Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to          

Commission File Number: 001-35719

Southcross Energy Partners, L.P.

(Exact name of registrant as specified in its charter)

(214) 979-3700

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of units outstanding of the issuer’s classes of common units, subordinated units and series A convertible preferred units, as of the latest practicable date:

As of May 6, 2013, the registrant has 12,219,699 common units outstanding, 12,213,713 subordinated units outstanding and 1,466,325 series A convertible preferred units outstanding.  Our common units trade on the NYSE under the symbol “SXE.”

Table of Contents

Commonly Used Terms

As generally used in the energy industry and in this Quarterly Report on Form 10-Q, the following terms have the following meanings:

/d: Per day

Bbls: Barrels

Condensate: Hydrocarbons that are produced from natural gas reservoirs but remain liquid at normal temperature and pressure

MMBtu: One million British thermal units

Mcf: One thousand cubic feet

Mgal: One thousand gallons

MMcf: One million cubic feet

NGLs: Natural gas liquids, which consist primarily of ethane, propane, isobutane, normal butane, natural gasoline and stabilized condensate

Residue gas: Pipeline quality natural gas remaining after natural gas is processed and NGLs and other matters are removed

Rich gas: Natural gas that is high in NGL content

Throughput: The volume of natural gas or NGLs transported or passing through a pipeline, plant, terminal or other facility

y-grade: Commingled mix of NGL components extracted via natural gas processing normally consisting of ethane, propane, isobutane, butane and natural gasoline.

2

Table of Contents

FORM 10-Q

TABLE OF CONTENTS

Southcross Energy Partners, L.P.

3

Table of Contents

FORWARD-LOOKING INFORMATION

Investors are cautioned that certain statements contained in this Quarterly Report on Form 10-Q as well as in periodic press releases and oral statements made by our management team during our presentations are “forward-looking” statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions, or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, are also forward-looking statements. These forward-looking statements involve external risks and uncertainties, including, but not limited to, those described under the section entitled “Risk Factors” included herein and in our 2012 Annual Report on Form 10-K.

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond the control of our management team. All forward-looking statements in this Quarterly Report on Form 10-Q and subsequent written and oral forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these risks and uncertainties. These risks and uncertainties include, among others:

·                  the volatility of natural gas, crude oil and NGL prices and the price and demand of products derived from these commodities;

·                  competitive conditions in our industry and the extent and success of producers replacing declining production and our success in obtaining new sources of supply;

·                  industry conditions and supply of pipelines, processing and fractionation capacity relative to available natural gas from producers;

·                  our dependence upon a relatively limited number of customers for a significant portion of our revenues;

·                  actions taken or inactions or non-performance by third parties, including suppliers, contractors, operators, processors, transporters and customers;

·                  our ability to effectively recover NGLs at a rate equal to or greater than our contracted rates with customers;

·                  our ability to produce and market NGLs at the anticipated differential to NGL index pricing;

·                  our access to markets enabling us to match pricing indices for purchases and sales of natural gas and NGLs;

·                  our ability to complete projects within budget and on schedule, including but not limited to, timely receipt of necessary government approvals and permits, our ability to control the costs of construction and other factors that may impact projects;

·                  our ability to consummate acquisitions, integrate the acquired businesses successfully, realize anticipated cost savings and other synergies from any acquisitions;

·                  our ability to manage over time changing exposure to commodity price risk;

·                  the effectiveness of our hedging activities or our decisions not to undertake hedging activities;

·                  our access to financing and ability to remain in compliance with our financing covenants;

·                  our ability to generate sufficient operating cash flow to fund our minimum quarterly distribution;

·                  changes in general economic conditions;

·                  the effects of downtime associated with our assets or the assets of third parties interconnected with our systems;

·                  operating hazards, fires, natural disasters, weather-related delays, casualty losses and other matters beyond our control;

·                  the failure of our processing plants to perform as expected, including outages for unscheduled maintenance or repair;

·                  the effects of laws and governmental regulations and policies;

·                  the effects of existing and future litigation; and

·                  other financial, operational and legal risks and uncertainties detailed from time to time in our filings with the U.S. Securities and Exchange Commission.

Developments in any of these areas could cause actual results to differ materially from those anticipated or projected; or affect our ability to maintain distribution levels; or access necessary financial markets,  or cause a significant reduction in the market price of our common units.

