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Executives

Michael Anderson – SVP and CFO

David Biegler – Chairman, President and CEO

Analysts

John Tysseland – Citigroup

Michael Blum – Wells Fargo

Helen Ryoo – Barclays Capital

Selman Akyol – Stifel Nicolaus

Ethan Bellamy – Robert W. Baird Research

Matt Niblack – HITE Hedge Asset Management

Southcross Energy Partners L.P. (SXE) Q4 2012 Earnings Call March 28, 2013 9:30 AM ET

Operator

Good morning and welcome to the Southcross Energy Partners’ Fourth Quarter and Year-End 2012 Financial and Operating Results call. As a reminder, today’s call is being recorded, and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

With that, I will turn the call over to Mr. Michael Anderson, Senior Vice President and Chief Financial Officer.

Michael Anderson

Thank you and good morning everyone. We appreciate your joining us for the Southcross Energy Partners’ fourth quarter and year-end 2012 financial and operating results conference call. With me today is David Biegler, our Chairman, President and Chief Executive Officer.

And before we begin, I would like to remind all participants that our comments today may include forward-looking statements. It should be noted that a variety of factors could cause the Partnership’s actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. For a complete discussion of these risks, we encourage you to read the Partnership’s earning release and our documents filed with the SEC.

Today’s call may also contain certain non-GAAP financial measures. You can refer to the press release we issued this morning for important disclosures regarding such measures and their reconciliations. You can obtain a copy of our press release in the investor relations tab of our website at southcrossenergy.com.

And with that, I will hand the call over to David Biegler. David?

David Biegler

Thank you, Michael. I will start by summarizing recent events that has a lot of content in our earnings release that we issued this morning. First, fourth quarter results were below expectations, primarily due to difficulties we encountered in the start of our new Bonnie View fractionation facility and several other events I’ll cover later.

While these events are now largely behind us, their impact will affect our full-year results, and as a result, we are today modifying our guidance for 2013 regarding Adjusted EBITDA, distribution growth, and expansion capital expenditures.

While this is obviously disappointing, we’ve remained committed to our unit holders and to our growth plans, as we believe we’re still in the early stages of growth at Southcross Energy. Our sponsor Charlesbank Capital Partners is the majority owner of the holding company that owns all of our general partner and approximately 58.5% of Southcross Energy Partners.

In conjunction with our announcements today, as I will discuss in more detail shortly, Charlesbank is providing additional capital support for Southcross. We remain convinced there is a significant value and growth potential for the partnership. The first question is what’s changed since our last quarter’s conference call? The predominant portion of the change has been caused by several events. It took longer than we had anticipated to reach the expected level of performance of our new Bonnie View NGL fractionator, curtailments and other actions by our third-party processor, which we believe were not contractually justified and we have taken actions to enforce, caused us to bypass gas from being processed or to process gas at reduced profit levels, and earlier and more extensive turnaround maintenance at our Gregory plant resulted an added and unanticipated operating expenses.

Collectively, these three items impacted negatively Adjusted EBITDA by an estimated $8.6 million during the fourth quarter. Because some of the effects of these events are carried over into the first quarter of 2013, Adjusted EBITDA for that quarter will also be lower. We anticipate and estimate first quarter of Adjusted EBITDA of $4 million to $6 million. With a slower than anticipated start to the year, we are revising our previous 2013 adjusted EBITDA guidance to a range of $42 million to $55 million. The change in wider range are a result of continuing uncertainty around the pace of earnings growth, from the newly constructed assets put into service over the past few months.

We believe there is more potential variability in NGL prices and processing volumes going forward. We expect our fourth quarter 2013 Adjusted EBITDA to be in the range of $14 million to $17 million. While not the pace of growth over the course of 2013 that we had planned, we believe getting to this fourth quarter run rate puts Southcross on track with our original profitability and growth targets. In essence and in summary, we believe we’ve been delayed about two quarters from our original plan.

With this change, we are also revising our guidance related to distribution growth to be that our quarterly distributions will meet or exceed our target minimum quarterly distributions of $0.40 per unit over the course of the year. Largely as a result of reduced profitability since our IPO, we plan to bolster our capital structure over the next 45 days principally with additional capital support from Charlesbank. In conjunction with this capital support, we have reached agreement with our lending group, that eliminates any foreseeable restriction on our ability to pay our first quarter distribution, specifically the amendment to our credit facility affected as of yesterday, will allow us to borrow and make our first quarter 2013 distribution, regardless of whether we are in compliance with certain financial covenants for the period ending March 31, 2013.

