UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

MARTIN MIDSTREAM PARTNERS L.P.

(Exact name of Registrant as specified in its charter)

DELAWARE		000-50056		05-0527861
(State of incorporation or organization)		(Commission file number)		(I.R.S. employer identification number)
4200 STONE ROAD
KILGORE, TEXAS				75662
(Address of principal executive offices)				(Zip code)

Registrant’s telephone number, including area code: (903) 983-6200

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

     On November 14, 2005, Martin Midstream Partners L.P. (the “Partnership”) filed a Current Report on Form 8-K (Date of Report: November 10, 2005) to report its acquisition of Prism Gas Systems I, L.P. (“Prism”), a natural gas gathering and processing company with gathering and processing assets located in East Texas, Northwest Louisiana and the Texas Gulf Coast. In such Form 8-K, the Partnership indicated that it would file the historical and pro forma financial information required under Item 9.01 with respect to the acquisition of Prism no later than 71 days after the date that such Form 8-K was required to be filed. This amendment is filed to provide the required financial information of Prism. Prism owns unconsolidated interests in Waskom Gas Processing Company and certain gathering systems in East Texas and the Gulf Coast area. As required by Item 9.01(a), included with the financial information for Prism is certain financial information pertaining to Waskom Gas Processing Company, as more fully described below.

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired

The audited consolidated financial statements of Prism for the years ended December 31, 2004, 2003 and 2002, including the independent auditor’s report of Deloitte & Touche LLP thereon.

The unaudited consolidated and condensed financial statements of Prism for the nine months ended September 30, 2005 and 2004.

The audited financial statements of Waskom Gas Processing Company for the years ended December 31, 2004, 2003 and 2002, including the independent auditor’s report of Deloitte & Touche LLP thereon.

The unaudited condensed financial statements of Waskom Gas Processing Company for the nine months ended September 30, 2005 and 2004.

(b) Pro Forma Financial Information

Unaudited Pro Forma Consolidated Balance Sheet of the Partnership as of September 30, 2005.

Unaudited Pro Forma Consolidated Statement of Operations of the Partnership for the nine months ended September 30, 2005.

Unaudited Pro Forma Consolidated Statement of Operations of the Partnership for the year ended December 31, 2004.

Notes to the Unaudited Pro Forma Financial Statements.

(c) Exhibits

EXHIBIT
NUMBER				DESCRIPTION
23.1		—		Consent of Deloitte & Touche LLP

SIGNATURES

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

		MARTIN MIDSTREAM PARTNERS L.P.
		By:		Martin Midstream GP LLC
				Its General Partner
Date: January 4, 2006						By:		/s/ Robert D. Bondurant
										Robert D. Bondurant,
										Executive Vice President and
										Chief Financial Officer

Prism Gas Systems I, L.P.
Consolidated Financial Statements
as of and for the Years Ended
December 31, 2004, 2003 and 2002

Table of Contents

		Page Number
Report of Independent Accountants		F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003		F-3
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002		F-4
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002		F-6
Notes to Consolidated Financial Statements		F-7

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INDEPENDENT AUDITORS’ REPORT

Shareholders
Prism Gas Systems, Inc.
Bedford, Texas

We have audited the accompanying consolidated balance sheets of Prism Gas Systems, Inc. and subsidiary (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for asset retirement obligations in 2003 as required by Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.

Deloitte & Touche LLP

May 6, 2005

PRISM GAS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003

		2004				2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	9,043,730			$	5,009,715
Accounts receivable			8,917,045				4,526,796
Accounts receivable—related party			611,819				27,117
Inventories			200,039				232,307
Derivative asset, current			8,350
Prepaid assets			396,239				502,214
Total current assets			19,177,222				10,542,179
PROPERTY AND EQUIPMENT:
Gas plant and gathering system assets			8,181,184				7,204,548
Other fixed assets			245,860				190,350
Accumulated depreciation, depletion and amortization			(2,750,345	)			(1,848,154	)
Total property and equipment			5,676,699				5,546,744
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES			16,073,066				15,346,746
DEPOSIT ON FIXED ASSETS TO BE PURCHASED							1,500,000
OTHER ASSETS			381,049				413,906
TOTAL		$	41,308,036			$	33,349,575
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	3,889,013			$	4,146,434
Accounts payable—related party			7,383,315				4,380,854
Current portion of notes payable
Taxes payable			74,100				74,223
Derivative liabilities—current			320,642				75,536
Total current liabilities			11,667,070				8,677,047
LONG-TERM LIABILITIES
Deferred income taxes			1,499,913
Asset retirement obligation			202,413				138,662
Total liabilities			13,369,396				8,815,709
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS’ EQUITY:
Common stock			25				25
Additional paid-in capital			25,269,975				25,269,975
Retained earnings (deficit)			2,668,640				(736,134	)
Total shareholders’ equity			27,938,640				24,533,866
TOTAL		$	41,308,036			$	33,349,575

See notes to consolidated financial statements.