The foregoing list of risks and uncertainties may not contain all of the risks and uncertainties that could affect us. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not, in fact, occur. Accordingly, undue reliance should not be placed on these statements. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as otherwise required by law.

4

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SOUTHCROSS ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for unit data)

(Unaudited)

See accompanying notes.

5

Table of Contents

SOUTHCROSS ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per unit data)

(Unaudited)

See accompanying notes.

6

Table of Contents

SOUTHCROSS ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

See accompanying notes.

7

Table of Contents

SOUTHCROSS ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes.

8

Table of Contents

SOUTHCROSS ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN  PARTNERS’ CAPITAL AND MEMBERS’ EQUITY

(In thousands)

(Unaudited)

See accompanying notes.

9

Table of Contents

SOUTHCROSS ENERGY PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.              ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization

Southcross Energy Partners, L.P. (the “Partnership,” “Southcross,” the “Company,” “we,” “our,” or “us”) is a Delaware limited partnership formed in April 2012 to own, operate, develop and acquire midstream energy assets. Our common units are listed on the New York Stock Exchange (“NYSE”) under the symbol “SXE.”

Southcross Energy LLC was formed in 2009 and is the predecessor of the Partnership. In connection with our initial public offering (“IPO”), Southcross Energy LLC contributed all of its operating subsidiaries (its net assets on a historical cost basis), excluding certain liabilities and all preferred units, and became the holding company of the Partnership. Southcross Energy LLC holds all of the equity interests in Southcross Energy Partners GP, LLC, a Delaware limited liability company and our general partner (“General Partner”), as well as all subordinated units and the series A convertible preferred units issued on April 12, 2013 (See Note 11) and 7.5% of the common units of the Partnership.  Southcross Energy LLC is controlled through investment funds and entities associated with Charlesbank Capital Partners, LLC (“Charlesbank”). There was no change in the basis of accounting as a result of the IPO and the contributed net assets of Southcross Energy LLC.

On November 7, 2012, we completed our IPO and after the completion of the IPO and full exercise of the underwriters’ option to purchase additional common units, Southcross Energy LLC’s direct and indirect equity ownership in the Partnership was 58.5%. These condensed consolidated financial statements reflect the assets, liabilities, results of operations and cash flows of the Partnership beginning November 7, 2012 and Southcross Energy LLC for the periods ended prior to November 7, 2012.

See our 2012 Annual Report on Form 10-K for more information related to our organization.

The following table depicts the ownership structure of the Partnership as of March 31, 2013:

Description of Business

The Partnership is a midstream natural gas company with operations in South Texas, Mississippi and Alabama. We operate as one reportable segment and provide, through our subsidiaries, natural gas gathering, processing, treating, compression and transportation services and NGLs fractionation and transportation services.  The Partnership also sources, purchases, transports and sells natural gas and NGLs.  The Partnership’s network of operations provides a means of connecting our suppliers of natural gas to our customers, which include industrial, commercial and power generation customers and local distribution companies.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We prepared this Quarterly Report on Form 10-Q under the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Accordingly, these condensed consolidated financial statements do not include all of the disclosures required by GAAP and should be read with our 2012 Annual Report on Form 10-K. The condensed consolidated financial statements as of March 31, 2013, and for the three months ended March 31, 2013 and 2012, are unaudited and have been prepared on the same basis as the

10

Table of Contents

annual consolidated financial statements.  All intercompany accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.

In management’s opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals necessary for the fair presentation of the results of operations for the three months ended March 31, 2013 and 2012.  Information for interim periods may not be indicative of our operating results for the entire year. The disclosures included in this Quarterly Report on Form 10-Q provide an update to our 2012 Annual Report on Form 10-K.

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make various estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the period.  Actual results could differ from those estimates

We evaluate events that occur after the balance sheet date but before the financial statements are issued for potential recognition or disclosure.  Based on the evaluation, we determined that there were no material subsequent events for recognition or disclosure other than those disclosed herein.

Significant Accounting Policies

There were no material changes to our significant accounting policies described in Note 2 of our 2012 Annual Report on Form 10-K.

Recent Accounting Pronouncements - Accounting standard-setting organizations frequently issue new or revised accounting rules. We regularly review new pronouncements to determine their impact, if any, on our consolidated financial statements.