In connection with this amendment, Charlesbank provided $10 million of additional capital support that is already been set aside into a cash collateral account for the general partner for the benefit of the lenders under our credit facility. We are also working with our lenders to amend our credit facility to include more lenient financial covenants and exchange for additional capital that will be invested into the Partnership over the next 45 days.

While we’re still working to finalize this arrangement, we will be – we believe we will be able to accomplish it and provide adequate capital for the business maintain and grow distributions and achieve our financial targets laid out here. We expect the additional capital will provide our unit holders with several benefits including: one, offsetting our slower earnings ramp; two, underpinning the reworking of our bank agreements and adding cushion for our balance sheet leverage; and three, providing a foundation for our future distribution payments and growth. We believe that this plan strongly demonstrates the commitment of our majority owner, the Southcross and of our management team to our unit holders.

Now let’s take a look at some current trends for our partnership and for our industry. The Eagle Ford remains one of the most active place in the country and continues to strengthen and grow. According to a recent report released by Wood Mackenzie, the Eagle Ford is expected to become the largest oil and gas development in the world based on total capital expenditures. In the coming years, Wood Mackenzie believes that total investment in the play will surpass $100 billion. We continue to believe the Eagle Ford is the best place to be as a midstream company.

We have accomplished a great deal since the IPO. Just prior to our IPO, we completed our 200 million cubic feet per day state-of-the-art cryogenic gas processing facility at Woodsboro, near some of the most prolific Eagle Ford shale production. Last November, we started our Bonnie View fractionator on partial operations. It was a slower than expected ramp as we modified our engineering design adding time to the process.

While we achieved production of propane and heavier products during December and January, our ethane production did not increase until we completed the expansion of Bonnie View in February. With the expansion completed, we now have capacity for full ethane production and NGL production increases have continued in March. We’ve also worked through startup issues associated with production of purity NGL products.

Initially, we were making product with specifications that were less than what we needed to achieve. Today we’re producing purity products that meet specifications and are selling the bulk of products at normal prices. As a result, we have been able to significantly improve our profitability over the course of the first quarter. We also completed our Bee Line pipeline in the late February. This pipeline has 320 million cubic feet per day of capacity, is 57 miles long and runs from the core of the Eagle Ford to our processing and fractionation complex.

The Bee Line provides the foundation for filling the remaining capacity at our Woodsboro plant, as well as additional capacity for expansion of our processing. We have begun transporting new gas volumes on the Bee Line with additional volumes planned for the future. In the five months since our IPO, we’ve gone from a company largely under construction to achieving significant operational milestones that have helped position Southcross for the future. We believe we’re on track to deliver profit improvement in the second quarter and significant growth in the second half of 2013.

In terms of operating metrics, we are also achieving milestones. We improved total gas volumes, gas processing volumes and liquids production during the fourth quarter of 2012 compared to the third quarter of 2012. Total volumes through our system increased to over 619,000 MMBtu’s per day during the fourth quarter, an increase of 15% from the third quarter. Processed gas volumes increased in the fourth quarter to over 215,000 MMBtu’s per day, an increase of 29% from the third quarter, and NGL sales increased to over 11,000 barrels per day, an increase of 33% over the third quarter.

The fire at our Gregory plant in late January was unfortunate and that we have recently completed a significant turnaround, and we’re in the process of getting the facility back on line when the fire occurred. Fortunately no one was injured and the fire was contained in the small part of the facility. The lack of Gregory capacity however caused us to utilize third-party facilities during the first quarter at reduced profitability. We’re pleased to report that Gregory will be back in operation this week.

As we look forward toward our next stage of growth, we have completed the evaluation of a big package submission for the construction of our second processing plant at our Woodsboro site, but have not yet committed to the project. We will remain in position to begin the project as we carefully evaluate the pace of Eagle Ford production growth and the effect of recent openings of several competing gas processing plants. We will keep you posted with respect to the status of the project.

We continue to believe we have growth opportunities associated with our strategic location along the Gulf Coast region and access to key petrochemical and export facilities, specifically we are focusing much of our current attention and growth effort in this area and we’re continuing to build a better and stronger downstream NGL and residue natural gas business. We sell a large portion of our ethane and propane to Dow. However we are expanding our NGL business with increased opportunities and new customers.

We have just completed new propane, butane and natural gas contracts that we believe will begin improving profitability in May. These new firm contracts give us a high degree of confidence in securing NGL takeaway for all products at improved fixed prices relative to index and are an important development for Southcross.