PRISM GAS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

		2004				2003				2002
OPERATING REVENUES:
Gas, NGL and condensate sales		$	71,447,531			$	50,595,043			$	25,760,655
Gathering and compression fees			616,613				505,896				221,837
Other operating fees			257,870				233,763				165,904
Mark-to-market adjustment on derivative contracts			(945,386	)			(395,974	)			(111,561	)
Gain on sale of assets			7,500				1,056				7,950
Total operating revenues			71,384,128				50,939,784				26,044,785
OPERATING COSTS AND EXPENSES:
Cost of sales			68,132,242				48,110,424				24,409,049
Operating costs			1,720,989				1,874,503				1,603,393
Depreciation, depletion and amortization			982,818				667,016				537,541
General and administrative			2,764,996				2,178,432				2,024,680
Franchise taxes			58,838				71,343				61,821
Asset impairment charges			137,508								213,750
Total operating costs and expenses			73,797,391				52,901,718				28,850,234
OPERATING LOSS			(2,413,263	)			(1,961,934	)			(2,805,449	)
EQUITY IN NET EARNINGS OF PARTNERSHIPS AND JOINT VENTURES			7,111,939				3,998,037				2,310,942
INTEREST (EXPENSE) INCOME			(19,715	)			7,811				20,525
OTHER INCOME (LOSS)			225,726								(2,238	)
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE			4,904,687				2,043,914				(476,220	)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX EXPENSE OF $0							(16,991	)
NET INCOME (LOSS) BEFORE TAXES			4,904,687				2,026,923				(476,220	)
INCOME TAX EXPENSE (LOSS)			1,499,913
NET INCOME		$	3,404,774			$	2,026,923			$	(476,220	)

See notes to consolidated financial statements.

PRISM GAS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

										Additional				Retained				Total
		Common Stock								Paid-In				Earnings				Shareholders’
		Shares				Amount				Capital				(Deficit)				Equity
BALANCE—January 1, 2002			2,552			$	25			$	21,732,175			$	(2,286,837	)		$	19,445,363
Net loss															(476,220	)			(476,220	)
BALANCE—December 31, 2002			2,552				25				21,732,175				(2,763,057	)			18,969,143
Common stock subscribed											3,537,800								3,537,800
Net income															2,026,923				2,026,923
BALANCE—December 31, 2003			2,552				25				25,269,975				(736,134	)			24,533,866
Net income															3,404,774				3,404,774
BALANCE—December 31, 2004			2,552			$	25			$	25,269,975			$	2,668,640			$	27,938,640

See notes to consolidated financial statements.

PRISM GAS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

		2004				2003				2002
OPERATING ACTIVITIES:
Net income (loss)		$	3,404,774			$	2,026,923			$	(476,220	)
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization			982,818				667,016				537,541
Deferred taxes			1,499,913
Gain on sale of asset			(7,500	)			(1,056	)
Equity in net earnings of partnerships and joint ventures			(7,111,939	)			(3,998,037	)			(2,310,942	)
Noncash mark-to-market adjustment on derivative contracts			236,756				9,243				111,561
Asset impairment charges			137,508								213,750
Distributions in-kind from equity investment			4,976,180				3,886,882				7,008,420
Noncash processing fees			824,178
Cumulative effect of a change in accounting principle							16,991
Changes in operating assets and liabilities:
Accounts receivable—related party			(584,702	)			223,389				(250,506	)
Other current assets			(4,154,980	)			(1,511,529	)			(2,537,192	)
Noncurrent assets			32,857				(108,396	)			(305,100	)
Accounts payable—related party			3,002,338				2,052,896				2,237,958
Other current liabilities			(257,421	)			188,536				3,477,512
Net cash provided by operating activities			2,980,780				3,452,858				7,706,782
INVESTING ACTIVITIES:
Additions to gas plant and gathering system assets—net of purchase price adjustments			(1,131,020	)			(1,964,093	)			(651,435	)
Additions to other fixed assets			(55,510	)			(65,867	)			(5,257	)
Refund (deposits) on fixed assets to be purchased			1,500,000				(1,500,000	)
Proceeds from insurance settlement			147,004
Proceeds from sale of an asset			7,500				2,500
Investments in partnerships and joint venture—net			(127,239	)			(3,354,844	)			(4,943,521	)
Distribution from partnership			712,500								75,000
Net cash provided by (used in) investing activities			1,053,235				(6,882,304	)			(5,525,213	)
FINANCING ACTIVITIES:
Sale of common stock—cash contribution							3,537,800
Proceeds from note payable							215,323
Repayment of note payable							(422,382	)			(135,917	)
Net cash provided by (used in) financing activities			—				3,330,741				(135,917	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			4,034,015				(98,705	)			2,045,652
CASH AND CASH EQUIVALENTS—Beginning of year			5,009,715				5,108,420				3,062,768
CASH AND CASH EQUIVALENTS—End of year		$	9,043,730			$	5,009,715			$	5,108,420
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid		$	34,375			$	7,789			$	15,112
Taxes paid		$	121,240			$	122,549			$	152,234