In February 2013, the Financial Accounting Standards Board issued an accounting standards update on “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  This update requires that we report reclassifications out of accumulated other comprehensive income and their effect on net income by component or financial statement line effective for our quarterly filing for the three months ended March 31, 2013.

The Partnership adopted this standard effective January 1, 2013, which did not have a material impact on our financial statements.

11

Table of Contents

3. NET INCOME PER LIMITED PARTNER UNIT AND DISTRIBUTIONS

Earnings Per Limited Partner Unit of the Partnership

The following is a reconciliation of net loss attributable to limited partners and the limited partner units used in the basic and diluted earnings per unit calculations for the three months ended March 31, 2013 (in thousands, except unit and per unit data):

(1) Because we had a net loss for the three months ended March 31, 2013, the weighted average units outstanding are the same for basic and diluted net loss per common unit. At March 31, 2013, the amount of unvested common units that were not included in the computation of diluted per unit amounts was 140,100.

Distributions

Our Second Amended and Restated Agreement of Limited Partnership (“Partnership Agreement”) requires that, within 45 days after the end of each quarter, beginning with the quarter ending December 31, 2012, we distribute all of our Available Cash (as defined in the Partnership Agreement) to unitholders of record (other than holders of Series A Preferred Units (as defined below)) on the applicable record date, as determined by our General Partner.

The following table represents our distribution declared for the quarter ended March 31, 2013 and distribution paid for the quarter ended December 31, 2012 (in thousands, except per unit data):

(1) Per unit distribution of $0.24 corresponds to the minimum quarterly distribution of $0.40 per unit, or $1.60 on an annualized basis, pro-rated for the portion of the quarter following the closing of our IPO on November 7, 2012.

12

Table of Contents

On April 12, 2013, we raised $34.2 million of equity through an issuance of 1,466,325 Series A Convertible Preferred Units (“Series A Preferred Units”) to satisfy the requirements of the second amendment to our $350.0 million senior secured credit facility with Wells Fargo Bank, N.A., as administrative agent, and a syndicate of lenders (“Credit Facility”) (See Note 5 and Note 11). Under the provisions of our Partnership Agreement, we are required to pay the holders of our Series A Preferred Units quarterly distributions of in-kind Series A Preferred Units for the first four full quarters following the issuance of the units and continuing thereafter until we have given notice under the Credit Facility that we have achieved the Target Leverage Ratio (See Note 5) and after the board of directors of our General Partner determines to begin paying quarterly distributions in cash.

Earnings Per Common Unit of Southcross Energy LLC

Southcross Energy LLC calculated earnings per common unit by first deducting the amount of cumulative returns on both the redeemable preferred and preferred units from net income (loss), and dividing this amount by the weighted average number of vested common units (including both the vested Class A common units and Class B units).  For the calculation of diluted earnings per unit, the weighted average unvested units were included in the computation.

The following is a reconciliation of net income per common unit used in the basic and diluted earnings per unit calculations for the three months ended March 31, 2012 (in thousands, except unit and per unit data):

Southcross Energy LLC calculated earnings per common unit by first deducting the amount of cumulative returns on both Redeemable Preferred and Preferred units from net income (loss), and dividing this amount by the weighted average number of vested common units.  For the calculation of diluted earnings per unit, the unvested units have been included in the computation.  The weighted average number of unvested units that were included in the computation of diluted earnings per unit for the three months ended March 31, 2012 was 237,409 units.  There were no units excluded from out diluted earnings per unit computation as we do not have any anti-dilutive units for the three months ended March 31, 2012.

4. FINANCIAL INSTRUMENTS

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable

As of March 31, 2013 and December 31, 2012, the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable represent fair values based on the short-term nature of these instruments.

Credit Facility

The fair value of our Credit Facility executed in 2012 approximates its carrying amount as of March 31, 2013 due primarily to the variable nature of the interest rate of the instrument and given the limited changes in the interest rate environment since its origination on November 7, 2012, which is considered a Level 2 fair value measurement.

Derivatives

Interest Rate Swaps

The Partnership manages its interest rate risk through interest rate swaps.  As of March 31, 2013, the current portion of the interest rate swap liability of $0.5 million was included within other current liabilities, and the non-current portion of the interest rate swap liability of $0.1 million was included within other non-current liabilities.