We’re optimistic about our NGL and residue gas business and believe we will see increased profitability with increased throughput during the second and third quarters. The continued expansion and development of petrochemical facilities and growth of NGL and natural gas export facilities in the Corpus Christi area should continue to create opportunities for well positioned companies such as Southcross. As we have emphasized to our customers and investors, we believe Southcross’ strategic position in the Eagle Ford shale and proximity to the lower Gulf Coast petrochemical and industrial infrastructure, gives us an edge and direct access for residue natural gas, as well as avoiding transportation of NGLs to and from Mont Belvieu.

This positioning provides more value to our gas producer customers and to our end-use NGL at residue gas customers. We remain confident and excited about our future in the Eagle Ford and throughout our portfolio. Our team is focused on increasing profits and distributable cash flow and on creating a strong Southcross Energy.

With that in mind, let me turn it back over to Michael for financial review of the quarter and the revised guidance we issued this morning. Michael?

Michael Anderson

Thanks David. I hope that you’ve all had a chance to read the press release that we issued this morning. Our fourth quarter included the combined results of both, Southcross Energy Partners LP and Southcross Energy LLC, the predecessor of Southcross Energy Partners LP. Now as you know, we completed our initial public offering on November 7, 2012.

David has already been through our discussion on Adjusted EBITDA of $1.3 million for the quarter and roughly $8.6 million of items that negatively impacted performance for the quarter. Let me add a few details. The curtailments at our third-party gas processors facility caused us to shut in producers or processed gas at alternative sites and with reduced profitability. This resulted in about $2.6 million in reduced Adjusted EBITDA for the quarter.

We had highlighted the continuation of these issues which we saw in third quarter during our December conference call. Spending on a maintenance turnaround at our Gregory plant, resulted in an additional $2 million of operating expense during the quarter, and startup related issues at Bonnie View negatively impacted Adjusted EBITDA by about $4 million during the quarter. These Bonnie View startup issues included lower NGL barrel production than what we had forecast as well as production of more mixed stream blends in which we took significant sales price discounts on the product. Fortunately these startup issues are largely behind us as we approach the end of the first quarter and we are now producing high quality products and improved volumes.

Maintenance capital expenditures were $1.8 million for the quarter which included slightly higher than expected spending on the Gregory plant turnaround. Interest expense was $1.3 million. And as a result, we generated negative adjusted distributable cash flow in the fourth quarter, against the roughly $6 million of distributions that we paid in February 2013 that have pro-rated to 2012 fourth quarter.

We had a $191 million of debt outstanding under our $350 million revolving credit facility at December 31, 2012. Growth capital spending during the quarter of $56 million was largely related to completion of our key growth projects namely, Bonnie View and the Bee Line pipeline. As David mentioned, we are revising our previous 2013 annual Adjusted EBITDA guidance and providing additional detail around the first quarter and the fourth quarter of the year.

Adjusted EBITDA for the first quarter of 2013 is estimated to be between $4 million and $6 million and it will be impacted by several of the items that David mentioned including curtailments by our third-party gas processor, the Bonnie View startup issues and also the Gregory fire that we had at the end of January.

Fourth quarter Adjusted EBITDA is estimated to be between $14 million and $17 million. Now incorporating our slower start to the year and our expected growth over the course of the year, our 2013 annual Adjusted EBITDA guidance range is now $42 million to $55 million. For the year, growth capital spending is now anticipated to be between $40 million and $50 million. Maintenance capital expenditures during the year are expected to be in the range of $4 million to $6 million. And lastly, with continued activity in our bank group discussions, we are going to file a 15-day extension with the SEC for filing our Form 10-K and therefore we expect our Form 10-K to be on file with the SEC on or before April 16.

And with that, I will turn the call back over to David for closing comments before we open up the lines for Q&A. David?

David Biegler

Thanks Michael. I want to reiterate that we’re focused on providing value for our assets and growth to our unit holders. We believe we have built a platform of assets that ensures Southcross Energy has the capabilities it needs for growing future.

With that, I’d like to open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of John Tysseland with Citigroup. Please proceed with your question.

John Tysseland – Citigroup

Hi guys, good morning.

Michael Anderson

Good morning, John.

John Tysseland – Citigroup

Just wanted to touch on the impact of the delay and your ability to compete for any new supplies. Has Southcross lost or added any incremental producers dedicated to your system, or downstream customers over the last several months, as some of these kind of startup issues have happened?