See notes to consolidated financial statements.

PRISM GAS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1.		NATURE OF BUSINESS
		Prism Gas Systems, Inc. and subsidiary (the “Company”), a Delaware corporation, was formed on January 10, 2000. The Company is party to subscription agreements with Natural Gas Partners, Inc. (“NGP”) and certain management members, which govern the sale of the Company’s common stock. Under these agreements, NGP and those certain management members committed to infuse $25,520,000 into the Company at the request of management in return for common stock. At December 31, 2002, $3,572,800 remained outstanding under the subscription agreements. On July 2, 2003, the Company issued a notice of call for the remaining subscriptions outstanding. As of December 31, 2003, all capital has been funded under the subscription agreements. The Company is engaged in the gathering, processing and marketing of natural gas and natural gas liquids, predominantly in Texas and northwest Louisiana. The Company accounts for its investments in Waskom Gas Processing Company (“Waskom”), the Matagorda Offshore Gathering System (“Matagorda”), and the Fishhook Gathering System (“Fishhook”) under the equity method of accounting. All significant intercompany transactions are eliminated.
2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		Cash and Cash Equivalents—Cash and cash equivalents include cash and all highly liquid investments with original maturities of three months or less at the date of purchase.
		Accounts Receivable—Accounts receivable include trade receivables and miscellaneous other receivables.
		Inventories—Inventories are stated at the lower of cost or market and consist primarily of natural gas liquids.
		Fixed Assets—Fixed assets are depreciated using the straight-line method at rates based on the estimated useful lives of the classes of assets, as follows:

		Years
Gas gathering equipment			10
Gas plants			10
Furniture and fixtures			7
Computer equipment			5
Computer software			3

Repairs and maintenance are charged to operations as incurred. Renewals and betterments are capitalized. When assets are sold, retired or otherwise disposed of, the applicable costs and reserves are removed from the accounts, and the resulting gain or loss is recognized.

Investments—The Company uses the equity method of accounting for investments in partnerships where the ability to exercise significant influence over such entities exists. Investments in partnerships, at equity, consist of capital contributions and advances plus the Company’s share of accumulated

		earnings as of the partnerships’ latest fiscal year-ends, less capital withdrawals and dividends. Any excess of cost over the underlying equity in net assets is recognized as goodwill. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, this goodwill is not subject to amortization and is accounted for as a component of the investment. Equity method investments are subject to impairment under the provisions of Accounting Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.
		Accounts Payable and Accrued Expenses—Accounts payable and accrued expenses include trade accounts payable and period-ending accruals for items such as payroll, interest, and sales and use tax.
		Asset Retirement Obligations—SFAS No. 143, Accounting for Asset Retirement Obligations, became effective beginning January 1, 2003. SFAS No. 143 requires the recognition of a fair value liability for any retirement obligation associated with long-lived assets in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s useful life. See Note 3 for additional information on the Company’s asset retirement obligations. Upon adoption of SFAS No. 143, the Company recorded an addition to gas plant and gathering system assets of $130,702, an asset retirement obligation of $134,623, accumulated depreciation of $26,140 and a pretax charge of $16,991. In 2004, the Company recorded an addition to gathering system assets of $59,591 and an asset retirement obligation of equal value. The retirement obligation requires management to make significant estimates and judgments regarding the Company’s expected plugging and abandonment costs and retirement dates.
		Impairment of Long-Lived Assets—The Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires the Company to assess the need for an impairment of capitalized costs of its natural gas properties on a property-by-property basis. If the net capitalized cost of a property is more than the estimated undiscounted future cash flows expected to be received from the property, then an impairment loss is recognized sufficient to bring net capitalized costs down to discounted future cash flows expected to be received from the property.
		During 2002, the Company recorded noncash impairment charges of approximately $214,000 to write down certain gas plant and gathering system assets at the Company’s McLeod plant. During 2003, the Company concluded, based on significant assumptions and projections, that there was no event, change in circumstance or expectation that would indicate the existence of an impairment loss. Accordingly, the Company did not recognize an impairment charge. During 2004, the Company recorded noncash impairment charges of approximately $137,500 to write down certain gas plant assets at the McLeod plant. Quoted market prices were the basis for determination of fair value related to the impairment charge.
		Revenue Recognition—Revenues are recognized when title passes or service is performed. The Company’s businesses consist largely of the ownership and operation of physical assets. End sales from these businesses result in physical deliveries of commodities to the Company’s commercial, industrial and retail customers.
		Comprehensive Income—In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which established reporting and disclosure requirements for comprehensive income and its components within the financial statements. The Company had no comprehensive income components as of December 31, 2004, 2003 and 2002. Accordingly, comprehensive income is the same as the net income for the years ended December 31, 2004, 2003 and 2002.