13

Table of Contents

The fair value of the interest rate swap liabilities were as follows (in thousands):

In March 2012, we terminated an interest rate cap contract and entered into an interest rate swap contract with Wells Fargo, N.A. The interest rate swap has a notional value of $150.0 million, and a maturity date of June 30, 2014. We receive a floating rate based upon one-month LIBOR and pay a fixed rate under the interest rate swap of 0.54%. The interest rate swap is designated as a cash flow hedge for accounting purposes and, thus, to the extent the cash flow hedge is effective, unrealized gains and losses are recorded to accumulated other comprehensive (loss)/income and recognized in interest expense as the underlying hedged transactions (interest payments) are recorded. Any hedge ineffectiveness is recognized in interest expense immediately. The Partnership did not have any hedge ineffectiveness during the period ended March 31, 2013.

Based on current interest rates, the Partnership estimated that approximately $0.5 million of hedging losses related to the interest rate swap contract will be reclassified from accumulated other comprehensive (loss)/income into results of operations within the next 12 months.

The amounts recognized in interest expense associated with derivatives that are not designated as hedging instruments were as follows (in thousands):

The amounts recognized in interest expense associated with derivatives that are designated as hedging instruments were as follows (in thousands):

The change in value recognized in other comprehensive loss on the interest rate swap (effective portion) was as follows (in thousands):

14

Table of Contents

Commodity Swaps

In its normal course of business, the Partnership periodically enters into month-ahead swap contracts to hedge its exposure to certain intra-month natural gas index pricing risk. There were no outstanding month-ahead swap contracts as of March 31, 2013 or as of December 31, 2012.  The Partnership defines the contracts as Level 2, because the index price associated with such contracts is observable and tied to a similarly quoted first-of-the-month natural gas index price.

The realized losses on these derivatives, recognized in revenues in our statements of operations were as follows (in thousands):

5. LONG-TERM DEBT

Credit Facility

In connection with the closing of the IPO, the Partnership entered into the Credit Facility and utilized it to fund fees and expenses incurred in connection with the IPO and for the repayment of a portion of Southcross Energy LLC’s debt under its amended and restated credit agreement.

The Partnership may utilize the Credit Facility for working capital requirements and capital expenditures, the purchase of assets, the payment of distributions, the repurchase of units and general purposes of the Partnership. The Credit Facility matures on November 7, 2017, the fifth anniversary of the IPO closing date.

Prior to amending our Credit Facility as discussed below, the Credit Facility included a sublimit of up to $75.0 million for letters of credit of which $25.3 million was outstanding as of March 31, 2013. The Credit Facility also contained various covenants and restrictive provisions and required maintenance of certain financial and operational covenants including but not limited to the following:

·                                          prior to exercising a one-time covenant election (defined by the Credit Facility) in connection with the issuance of certain unsecured notes, a consolidated total leverage ratio (generally defined as debt to EBITDA, as adjusted) of not more than 5.25 to 1.00 with step downs as set forth in the Credit Facility, and a consolidated interest coverage ratio of not less than 2.75 to 1.00. The requirement to maintain a certain consolidated total leverage ratio is subject to a provision for increases to 5.00 to 1.00 in connection with certain future acquisitions; and

·                                          upon exercising a one-time covenant election (defined by the Credit Facility) in connection with the issuance of certain unsecured notes, a consolidated total leverage ratio of not more than 5.25 to 1.00, a consolidated senior secured leverage ratio of not more than 3.50 to 1.00 and a consolidated interest coverage ratio of not less than 2.75 to 1.00.

The Credit Facility also required the Partnership’s Woodsboro gas processing plant and Bonnie View NGL fractionation facility to meet certain initial average daily processing volume requirements by December 31, 2012. Due to required operational ramp up time of the Bonnie View NGL fractionation facility, prior to December 31, 2012, the Partnership requested and received an extension of time to achieve the initial average daily processing volumes to January 31, 2013. The Partnership met the average daily processing volumes necessary to satisfy the Credit Facility’s operational covenants in January 2013. The Partnership is not required to meet these average daily processing volumes on an ongoing basis to be in compliance with the Credit Facility.

Borrowings under the Credit Facility bear interest at LIBOR plus an applicable margin or a base rate as defined in the respective credit agreements. Under the terms of the Credit Facility, the applicable margin under LIBOR borrowings was 3.25% at March 31, 2013. The weighted-average interest rate as of March 31, 2013 was 3.49%.