David Biegler

John, this is David. Let me take the last one first. We’ve lost no downstream customers. The effect of the delays and our unwillingness to the add production or supply until we knew for sure that we had all of these issues resolved has delayed the addition of any new supplies. So there has been an effect, it’s not – the delay has not been so much losing customers as it has been the effect of not being able to – unless us being willing to aggressively add. We have had an effect during the year however, unrelated to this, it really relates to in essence the supply demand balance of supply and processing capacity in the Eagle Ford really in the first quarter that some of the volume that we had under contract, under firm commitment with a capacity payment, the counterparty has elected to go ahead and make the payment to us and to not send the gas.

Now the good effect of that is we’re getting the fixed fee payment and the capacity payment. The bad effect is it is having an effect on the – primarily on the second through the fourth quarters, because that capacity payment did not equal the entire margin that we were expecting. So there has been – my point is there has been some volume change. It is much of anything really are choosing not to ensure we didn’t add supply during the period to ensure we had it all covered.

The second is that the overall supply demand balances, we see its supply somewhat leveling or the rate of growth has not been as great. And then there has been some significant capacity being added in the first quarter. So we’re watching that carefully.

John Tysseland – Citigroup

But from a producer’s perspective and a supply perspective, is there anything changed in terms of what you expected on a normalized run rate basis after you kind of get your facilities up and running, the amount of supplies and producers that you were expecting to come into your facility or is that now being ratcheted back a little bit on the backend side?

David Biegler

Let me add to it. It’s not a simple yes or no. There is no effect – the good news is if there is any, then when we turn to the corner really at the beginning of the second quarter, April 1, all the facilities are running everything, we’re producing, we’re aggressively seeking new supply. So there has been nothing in terms of these good effects, the future attractiveness of us to a producer or our ability to attract supply. My only caution is that we do see versus five months ago, not now – I wouldn’t call it as a significantly negative term but at least a more conservative assessment of the outlook for supply volumes coming into processing facilities in general and the Eagle Ford.

John Tysseland – Citigroup

That’s helpful. And then lastly, can you give us a little more detail on the Charlesbank investment, and how that’s being structured? Should we expect this to be an increase in overall units outstanding, or how is that investment being made into the Partnership?

Michael Anderson

Hi, John, it’s Michael. So let me just say that a lot of that is to be determined. As you know we have a Conflicts Committee that’s going to be representing the public unit holders in terms of how that investment is going to be structured. Where we are right now is that there has been an intent to put that capital into the business, we’re going to be working – that we’re working right now on how that’s going to work and be structured, but it’s really going to have to go through a process to the Conflicts Committee and make sure that we structure it the best way we can for the company.

Our objective is to bring equity into the business. Exactly, what the terms of that are going to be I think have to be determined by the Conflicts Committee and Charlesbank.

John Tysseland – Citigroup

Is there a timing as to when you might be able to kind of give us an idea of when that – what that structure looks like?

Michael Anderson

Yes, we will be able to get this not only structured but accomplished and fixed and behind us in the course of the next 30 days. We don’t want to have this linger at all. We want to get the balance sheet more to our liking and get that behind us and move forward.

John Tysseland – Citigroup

Okay, thank you.

Operator

Our next question comes from the line of Michael Blum with Wells Fargo. Please proceed with your question.

Michael Blum – Wells Fargo

Thanks, good morning everybody.

David Biegler

Good morning, Mike.

Michael Blum – Wells Fargo

Maybe just following on John’s earlier question. So if you’ve seen kind of supplies into processing plants leveling off somewhat or maybe the rate of growth is not what you originally were forecasting. I want to just understand then, I think you said you are going to go ahead with the processing plant expansion, so I guess the question is, the thinking there and then just can you just walk through the delta in growth CapEx from your original guidance for 2013 versus the new guidance?

David Biegler

Yes, Michael let me – first, I probably didn’t say it very well. Well to make sure because this is important, in terms of the expansion of our processing facility, we have done all the work to be ready to proceed with that quickly, should we make – pull the trigger and make it happen, I like to make it happen. We are not at this point saying that we’re ready to do that. We are carefully watching the production trends and trying to be conservative about committing to that capital.

So we have – the important thing is we have existing spare capacity at the Woodsboro, Gregory complex. They were going to fill first and it’s only when we see ourselves prospectively nearing running out of that capacity would we entertain it. The other thing in terms of the supply demand balance, if anything is more – as much the supply of processing capacity that has come on really in the fourth quarter of ‘12 and the third quarter of – I’m sorry, in the first quarter of ‘13, there has been about 1.7 Bcf a day of capacity come on really in about a five month period.