		Federal Income Taxes—The Company’s liability for federal income taxes is based on earnings for the year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply in the years in which those temporary differences are expected to be recovered or settled.
		Derivative Instruments and Hedging Activities—SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards for derivative instruments and hedging activities. It requires that all derivatives be included on the balance sheet as an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If such hedge accounting criteria are met, the change is deferred in shareholders’ equity as a component of accumulated other comprehensive income. The deferred items are recognized in the period the derivative contract is settled. The Company has not designated any of its derivative instruments as hedges and has elected to mark them to market, with all market value adjustments being recorded in the consolidated statements of operations in the current period.
		Stock-Based Compensation—SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to continue to account for such transactions under APB Opinion No. 25, Accounting for Stock Issued to Employees, but are required to disclose pro forma net income or loss as if the Company had applied methods prescribed by SFAS No. 123.
		On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value method of accounting for stock-based compensation. In addition, SFAS No. 148 requires more prominent disclosures in the financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
		The Company complies with the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148; however, the Company has elected to continue to apply the provisions of APB Opinion No. 25 and related interpretations in accounting for its grants to employees. The Company uses the intrinsic value method under APB Opinion No. 25 to account for stock-based employee compensation. In addition, no costs are included in net income for the years ended December 31, 2004 and 2003 related to stock-based employee compensation under the intrinsic value method. If the Company had used the fair value method under SFAS No. 123, no costs would have been recorded under this method.
		Use of Estimates—The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts at the date of the financial statements and the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates.
		Recently Issued Accounting Pronouncements—In April 2002, the FASB issued SFAS No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which became effective beginning January 1, 2003. The statement rescinds, updates,

		clarifies, and simplifies various existing accounting pronouncements. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. The adoption of this standard did not have an impact on the Company’s financial statements.
		In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this standard did not have an impact on the Company’s financial statements.
		In January 2003, the FASB issued Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities (revised December 2003, “FIN 46R”). FIN 46 clarifies treatment of certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. FIN 46, which became effective on December 31, 2003, applies to variable interest entities (“VIEs”) created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. The implementation of FIN 46 did not have a material impact on the Company’s consolidated financial statements.
		In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts and hedging activities. SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly and is effective for contracts entered into or modified after June 30, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
		In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer of financial instruments classifies and measures in its statement of financial position certain instruments with characteristics of both liabilities and equity. SFAS No. 150 modifies the accounting and financial statement disclosures of certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 became effective for the Company beginning January 1, 2004. The adoption of this standard did not have an impact on the Company’s financial statements.
		In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. This statement revised SFAS No. 123, Accounting for Stock-Based Compensation, and requires companies to expense the value of employee stock options and similar awards. The effective date of this standard is interim and annual periods beginning after January 1, 2006. Stock options have not been issued in the Company’s stock; therefore, adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
3.		ASSET RETIREMENT OBLIGATION
		SFAS No. 143 became effective January 1, 2003. SFAS No. 143 requires the recognition of a fair value liability for any legal retirement obligations associated with long-lived assets in the period in which it is

		incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as a part of the carrying amount of the long-lived asset and depreciated over the asset’s useful life.
		The Company’s long-lived assets captured under SFAS No. 143 are natural gas processing plants and pipelines. The Company’s asset retirement obligations include purging, plugging and remediation costs.
		The following is a reconciliation of the asset retirement obligation liability at December 31, 2004 and 2003 (in thousands):

Beginning balance—January 1, 2003		$	—
Cumulative effect adjustment			135
Accretion expense			4
Ending balance—December 31, 2003		$	139
Liabilities incurred			59
Accretion expense			4
Ending balance—December 31, 2004		$	202

The following pro forma data summarizes our net income as if the Company had adopted SFAS No. 143 on January 1, 2002. The associated pro forma asset retirement obligation was $130,702 on January 1, 2002. The balance at December 31, 2002 would have been $134,623. Values in the pro forma summary are in thousands.