Our borrowings under the Credit Facility were $246.0 million as of March 31, 2013, and our remaining available capacity under the Amended Credit Facility (as defined below) was $14.0 million as of March 31, 2013. For the three months ended March 31, 2013, our average outstanding borrowings were $229.8 million and our maximum outstanding borrowings were $246.0 million.

As of March 31, 2012, Southcross Energy LLC had an outstanding term loan of $158.9 million with a LIBOR interest rate of 3.25% and two revolver loans, one of $66.5 million with a LIBOR interest rate of 3.25% and the other of $12.0 million with an ABR interest rate of 5.25%.

15

Table of Contents

Amended Credit Facility

On March 27, 2013, we entered into the first amendment (the “First Amendment”) to the Credit Facility. As a result of the First Amendment, our letters of credit sublimit was reduced from $75.0 million to $31.5 million and our available credit was reduced from $350.0 million to the sum of $250.0 million plus any amounts placed on deposit in a collateral account of our General Partner (the “Collateral Account”) and letters of credit outstanding. Amounts on deposit in the Collateral Account are pledged as collateral to the Credit Facility. On March 27, 2013, our General Partner deposited $10.0 million into the Collateral Account as required under the First Amendment. Pursuant to the First Amendment, we are allowed to pay our quarterly cash distribution of available cash for the first quarter 2013 in an amount not to exceed the amount then on deposit in the Collateral Account regardless of whether we meet certain financial covenants for the period ending March 31, 2013. Because the First Amendment did not modify our requirement to meet the financial covenants under the Credit Facility beginning March 31, 2013, and because we believed it was unlikely that we would be in compliance with our financial covenants for the quarter ending March 31, 2013, we further amended our Credit Facility as discussed below.  We incurred $0.5 million in fees in connection with the First Amendment, which have been deferred, and will be amortized over the remaining life of the Credit Facility.

On April 12, 2013, we entered into the limited waiver and second amendment (the “Second Amendment”) to the Credit Facility (as amended, the “Amended Credit Facility”), which waived our defaults relating to financial covenants in the Credit Facility for the period ending March 31, 2013 and provided more favorable financial covenants until we give notice under the Amended Credit Facility that we have achieved a consolidated total leverage ratio (the “Target Leverage Ratio”) of 4.25 to 1.00 for one quarter or 4.50 to 1.00 for two consecutive quarters, calculated excluding the benefit of cash on deposit in the Collateral Account and any equity cure amounts (the “Target Leverage Test”). The Target Leverage Test is not a required calculation under the Second Amendment, and can be calculated at our election. For any calendar quarter ending on or before December 31, 2013, we have the right (which cannot be exercised more than two times) to cure defaults under our financial covenants by having our General Partner and/or Southcross Energy LLC place additional funds into the Collateral Account (such funds being the equity cure). Our available credit continues to be subject to the availability limits described in the First Amendment.  We incurred $1.3 million in fees in connection with the Second Amendment which will be deferred and amortized over the remaining life of the Credit Facility.

As a condition to the Second Amendment, Southcross Energy LLC and our General Partner deposited into the Collateral Account a total of $34.2 million, including the $10.0 million previously deposited under the First Amendment. Additionally, Southcross Energy LLC and our General Partner agreed to deposit into the Collateral Account the proceeds they receive from cash distributions on our common and subordinated units that they own and that are attributable to the quarters ending March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013.

The Second Amendment provides for, among other things, the following:

·                                          an increase in our letters of credit sublimit from $31.5 million to $50.0 million;

·                                          until we achieve the Target Leverage Ratio:

·                                          an increase in our interest rate to be LIBOR plus 4.50% (after achieving the Target Leverage Ratio our interest rate reverts to the original pricing grid of not more than LIBOR plus 3.25%);

·                                          a limit to our growth capital expenditures of $25.0 million for the remaining three quarters of 2013 and $25.0 million for the 18-months ending June 30, 2015 (provided that if additional cash, as required under the Second Amendment, is placed in the Collateral Account, such expenditures may be increased to $28.0 million for the remaining three quarters of 2013 and the 18-months ending June 30, 2015);

·                                          distributions to our unitholders are effectively limited to our established minimum quarterly distribution of not more than $0.40 per unit;

·                                          our ability to make acquisitions is limited; and

·                                          proceeds from any new equity issuances or asset sales are to be applied to reduce any outstanding debt.