And we see that needs a little time to be absorbed into the market. Some of that had already been contracted (inaudible) but our approach is we want to be conservative about it. And the third point I would make is to emphasize what I said, a lot of our focus right now and actually I would tell you lot from the industry even, a lot of what we see in terms of opportunities is downstream of processing, it’s in the NGL infrastructure. There is a whole lot that breaking loose finally in terms of export and petrochemical expansion and whenever you do that product is moving and there is transportation and other opportunities, basis differential opportunities.

And then the final part I think of the answer is that, the most significant part of the capital expenditure reduction is really the change as it relates to the early spending in regard to the second skid. We had and that is on forecast of $60 million of capital, for example that was not going to benefit 2013. By enlarge that’s all been shelved later to be post 2013.

Michael Blum – Wells Fargo

Okay, just to be clear that $60 million, that’s related to this potential second processing plant?

David Biegler

Correct.

Michael Blum – Wells Fargo

Got it, okay. So that’s – potentially that’s either that will be done later or not at all depending on the demand [ph]?

David Biegler

That’s correct.

Michael Blum – Wells Fargo

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Helen Ryoo with Barclays. Please proceed with your question.

Helen Ryoo – Barclays Capital

Thank you. Good morning, just some clarification question. So you mentioned the – you went through credit facility amendment that you will not be restricted on your distribution payments regardless of your covenants, where you are with the covenants but is that – does that just apply to Q1 at this point?

Michael Anderson

It does Helen. And again our plan is that over the course of the next 30 days to bring capital into the business and get our balance sheet adjusted and move forward from there. So what we wanted to do is just – in this interim period just make sure that nobody was worried about where our covenant might come out in terms of Q1 and whether that would affect distributions. We wanted to take that risk completely off the table right now, as we’re talking to you today. And then go forward in terms of bringing new capital into the business on a short-term basis and again more forward from there.

Helen Ryoo – Barclays Capital

And your covenant number as it stands now, going after Q1, is that five times or 5.25. Could you remind me what that number is?

Michael Anderson

Sure. I mean the covenant as they stand today is 5.25 times for first quarter, that’s debt to EBITDA. Then it steps down to 4.75. 4.75 in the third quarter and then 4.5 going forward. One of the things that I would just highlight, much like we – kind of said there were probably couple of quarters behind when we came out of the gates with the regard to the credit facility, the definition of how you define debt to EBITDA is based upon first quarter only in terms of EBITDA performance times four.

So there is a big magnification effect and that’s one of the issues with regard to kind of coming out of the gates and building as we are forecasted to do. And so that just adds a little bit of volatility to that covenant. So what we want to do is basically get that kind of right at and move forward. But those are the covenants as they stand today.

Helen Ryoo – Barclays Capital

Okay, great. And then on your I guess, your review shows your realized NGL price was $0.70 and I guess that’s on your total volume but could – are you able to share what you realized on your equity volumes, and then how that price compares to the price environment we’re seeing today?

Michael Anderson

Yes, so Helen the $0.70 relates to the all of the NGLs we sold whether they were equity volumes or whether they were basically by sales with regard to in essence what kind of customers had. With regard to equity barrels, it’s not probably – not too surprising to let you know that we didn’t have equity barrels during the quarter. In fact, those were negative. And that is just because again the production that we had at Bonnie View was well below what we had forecasted in terms of the recoveries.

And certainly as we move forward, we’re going to be and that we are doing a lot better right now, but this is not really a great quarter to try to measure what we’re doing from a recovery and equity barrel standpoint.

Helen Ryoo – Barclays Capital

Okay. But I guess your second half – your EBITDA I guess with profile for 2013, it’s going to increase and it means you’re probably start having some equity barrels maybe second half of the year, is that a good way of thinking about it?

David Biegler

Yes, Helen this is David and I just want to add to the price question. Yes, in the second quarter going forward, as I mentioned earlier in essence, when we start the second quarter April 1, the fractionator well it has been running and its generating product and Woodsboro is recovering off. Therefore has the ability to sell downstream or move that downstream and to recover the products.

So yes, the equity barrels will would then be in a position to be created. We’ve been a bit conservative I think in our forecast and given our sales, some ramp over the second quarter but we fully expect in that time period to be up to what in essence is for capability of the facilities. I do want to stress in the answer to your question. Your question was very on point as to really one of the principal difficulties in the fourth quarter rather and that is that the net effect of a fractionator that is not producing product on specification is that you’re forced to reduce the capacity or the recovery factors going in, so you have some volume shortfall with it.