		2003				2002
Net income (loss)—as reported		$	2,027			$	(476	)
Pro forma adjusted to reflect retroactive adoption of SFAS No. 143—net of related tax effects			17				(17	)
Pro forma net income (loss)		$	2,044			$	(493	)

4.		INVESTMENT IN PARTNERSHIPS AND JOINT VENTURES, AT EQUITY
		A summary of the Company’s investments in partnerships and joint ventures, at equity and related equity in net earnings as of and for the year ended December 31, 2004, 2003 and 2002 is as follows:

						Equity in Net								Equity in Net								Equity in Net
		Investments				Earnings				Investments				Earnings				Investments				Earnings
		2004				2004				2003				2003				2002				2002
Fishhook		$	938,026			$	493,470			$	—			$	—			$	—			$	—
Matagorda			1,181,361				810,745				1,527,672				214,043				1,311,629				259,687
Waskom			13,953,679				5,807,724				13,819,074				3,783,994				10,569,118				2,051,255
		$	16,073,066			$	7,111,939			$	15,346,746			$	3,998,037			$	11,880,747			$	2,310,942

Fishhook Offshore Gathering System—During 2004, the Company purchased a 50% interest in the assets of PIPE, LLC for approximately $275,000. Fishhook is operated by the joint 50% owner. Distributions of $0 were received in 2004. The investment in Fishhook includes the reinvestment of a distribution received from Matagorda.

Condensed financial information of Fishhook for the year ended December 31, 2004 has been summarized from unaudited financial statements, as follows:

		2004
Assets
Current assets		$	758,199
Property, plant and equipment—net			591,908
Other noncurrent assets—at cost
		$	1,350,107
Liabilities and Shareholders’ Equity
Current liabilities		$	83,865
Noncurrent liabilities			876,634
Shareholders’ equity			389,608
		$	1,350,107
Operations
Revenues		$	1,450,295
Net earnings		$	986,940

Matagorda Offshore Gathering System—During 2001, the Company purchased a 50% interest in the assets of Matagorda for approximately $1 million. Matagorda is operated by the joint 50% owner. Distributions of $712,500, $0 and $75,000 were received in 2004, 2003 and 2002, respectively.

Condensed financial information of Matagorda for the years ended December 31, 2004, 2003 and 2002 have been summarized from unaudited financial statements, as follows:

		2004				2003				2002
Assets
Current assets		$	7,132,644			$	5,507,658			$	3,455,659
Property, plant and equipment—net			3,167,124				2,455,440				2,826,034
Other noncurrent assets—at cost			21,351								600
		$	10,321,119			$	7,963,098			$	6,282,293
Liabilities and Shareholders’ Equity
Current liabilities		$	5,854,354			$	4,464,746			$	3,212,027
Noncurrent liabilities			2,150,000				2,150,000				2,150,000
Shareholders’ equity			2,316,765				1,348,352				920,266
		$	10,321,119			$	7,963,098			$	6,282,293
Operations
Revenues		$	32,798,731			$	27,714,943			$	18,591,607
Net earnings		$	1,621,491			$	428,086			$	519,374

Waskom Gas Processing Company—During 2001, the Company purchased a 33.33% partnership interest in Waskom from a former partner in the partnership for a net purchase price of approximately $10.5 million. During 2003, the Company purchased an additional 16.67% partnership interest from a former partner in the partnership for a net purchase price of approximately $3.6 million, resulting in the two remaining partners each having a 50% partnership interest. Waskom was formed to engage in the gathering, processing and marketing of natural gas and natural gas liquids. Waskom is operated by the Company. As a result of a smaller initial capital contribution by one of the partners, under the terms of the partnership agreement, revenues and expenses are not evenly allocated to the partners until terms of a payout provision defined in the agreement were reached. The payout provision of the partnership agreement provides that a former partner and Prism (as successor to an original partner) shall receive from their share of operating revenues an amount equal to 135% of their initial investment as escalated pursuant to the provisions of the agreement. In August 2004, this payout threshold was met resulting in equal distribution of proceeds from that time forward.