Pursuant to the Second Amendment, during the second quarter of 2013, Southcross Energy LLC and/or our General Partner are required to make an equity investment in us in an aggregate amount equal to $40.0 million in exchange for new equity securities, which distributions on such securities are required to be non-cash pay until the Target Leverage Test has been satisfied. In accordance with the Second Amendment, on April 12, 2013, we issued 1,466,325 Series A Preferred Units to Southcross Energy LLC and agreed

16

Table of Contents

to sell, by June 30, 2013, an additional 248,675 Series A Preferred Units in exchange for the investment of $40.0 million, to satisfy this requirement (See Note 11). Southcross Energy LLC and our General Partner utilized the $34.2 million on deposit in the Collateral Account to purchase the initial Series A Preferred Units on April 12, 2013.  In addition, cash distributions of $5.8 million paid by us to Southcross Energy LLC and our General Partner for the quarter ended March 31, 2013 must be deposited into the Collateral Account, and will be used to purchase the remaining 248,675 Series A Preferred Units.  The total capital infusion to us of $40.0 million from all sales of Series A Preferred Units and General Partner contributions (See Note 11), were and will be used to reduce borrowings under our Amended Credit Facility.

If we fail to meet the Target Leverage Test by June 30, 2014, all or a portion of the cash distributions we make to Southcross Energy LLC and our General Partner for the quarters ending June 30, 2013, September 30, 2013 and December 31, 2013 will be deposited into the Collateral Account and will be invested in us as additional non-cash pay equity securities until the Target Leverage Test has been satisfied. If as of June 30, 2014, the Target Leverage Test is met, any funds then on deposit in the Collateral Account (other than equity cure amounts and amounts deposited in the Collateral Account to allow the Partnership to increase the amount of its capital expenditures) will be released to Southcross Energy LLC and our General Partner.

The Second Amendment requires us to have Consolidated EBITDA (as defined in the Credit Facility) of at least $9.0 million for the quarter ending June 30, 2013, and we are not subject to a consolidated total leverage ratio for such quarter.  Additionally, we have cure rights to provide additional cash into the Collateral Account should we fall short of the$9.0 million Consolidated EBITDA covenant requirement (see below). The Second Amendment provides that until we satisfy the Target Leverage Ratio, we are allowed to calculate an adjusted consolidated total leverage ratio, which allows for the netting of total funded indebtedness with amounts on deposit in the Collateral Account, and we may not permit our adjusted consolidated total leverage ratio to exceed the ratio set forth below for the corresponding period (as provided in the Second Amendment):

Upon satisfying the Target Leverage Ratio, beginning with the quarter ending September 30, 2013, the Second Amendment provides that we will not permit our maximum consolidated total leverage ratio to exceed the ratio set forth below for the corresponding period (as provided in the Amended Credit Facility):

The Second Amendment changed the minimum consolidated interest coverage ratio to 2.25 to 1.00 for the quarters ending September 30, 2013 and December 31, 2013 and 2.50 to 1.00 for the quarters ending March 31, 2014 and thereafter.

If, for the calendar quarters ending on or before December 31, 2013, we fail to comply with the financial covenants of the Amended Credit Facility (“Financial Covenant Default”) we have the right (which cannot be exercised more than two times) to cure such Financial Covenant Default by having Southcross Energy LLC and/or our General Partner deposit into the Collateral Account the amount required by the Second Amendment to cure such Financial Covenant Default.

After the application of the proceeds from the equity infusion on April 12, 2013, our borrowings under the Amended Credit Facility were $222.8 million and our available borrowing capacity was $27.2 million.

17

Table of Contents

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

Depreciation is provided using the straight-line method based on the estimated useful life of each asset.  Depreciation expense for the three months ended March 31, 2013 and 2012 was $7.2 million and $3.7 million, respectively.

Costs related to projects during construction, including interest on funds borrowed to finance the construction of facilities, are capitalized as construction in progress.  For the three months ended March 31, 2013 and 2012, the Partnership capitalized interest of $0.6 million and $1.1 million, respectively.