The other big effect is you – to keep running, you basically are forced to produce product that’s off spec, off spec product meaning product that instead of being pure propane or a butane or gasoline as a mixture of several of them or two of them has to be sold at a deep discount. So the $0.70 price you are describing, really describe – that’s a differential between that and a normal OPIS price sale which is significant in this case, really is the difference that creates a lot of the $4 million effect in the fourth quarter from the Bonnie View difficulties. So it’s reflected not just in the equity barrel creation (inaudible) but actually in the prices received for the products, not equaling in essence what you had to have to fully recover your money.

Helen Ryoo – Barclays Capital

All right, that’s very helpful. And just to clarify, I guess your full-year guidance, your revised guidance I guess it really includes very modest NGL equity volume and therefore compares to a sort of a more normalized level you will probably see in ‘14, ‘15. You would be less sensitive – your EBITDA number would be less sensitive to where NGL price is this year, is that fair?

David Biegler

That is a fair comment.

Helen Ryoo – Barclays Capital

Okay.

David Biegler

Where it become – because of that less sensitive to the commodity price level and the OPIS price level of NGLs.

Helen Ryoo – Barclays Capital

Okay. And what kind of – I know you have sort of a big skew towards the ethane in your equity barrel, but what kind of ethane price are you factoring in for your guidance?

Michael Anderson

Yes, Helen what we do in terms of our numbers is we basically look at the PIRA price deck. They do have increasing ethane over the course of the year, sort of in the high 20s today and they get into I think mid 30s by the end of the year.

David Biegler

Yes, the actual fourth quarter PIRA price for ethane is $0.36 a gallon OPIS price.

Helen Ryoo – Barclays Capital

Okay, great. Thank you very much.

David Biegler

Sure, thanks.

Operator

Our next question comes from the line of Selman Akyol with Stifel. Please proceed with your question.

Selman Akyol – Stifel Nicolaus

Thank you. Good morning.

Michael Anderson

Hi Selman.

Selman Akyol – Stifel Nicolaus

Couple of points clarification, I appreciate you discussing the additional capacity being brought on within the Eagle Ford over the last five months but is that – are you seeing any – because of additional supply any change in contract terms at all, that people wanting, would you anticipate everything on a go-forward basis, fee basis et cetera?

David Biegler

Selman, it’s actually a very good question. And I said 1.7 billion a day, actually I forgot to count ours which makes it 1.9 billion a day. But what we are seeing I wouldn’t call – I would call it as much on the part of processors, some coming off of original price demands for processing. So the market is becoming what I would call more normal in terms of people are no longer being able let’s say to demand from somebody else like long-term contract at a premium price. People, the producers and the counterparties today pretty much I would say understand they have more options. And I don’t want to leave the impression that it’s an oversupply or glutted market that’s really collapsing, but I would tell you that – and I describe it as beginning to flatten and become a more standard or normal environment for the industry, still good pricing, but it is flattening some.

And our estimation in terms of kind of the counterparties we see and also just in terms of our sense of the intelligence feedback in the marketplace on the people we’re competing against.

Selman Akyol – Stifel Nicolaus

Appreciate the color. So as we think about the capital infusion and I understand you want to get that firmed up to next 30 days and within the next two weeks you’re going to file your 10-K, so it sounds like that capital infusion could come outside or after the K is filed up. Any thoughts to whether you will describe exactly how that settles out so we can incorporate it into our models in our thinking for the rest of the year? Would you plan on releasing that or should we anticipate waiting for that until the end of the second quarter?

Michael Anderson

The capital infusion?

Selman Akyol – Stifel Nicolaus

Correct.

Michael Anderson

Well our intention is that you guys will know exactly what that looks like when that gets funded.

Selman Akyol – Stifel Nicolaus

All right.

David Biegler

Selman, it would be an 8-K item, the very slowest.

Selman Akyol – Stifel Nicolaus

Okay. Lastly, was there any discussion I guess, given that all this occurred in the fourth quarter and here we are again to the first quarter, releasing early or somehow bringing this to ahead, was there a reason for the delay I guess?

Michael Anderson

Selman, not really. I think a lot of this boils down to where we were coming out in the first quarter. With regard to the fourth quarter numbers, we had highlighted a couple of the items that we thought would be impacting us. And then a lot of this came down towards really in the last few weeks in terms of what we wanted to do with the banks and try to sell things out for the markets and provide some more confidence and certainty where we are right now as opposed to where we might have been.