Condensed financial information of Waskom for the years ended December 31, 2004, 2003 and 2002 has been summarized from unaudited financial statements, as follows:

		2004				2003				2002
Assets
Current assets		$	6,558,846			$	5,526,402			$	4,667,779
Property, plant and equipment—net			18,084,591				18,240,707				19,038,362
		$	24,643,437			$	23,767,109			$	23,706,141
Liabilities and Partners’ Equity
Current liabilities		$	4,263,069			$	3,563,703			$	3,056,450
Partners’ equity			20,380,368				20,203,406				20,649,691
		$	24,643,437			$	23,767,109			$	23,706,141
Operations
Revenues		$	38,297,841			$	28,092,422			$	22,547,888
Net earnings		$	8,532,749			$	6,059,357			$	3,326,036

		No cash distributions were received in 2004, 2003, or 2002. Distributions of products in-kind of $4,976,180, $3,886,882 and $7,008,420 were received in 2004, 2003 and 2002, respectively. Distributions of products in-kind are valued at prevailing market prices at the time of distribution.
5.		INCOME TAXES
		The Company’s income tax expense for the years ended December 31, 2004, 2003 and 2002 were $1,499,913 and $0, respectively. A reconciliation of the income tax expense based upon federal statutory rates is as follows:

		2004				2003				2002
Income tax expense at statutory rates		$	1,714,640			$	709,423			$	(166,677	)
Other			7,475				4,274				(16,636	)
Valuation allowance			(222,202	)			(713,697	)			183,313
Total tax expense		$	1,499,913			$	—			$	—

The tax effects of significant temporary differences and carryforwards are as follows:

		2004				2003				2002
Deferred income tax assets		$	5,658,225			$	4,003,330			$	2,579,006
Deferred income tax liabilities			(7,158,138	)			(3,781,128	)			(1,643,107	)
Net deferred income tax assets (liabilities)			(1,499,913	)			222,202				935,899
Valuation allowance							(222,202	)			(935,899	)
Net deferred income tax assets (liabilities)		$	(1,499,913	)		$	—			$	—

		At December 31, 2004, 2003 and 2002, the Company had a net operating loss carryforward totaling approximately $4.8 million, $4.5 million and $3.9 million, respectively.
6.		DERIVATIVE INSTRUMENTS
		The Company periodically enters into derivative contracts to mitigate the effects of significant fluctuations in commodity prices. At December 31, 2004, the Company had the following open contracts:

Volume

Call

Product

Per Month

Period Covered

Price

Natural gas

10,000 MMBtu

January 1, 2005 to December 31, 2005

$

7.50

Natural gas

10,000 MMBtu

January 1, 2005 to December 31, 2005

$

6.85

Crude oil

2,000 Bbl

January 1, 2005 to December 31, 2005

$

40.90

Crude oil

2,000 Bbl

January 1, 2005 to December 31, 2005

$

45.00

Volume

Put

Product

Per Month

Period Covered

Price

Natural gas

10,000 MMBtu

January 1, 2005 to December 31, 2005

$

5.50

Natural gas

10,000 MMBtu

January 1, 2005 to December 31, 2005

$

6.00

Crude oil

2,000 Bbl

January 1, 2005 to December 31, 2005

$

34.00

Crude oil

2,000 Bbl

January 1, 2005 to December 31, 2005

$

39.00

		Based on future market prices at December 31, 2004, the fair value of the open contracts to the Company was a net liability of $312,292.
7.		EMPLOYEE STOCK OPTION PLAN
		On January 13, 2000, the Company’s Board of Directors approved the Option Plan (the “Plan”) for certain officers and employees of the Company. The Plan provides for future awards of stock options of up to 450 shares of common stock, subject to certain restrictions, with an initial exercise price of $10,000. The exercise price is to be increased by 10% per annum, prorated for partial years. The initial date for the escalation of the exercise price is based on the weighted average subscription payment percentage. The subscription payment percentage is determined based on total subscriptions to date under the Company’s subscription agreements as a percentage of the maximum subscription of $25,520,000. The options vest evenly over a period of three years beginning with the date of the award.

An analysis of the stock option activity for the years ended December 31, 2004, 2003 and 2002 is as follows:

						December 31				Weighted
		Number of				Option				Average
		Shares				Price				Option Price
Options outstanding at January 1, 2002			310			$	10,441			$	10,441
Options granted
Options outstanding at December 31, 2002			310				10,441				10,441
Options granted
Options outstanding at December 31, 2003			310				12,370				12,370
Options granted
Options outstanding at December 31, 2004			310			$	13,611			$	13,611

		SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based employee compensation at fair value. The Company has chosen to apply APB No. 25 and related interpretations to account for stock-based compensation. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the measurement date over the amount an employee must pay to acquire the stock. Since the stock options’ exercise price increases every year, and the vesting of the performance-based options is contingent on an uncertain future event, the measurement date will not occur until the options are exercised. No compensation expense has been recorded as of December 31, 2004, 2003 and 2002 related to outstanding stock options. The fair value of the Company’s common stock was determined using the price per share of $10,000 received in the sale of stock to NGP per the stock subscription agreement.
8.		RELATED PARTY TRANSACTIONS
		During the years ended December 31, 2004, 2003 and 2002, the Company made finance advisory fee payments totaling $170,124, $170,731 and $170,500, respectively, pursuant to the Fee and Reimbursement Agreement between the Company and NGP.
		During 2004, 2003 and 2002, the Company engaged in certain material transactions with Waskom Gas Processing Company (“WGPC”). The Company believes that the terms of these transactions were comparable to those that could have been negotiated with unrelated third parties. As of December 31, 2004, 2003 and 2002, the Company had receivables of approximately $612,000, $271,000 and $251,000, and payables of approximately $7.4 million, $4.4 million and $2.3 million, respectively, due from and due to WGPC.
		As of December 31, 2004, 2003 and 2002, there are no loans or extensions of credit to directors and executive officers of the Company.
9.		CREDIT FACILITY
		On November 5, 2003, the Company entered into a $25 million Senior Secured Revolving Credit Facility (“Credit Facility”) that matures on November 5, 2006. Under the terms of the Credit Facility,

		interest is payable quarterly at the bank’s stated adjusted base rate plus a margin ranging from 1% to 2%, or LIBOR plus a margin ranging from 1.75% to 2.75%, based on the ratio of Funded Debt to EBITDA (1% and 1.75%, respectively, on December 31, 2004), as defined within the Credit Facility agreement.
		The Credit Facility is secured by substantially all of the Company’s assets. As of December 31, 2004, there were no borrowings under the Credit Facility. The Company is required to maintain certain financial covenants under the debt agreement.
10.		COMMITMENTS AND CONTINGENCIES
		The Company has noncancelable operating leases for office space and equipment that expire in May 2007. Rental expense under those leases was approximately $111,500, $99,500 and $80,000, respectively, for each of the years ended December 31, 2004, 2003 and 2002. The following is a summary of future minimum rental payments due under the lease agreement at December 31, 2004:

Year Ending
December 31
2005		$	114,000
2006			52,000
2007			3,000
		$	169,000

		The Company is involved in various acquisitions and sales of property and other business transactions. Through the ordinary course of business, the Company is subject to various claims and other legal actions. However, it is anticipated that all matters will be satisfactorily resolved and will not have a significant impact on the assets and operations of the entity.
		The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Management believes that any future costs should not have a material adverse effect on the Company’s liquidity or financial position.
11.		SUBSEQUENT EVENTS
		In August 2003, the Company entered into an agreement to purchase certain natural gas transmission, gathering and compression facilities located in Panola and Harrison Counties, Texas. At the execution of the purchase agreement, the Company funded a down payment of $1.5 million to the seller. The down payment is nonrefundable in the event that the Company breaches or, except as permitted under the agreement, fails to fully perform its obligations. The purchase was approved by FERC in March 2004. As a result of the loss of substantial volumes from the system, the parties agreed to an amended and reduced purchase price. As a result of the amended price a third party holding a preferential right of purchase exercised its right and replaced the Company as purchaser and acquired the system on March 31, 2005. The Company is entitled to a refund of its down payment and is obligated to reimburse the seller revenues attributable to the system for the period July 1, 2003 through March 31, 2005 resulting in a settlement to the seller of approximately $69,000.

		In the third quarter of 2004, the Company along with its partner in the Waskom Gas Processing Company, signed an Authority for Expenditure to expand the fractionation capacity at the Waskom plant by 2,000 barrels per day. The Waskom plant is nearing design capacity for gas processing and raw production fractionation and this expansion will allow the plant to continue fractionating third-party volumes. The total cost of the fractionation expansion is projected to be $3.2 million. As of December 31, 2004, approximately $86,000 had been spent on the project.
		On January 1, 2005, the Company converted from a Delaware C Corporation to a Texas limited partnership. Basic ownership of the Company remains the same between NGP and Prism management.