In January 2013, we shut down our Gregory facility to perform extensive turnaround maintenance activities and to connect additional equipment to enhance NGL recoveries.  As the turnaround maintenance was nearing completion in January 2013, we experienced a fire at this facility.  In connection with the fire, we spent approximately $2.8 million to return the plant to service and filed an insurance claim related to these costs.  We believe it is probable that we will be able to recover these costs, less a $0.3 million deductible, under our current insurance policies.

7. OTHER ASSETS

Other assets consisted of the following (in thousands):

The Partnership incurred $5.2 million in costs as a result of entering into amendments to our credit agreements during 2012.

Deferred financing costs are amortized over the life of the Credit Facility.  Amortization of deferred financing costs recorded in interest expense was $0.3 million for each of the three months ended March 31, 2013 and 2012.

18

Table of Contents

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following (in thousands):

Trade accounts payable as of March 31, 2013 and December 31, 2012 included $17.7 million and $40.7 million, respectively,  related to capital expenditures and such amounts have been reflected as non-cash investing activities within the condensed consolidated statement of cash flows.

9. COMMITMENTS AND CONTINGENCIES

Legal Matters

On March 5, 2013, a subsidiary of the Partnership filed suit against Formosa Hydrocarbons Company, Inc. (“Formosa”).  The lawsuit seeks recoveries of losses that we believe our subsidiary experienced as a result of the failure of Formosa to perform certain of its obligations under the gas processing contract between the parties.  Formosa has filed a response generally denying our claims. We cannot predict the outcome of such litigation or the timing of any related recoveries by the Partnership.

From time to time, we are party to certain legal or administrative proceedings that arise in the ordinary course and are incidental to our business. There are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on our results of operations, cash flows or financial condition. However, future events or circumstances, currently unknown to management, will determine whether the resolution of any litigation or claims will ultimately have a material effect on our results of operations, cash flows or financial condition in any future reporting periods. As of March 31, 2013, we did not have any amounts accrued for our legal proceedings.

Regulatory Compliance

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

Operating Leases

We maintain operating leases in the ordinary course of business activities.  These leases include those for vehicles, office buildings and other operating facilities and equipment.  The terms of the agreements vary from 2013 to 2017.  Future minimum annual rental commitments under our operating leases at March 31, 2013 were as follows (in thousands):

Expenses associated with operating leases were $0.5 million for the three months ended March 31, 2013 and 2012.

Purchase Commitments

At March 31, 2013, we had commitments of approximately $1.7 million to purchase equipment related to our capital projects.

19

Table of Contents

10. TRANSACTIONS WITH RELATED PARTIES

Charlesbank

Historically, Charlesbank provided certain management services to Southcross Energy LLC pursuant to a management services agreement (“Charlesbank Agreement”) that specified an annual management fee of $0.6 million. Southcross Energy LLC received services under the Charlesbank Agreement until the IPO. Concurrently with the IPO, the Charlesbank Agreement was terminated.

For the three months ended March 31, 2012, Southcross Energy LLC incurred management fees of $0.2 million for services received under the Charlesbank Agreement.

Southcross Energy GP, LLC (our General Partner)

Our General Partner does not receive a management fee or other compensation for its management of us.  However, our General Partner and its affiliates are entitled to reimbursements for all expenses incurred on our behalf, including, among other items, compensation expense for all employees required to manage and operate our business.  During the three months ended March 31, 2013, we incurred expenses of $5.9 million related to these reimbursements which were reflected in operating expenses in our consolidated statement of operations.

The reimbursement of our compensation expenses to our General Partner began on January 1, 2013 in accordance with our Partnership Agreement.

11. PARTNERS’ CAPITAL

Common Units

Our common units represent limited partner interests in us. The holders of our common units are entitled to participate in partnership distributions and are entitled to exercise the rights and privileges available to limited partners under our Partnership Agreement. We have authorized 13,963,713 common units as of March 31, 2013 and December 31, 2012.

Subordinated Units

Subordinated units represent limited partner interests in us and convert to common units at the end of the subordination period (as defined in our Partnership Agreement). The principal difference between our common units and our subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units do not accrue arrearages.

General Partner Interests

Our general partner interest consisted of 498,518 general partner units as of March 31, 2013 and December 31, 2012 and, as defined by the Partnership Agreement, are not considered to be units (common or subordinated) but are representative of the general partner’s 2.0% ownership interest in us. Subsequent to March 31, 2013 and in conjunction with the Private Placement (as defined below), our General Partner made a capital contribution in the amount of $0.7 million in exchange for an issuance of an additional 29,925 general partner units on April 12, 2013, in order to maintain its 2.0% ownership interest in us.