So we certainly consider that. We felt that the fourth quarter numbers especially given that they were a partial quarter for the IPO which got done on November 7 and the things we talked about in that earnings call was not nearly as relevant with regard to what we wanted to provide in terms of where we are today on a go-forward basis. So that’s one of the reasons that we wanted to – and I kind of keep this on track and provide the most updated information that we could today.

Selman Akyol – Stifel Nicolaus

All right, well thank you very much.

Operator

Our next question comes from the line of Ethan Bellamy with Baird Research. Please proceed with your question.

Ethan Bellamy – Robert W. Baird Research

Thank you guys. Just to follow-up on Helen’s question. So if you’re looking for ethane prices, say mid 30s towards the end of the year, can you help us out on sensitivity, let’s say if ethane prices actually retrench, what kind of an EBITDA impact would that have potentially?

Michael Anderson

Yes, so if you look at our numbers as we go out for the rest of the year, I think at the time of the IPO, we talked about a 5% move in NGL prices equating to about $1.8 million effect on our gross margin. And today we would say that 5% effect has about $1.1 million effect on our gross margin going forward. So you can kind of do the math with regard to that.

Ethan Bellamy – Robert W. Baird Research

Okay, it’s helpful.

Michael Anderson

For the year.

Ethan Bellamy – Robert W. Baird Research

Okay. With respect to Charlesbank, had they made any new midstream investments that might be suitable for dropdown? Are there any other discussions on an asset base other than just the financing? And can you remind me please, how long the life of the fund is where they hold Southcross units?

David Biegler

Yes. To answer the first one, no, they have not made any additional investments that would be eligible to be dropdown. The second piece of it, the life of the – they have I know it’s beyond five years of life left, I don’t want to give you an exact number but it’s an extended period of time of eligible life for the fund. I think the final answer is that we are – we said it originally and we still are cognizant of the merit of our GP investment and creating the ability for dropdown.

And we think this will be the year when we evaluate those more fully, but today there is no – Charlesbank investment or GP owned investment eligible for dropdown.

Michael Anderson

And just to add onto the comment, just if you look at what Charlesbank through our Southcross holdings entity owns, its 58.5% of the total ownership of the MLP, but 49.5% of that is subordinated units which clearly really need to go through kind of the conversion process. So you think about staying powered and trying to create value for Southcross. I think there is a lot of commitment from our management team in Charlesbank going forward that we’re in this for a while and believe we still have a very good opportunity.

Ethan Bellamy – Robert W. Baird Research

So the conversion of the sub units is usually tied to the MQD. Is there any provision for delayed sub-unit conversion because of this capital infusion or is there any impact there at all?

Michael Anderson

No, the MQD calculation really just goes about, have you paid and have you earned your distributions over basically a three year time period.

Ethan Bellamy – Robert W. Baird Research

Okay, thank you, Michael.

Operator

Our next question comes from the line of Matt Niblack with HITE Hedge Asset Management. Please proceed with your question.

Matt Niblack – HITE Hedge Asset Management

Hi, so the – I guess first question is as of right now, how far are your sort of daily volumes below the trends that you expected?

Michael Anderson

Yes, Matt, I think where we had forecasted and provided guidance back in December relative to where we thought we’d be at the end of the first quarter, we’re probably 15 million cubic feet a day less in terms of processing capacity. And a lot of that has been delays in terms of getting Bonnie View and everything working up and right. And so right now, I think we’re probably more delayed than we would expect to be in terms of those volumes versus a couple of quarters from now.

David Biegler

I would add just to put it into perspective for you Matt, and just to tie the two together. The volume expectation from the volume that is the counterparty pulled and is just paying us a deficiency fee on is 40 million a day.

Matt Niblack – HITE Hedge Asset Management

Okay. So there is a 50 million gross gap and 10 million net gap, is what you’re getting paid on?

David Biegler

Yes and the 40 – the difficulty with the 40 million is we’re getting paid, we’re just not getting paid all of the same amount of money as we had before, I would say as we had expected had we been able to earn full margin through the processing plant.

Matt Niblack – HITE Hedge Asset Management

Right. And so that 50 million per day gap is expected to be made up over the course of roughly kind of by end of Q2?

David Biegler

Well it will be – we will revisit by the end of Q2. I can assure you we’re aggressively seeking and engaging in discussions on additional volumes right now. I would tell you one of the reasons why, because it’s a natural question I think any of you would have the reasons for the fairly wide range in annual EBITDA. And the number one reason for that is exactly, Matt, what you’re asking which is the pace of adding additional volumes at this point is not defined. At the bottom end of the EBITDA range its volumes that we have under current and existing contracts that have a fairly well established track record on trend.

