITIES, PREFERRED UNITS AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 103,188 $ 62,451
Accounts payable – affiliates 12,856
Current portion of long-term debt 4,500
Other current liabilities 11,061 5,344
Total current liabilities 131,605 67,795
Long-term debt 471,129 267,300
Other non-current liabilities 1,109 1,692
Total liabilities 603,843 336,787
Commitments and contingencies
Series A convertible preferred units (1,769,915 units issued and outstanding as of December 31, 2013) 40,504
Partners’ capital:
Common units (23,800,943 and 12,253,985 units outstanding as of December 31, 2014 and 2013, respectively) 259,735 169,141
Class B Convertible units (14,889,078 units issued and outstanding as of December 31, 2014) 298,833
Subordinated units (12,213,713 units outstanding as of December 31, 2014 and 2013) 48,831 99,726
General Partner interest 12,385 6,367
Accumulated other comprehensive loss (210 )
Total partners’ capital 619,784 275,024
Total liabilities, preferred units and partners’ capital $ 1,223,627 $ 652,315
SOUTHCROSS ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Year Ended December 31,
2014 2013
Cash flows from operating activities:
Net loss $ (31,322 ) $ (15,970 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 42,206 33,548
Unit-based compensation 10,074 2,186
Loss on extinguishment of debt 2,316

Amortization of deferred financing costs

2,005 1,287
Loss (gain) on sale of assets, net 365 (25 )

Unrealized loss (gain) on financial instruments

168 (120 )
Equity in losses of joint venture investments 6,496
Impairment of assets 1,556
Other, net 65 130
Changes in operating assets and liabilities:
Trade accounts receivable, including affiliates (22,695 ) (6,675 )
Prepaid expenses and other current assets (5 ) (1,197 )
Other non-current assets (29 ) 215
Accounts payable and accrued liabilities 34,480 1,411

Other liabilities, including affiliates

2,655 1,183
Net cash provided by operating activities 48,335 15,973
Cash flows from investing activities:
Capital expenditures (120,759 ) (93,863 )
Expenditures for assets subject to property damage claims, net of insurance proceeds and deductibles 2,706 (3,383 )
Investment contribution to joint venture investments (148 )
TexStar Rich Gas System acquisition from affiliate (79,955 )
Other acquisitions (44,038 )

Proceeds from sale of assets

1,624 137
Net cash used in investing activities (240,570 ) (97,109 )
Cash flows from financing activities:
Proceeds from issuance of common units, net 144,671
Borrowings under our credit facility 244,500 129,300
Borrowings under our term loan agreement 450,000
Repayments under our credit facility (481,800 ) (53,000 )
Repayments under our term loan agreement (2,250 )
Payments on capital lease obligations (599 ) (542 )
Financing costs (17,777 ) (2,139 )
Proceeds from issuance of Series A convertible preferred units, net of issuance costs 38,832
Contributions from general partner 9,967 800
Payments of distributions and distribution equivalent rights (52,645 ) (35,992 )
Assumption and repayment of debt in TexStar Rich Gas System Transaction (100,000 )
Tax withholdings on unit-based compensation vested units (3,532 ) (264 )
Net cash provided by financing activities 190,535 76,995
Net decrease in cash and cash equivalents (1,700 ) (4,141 )
Cash and cash equivalents – Beginning of year 3,349 7,490
Cash and cash equivalents – End of year $ 1,649 $ 3,349
SOUTHCROSS ENERGY PARTNERS, L.P.
SELECTED FINANCIAL AND OPERATIONAL DATA
(In thousands, except for operational data)
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
2014 2013 2014 2013
Financial data:
Adjusted EBITDA $ 20,555 $ 14,038 $ 54,503 $ 34,486
Gross operating margin 37,239 28,175 121,595 93,546
Maintenance capital expenditures 1,730 1,296 5,777 3,353
Growth capital expenditures 33,138 6,418 114,983 90,510
Distributable cash flow 13,368 9,330 35,303 19,561
Cash distributions declared 13,368 13,755 51,638 43,701
Operating data:
Average throughput volumes of natural gas (MMBtu/d) (1) 972,240 636,661 884,259 622,238
Average volume of processed gas (MMBtu/d) 515,046 268,957 353,456 240,825
Average volume of NGLs fractionated (Bbls/d) 22,394 16,407 17,815 12,545
Realized prices on natural gas volumes sold ($/MMBtu) $ 3.98 $ 3.75 $ 4.40 $ 3.75
Realized prices on NGL volumes sold ($/gallon) 0.57 0.91 0.78 0.88

(1)

Average throughput volumes of natural gas per day include sales, transportation, fuel and shrink volumes.

SOUTHCROSS ENERGY PARTNERS, L.P.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In thousands)
(Unaudited)
Three Months Ended Year Ended
December 31, December 31,
2014 2013 2014 2013
Reconciliation of gross operating margin to net (loss) income:
Gross operating margin $ 37,239 $ 28,175 $ 121,595 $ 93,546
Add (deduct):
Income tax benefit (expense) 81 19 (52 ) (385 )
Equity in losses of joint venture investments (3,188 ) (6,496 )
Interest expense (6,222 ) (3,855 ) (15,562 ) (12,590 )
Loss on extinguishment of debt (2,316 )

Other income (expense)

9 (77 )
Loss (gain) on sale of assets (73 ) 25 (365 ) 25
General and administrative expense (4,663 ) (4,914 ) (32,385 ) (21,764 )
Impairment of assets (1,556 )
Depreciation and amortization expense (13,071 ) (8,590 ) (42,206 ) (33,548 )
Operations and maintenance expense (12,408 ) (10,186 ) (51,902 ) (41,254 )
Net income (loss) $ (2,296 ) $ 674 $ (31,322 ) $ (15,970 )
Three Months Ended Year Ended
December 31, December 31,
2014 2013 2014 2013
Reconciliation of net income (loss)
to Adjusted EBITDA and distributable cash flow:
Net income (loss) $ (2,296 ) $ 674 $ (31,322 ) $ (15,970 )
Add (deduct):
Depreciation and amortization expense 13,071 8,590 42,206 33,548
Interest expense 6,222 3,855 15,562 12,590

Unrealized (gain) loss on commodity swaps

(330 ) (120 ) 8 (120 )
Loss on extinguishment of debt 2,316
Revenue deferral adjustment 444 2,514
Unit-based compensation 711 542 2,931 2,186
Income tax (benefit) expense (81 ) (19 ) 52 385
Loss (gain) on sale of assets 73 (25 ) 365 (25 )
Major litigation costs, net of recoveries 513 517 1,904 517
Equity in losses of joint venture investments 3,188 6,496
Transaction-related costs (963 ) 9,850
Impairment of assets 1,556
Other, net 3 24 65 1,375
Adjusted EBITDA $ 20,555 $ 14,038 $ 54,503 $ 34,486
Cash interest, net of capitalized costs (5,538 ) (3,431 ) (13,371 ) (11,187 )
Income tax benefit (expense) 81 19 (52 ) (385 )
Maintenance capital expenditures (1,730 ) (1,296 ) (5,777 ) (3,353 )
Distributable cash flow $ 13,368 9,330 $ 35,303 $ 19,561
SOUTHCROSS ENERGY PARTNERS, L.P.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In thousands)
(Unaudited)
Low High
Reconciliation of net income (loss) to Adjusted
EBITDA guidance:
Net income (loss): $ (2,000 ) $

Add:
Interest expense 6,250 6,250
Income tax expense 50

50

Depreciation and amortization expense 13,200 13,200
Adjusted EBITDA $ 17,500 $ 19,500

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