Prism Gas Systems I, L.P.
Consolidated and Condensed Financial Statements
For the Periods Ended
September 30, 2005 and 2004

Table of Contents

		Page Number
Consolidated and Condensed Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 (audited)		F-20
Consolidated and Condensed Statements of Operations for the nine months ended September 30, 2005 and 2004 (unaudited)		F-21
Consolidated and Condensed Statements of Capital for the nine months ended September 30, 2005 and 2004 (unaudited)		F-22
Consolidated and Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)		F-23
Notes to Consolidated and Condensed Financial Statements		F-24

PRISM GAS SYSTEMS I, L.P. AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED BALANCE SHEETS

		September 30,				December 31,
		2005				2004
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	5,924,637			$	9,043,730
Accounts receivable, less allowance for doubtful accounts of $18,521 and $18,489 for 2005 and 2004, respectively			13,522,527				8,917,045
Due from affiliates			341,425				611,819
Inventories			374,314				200,039
Derivative asset, current			—				8,350
Prepaid assets			232,493				396,239
Total current assets			20,395,396				19,177,222
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES			17,037,371				16,073,066
PROPERTY AND EQUIPMENT:
Gas plant and gathering system assets			9,214,022				8,181,184
Other fixed assets			260,743				245,860
Accumulated depreciation, depletion and amortization			(3,366,998	)			(2,750,345	)
Property, plant and equipment, net			6,107,767				5,676,699
OTHER ASSETS			406,095				381,049
TOTAL		$	43,946,629			$	41,308,036
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	7,205,443			$	3,889,013
Due to affiliates			5,743,574				7,383,315
Taxes payable			6,388,464				74,100
Accrued settlement			1,100,000				—
Derivative liabilities—current			571,740				320,642
Total current liabilities			21,009,221				11,667,070
LONG-TERM LIABILITIES
Deferred income taxes			70,566				1,499,913
Asset retirement obligation			206,965				202,413
Total liabilities			21,286,752				13,369,396
COMMITMENTS AND CONTINGENCIES (Note 10)
EQUITY:
Common stock, $.01 par; 3,002 shares authorized; 2,552 issued and outstanding (See note 1)			—				25
Additional paid-in capital			—				25,269,975
Partners Capital			22,659,877				—
Accumulated earnings/deficit			—				2,668,640
Total equity			22,659,877				27,938,640
TOTAL		$	43,946,629			$	41,308,036

See notes to consolidated and condensed financial statements.

PRISM GAS SYSTEMS I, L.P. AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

		Nine Months Ended
		September 30,
		2005				2004
OPERATING REVENUES:
Gas, NGL and condensate sales		$	69,299,690			$	50,654,554
Gathering and compression fees			585,708				434,987
Other operating fees			253,419				206,607
Mark-to-market adjustment on derivative contracts			(765,716	)			(700,361	)
Total operating revenues			69,373,101				50,595,787
OPERATING COSTS AND EXPENSES:
Cost of sales			66,206,884				48,174,210
Operating costs			1,166,404				1,250,425
Depreciation and amortization			643,960				613,913
General and administrative			2,850,194				1,981,043
Total operating costs and expenses			70,867,442				52,019,591
OPERATING LOSS			(1,494,341	)			(1,423,804	)
Equity in net earnings of partnerships and joint ventures			4,896,023				5,473,848
Interest income (expense)			4,499				(18,332	)
Other income (expense)			(18,952)				233,225
NET INCOME  BEFORE TAXES			3,387,229				4,264,937
Current income taxes			8,543,690				—
Deferred income taxes			(1,429,347	)			1,328,230
NET INCOME (LOSS)		$	(3,727,114	)		$	2,936,707
Basic and diluted net income per partnership unit / common share		$	(1,460.47	)		$	1,150.75

See notes to consolidated and condensed financial statements.

PRISM GAS SYSTEMS I, L.P. AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED STATEMENTS OF CAPITAL
(Unaudited)

										Additional												Retained				Total Equity /
		Common Stock								Paid-in				Partners’ Capital								Earnings /				Partners’
		Units				Amounts				Capital				Units				Amount				(Deficit)				Capital
2004
Balances — December 31, 2003			2,552			$	25			$	25,269,975				—			$	—			$	(736,134	)		$	24,533,866
Net Income			—				—				—				—				—				2,936,707				2,936,707
Balances — September 30, 2004			2,552			$	25			$	25,269,975				—			$	—			$	2,200,573			$	27,470,573
2005
Balances — December 31, 2004			2,552			$	25			$	25,269,975				—			$	—			$	2,668,640			$	27,938,640
Common stock exchanged for partnership units			(2,552	)			(25	)			(25,269,975	)			2,552				25,270,000				—				—
Allocation of retained earnings			—				—				—				—				2,668,640				(2,668,640	)			—
Cash distributions			—				—				—				—				(1,551,649	)			—				(1,551,649	)
Net loss			—				—				—				—				(3,727,114	)			—				(3,727,114	)
Balances — September 30, 2005			—			$	—			$	—				2,552			$	22,659,877			$	—			$	22,659,877