And the remainder of it, largely is dependent upon progressively adding volumes, and that pace, it matters a lot, as you said whether we pick it up most of it at the end of the quarter or it takes longer in the year. And I am not waffling, it’s just I can’t give you a prediction. I don’t have a contract that I can point to, to tell you that it’s the end of the second quarter or at this timing.

Matt Niblack – HITE Hedge Asset Management

Right. And then looking at additional opportunities beyond what you currently have in place, second processing plant for example, I guess what is the pitch now to producers to get contracts signed there, given that there are so many larger and more established players in the Eagle Ford now and given it’s been a relatively challenging startup operationally?

David Biegler

Yes, I’d tell you first and foremost it’s been challenging for us financially, but we have done it in a matter basically that really to the producer its relatively not event, I mean we’ve been reliable taker of the supply. We haven’t – we’re named on the contracts. We’re trying to push the economic effect back on them. So that actually to them and which is what’s important for us in preserving the go-forward value of the company, we are doing what we’re promised and we’re a reliable processor.

I’d tell you the immediate attractions would be; one, we have immediate space available, and a lot of other people have taken their incremental space and filled it and then pulled it let’s say from others, but we have space available and we’ve got the pipeline capacity to get it there. The second is NGL takeaway. That’s really important to people today, because the whole supply trend in the Gulf Coast of NGLs and what happens to them and what producers care about is takeaway and that you’re going to keep flowing the fractionations. We do have and the prices we’re able to offer because of the local presence.

And then finally, I did mention it, just to kind of emphasize it, we think it is really important. Yesterday we completed the final contract, fully contracting all of our NGL at for ourselves and others at firm prices, differentials relative to OPIS. So before we primarily had ethane, propane and lot of the swing in the market, there has been somewhat in gasoline but significantly in butane, in the two butanes, iso and normal.

That contract matters a lot because we have a capability now of knowing we have firm prices and firm takeaway commitment from the purchaser. And then that is really driven – our ability to do that is driven by our location in the advent of Corpus Christi as a growing and more significant export market for NGLs. That’s what enables us to sign the contract. And those are I would tell you are the principal factors. We think we can compete with anybody on a go-forward basis.

Operator

Our next question comes from the line of John Tysseland with Citigroup. Please proceed with your question.

John Tysseland – Citigroup

Hi guys, I just had a quick follow-up question. Outside the $10 million of cash collateral that the Charlesbank is providing, do you have any – can you provide any range of the size of the capital commitment on the equity side that Charlesbank might be coming in with? I know the terms of it might still be outstanding, but since you have kind of provided guidance on your EBITDA, just seeing if you have an idea of what the size of that overall equity infusion might be?

Michael Anderson

Yes, John we’re not disclose a specific number, because again I think it’s under discussion. We clearly talked about that in our group of lenders and others. It is multiples of that initial $10 million and what we want to do again is make it be a sizable number that basically gets us into a good balance sheet perspective and having the flexibility to move forward like we need to be able to and be able to grow the business. So while I’m not going to give you a specific number, it’s a very meaningful number.

David Biegler

I would tell you John, and I realize it doesn’t help a lot in terms of well you still have a lack of quantification, but I do want to emphasize, it is a number based on our preliminary discussion with lenders and in our judgment would be sufficient to produce a balance sheet and a financial covenant structure on a go-forward basis that gives us as much assurance as we could hope for that we’re not going to be back in this position again.

John Tysseland – Citigroup

Okay, thank you.

Operator

(Operator Instructions) One moment while we hold for any further questions. Okay, it seems there are no further questions at this time. I’d like to turn the floor back over for closing comments.

David Biegler

Yes, this is David Biegler. I would like to close by thanking everybody for being listening in today for your courtesy. I want to emphasize two things: one, we understand the degree of deficiency in the fourth quarter and in the first quarter. We’re doing everything we can to address it and go forward. I am not trying to make light of the fourth and the first quarter but I do want to emphasize that in my judgment, our judgment we turned to corner at the end of this quarter.

We start April 1 with facilities that are all up and running as they should be, with a new NGL takeaway contract, with the ability to go out and add to the processing volumes and have available capacity to do it. I am not – I want to make sure, I don’t sound pollyannaish. We understand the hole we dug in the first quarter in terms of meeting the 2013 guidance, but company is in a different spot today than it was three months ago. And we still feel very much confident in the ability this year to produce for the remaining three quarters, growing EBITDA. And particularly, we feel confident in the back half of the year in the ability to produce at the level we originally discussed and promised.

And that completes my closing comments.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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