Series A Convertible Preferred Units

On April 12, 2013 (the “Issue Date”), we entered into a Series A Preferred Unit Purchase Agreement (the “Purchase Agreement”) with Southcross Energy LLC, pursuant to which we issued and sold 1,466,325 Series A Preferred Units to Southcross Energy LLC and agreed to sell, by June 30, 2013, an additional 248,675 Series A Preferred Units, in each case, for a cash purchase price of $22.86 per Series A Preferred Unit, in a privately negotiated transaction (the “Private Placement”).

The Series A Preferred Units are a new class of voting equity security that ranks senior to all of our other classes or series of equity securities with respect to distribution rights and rights upon liquidation.

The Series A Preferred Units have voting rights identical to the voting rights of the common units and will vote with the common units as a single class, such that each Series A Preferred Unit (including each Series A Preferred Unit issued as an in-kind distribution, discussed below) is entitled to one vote for each common unit into which such Series A Preferred Unit is convertible on each matter with respect to which each common unit is entitled to vote.

20

Table of Contents

The Private Placement resulted in proceeds to us of $33.5 million. We also received a $0.7 million capital contribution from our General Partner to maintain its 2.0% general partner interest in us. When we sell the remaining 248,675 Series A Preferred Units to Southcross Energy LLC for $5.7 million, our General Partner will make an additional capital contribution to us of $0.1 million.

The total capital infusion to the Partnership of $40.0 million, from all sales of Series A Preferred Units and General Partner capital contributions, were and will be used to reduce borrowings under our Amended Credit Facility (See Note 5).

Series A Preferred Unit Distribution Rights

Holders of Series A Preferred Units are entitled to quarterly distributions of in-kind Series A Preferred Units for the first four full quarters following the Issue Date and continuing thereafter until the board of directors of our General Partner determines to begin paying quarterly distributions in cash, and thereafter in cash. The board of directors of our General Partner may not elect to begin paying quarterly distributions on the Series A Preferred Units in cash until we have exercised the Target Leverage Option (pursuant to the Second Amendment) under our Amended Credit Facility.

In-kind distributions will be made in the form of Series A Preferred Units at a rate of $0.40 per outstanding Series A Preferred Unit per quarter (or 7% per year of the per unit purchase price) or, beginning after four full quarters, such higher per unit rate as is paid in respect of our common units. Cash distributions will equal the greater of $0.40 per unit per quarter or the quarterly distribution paid with respect to each common unit.

Series A Preferred Units Conversion Rights

Beginning on the later of January 1, 2015 and the date we exercise the Target Leverage Option (pursuant to the Second Amendment), Series A Preferred Units (including Series A Preferred Units issued as in-kind distributions) will be convertible into common units on a one-for-one basis, except that conversion will be prohibited to the extent that it would cause (on a pro forma basis) our estimated quarterly distributions over any of the succeeding four quarters to exceed our total distributable cash flow in that quarter. In addition, the Series A Preferred Units will be convertible into common units having a collective value of 110.0% of the Series A Preferred Units if a third party acquires majority ownership control of our General Partner or we sell substantially all of our assets, in either case prior to January 1, 2015.

Beginning on the later of January 1, 2015 and the date we exercise the Target Leverage Ratio (pursuant to the Second Amendment), we will have the right at any time to convert all or some of the Series A Preferred Units (including Series A Preferred Units issued as in-kind distributions) then outstanding into common units if (i) the daily volume-weighted average trading price of the common units on the national securities exchange on which the common units are listed or admitted to trading for the trailing 30-trading-day period prior to our notice of conversion is greater than 130.0% of the unit purchase price for the Series A Preferred Units, (ii) the average daily trading volume of common units on the securities exchange exceeds 40,000 common units for those 30 trading days and (iii) the conversion would not cause (on a pro forma basis) our estimated quarterly distributions over any of the succeeding four quarters to exceed our total distributable cash flow in that quarter.

12. UNIT BASED COMPENSATION

Long-Term Incentive Plan

On November 7, 2012, and in conjunction with the IPO, the Partnership established its 2012 Long-Term Incentive Plan (“Incentive Plan”), which provides incentive awards to eligible officers, employees and directors of our General Partner. Awards granted to employees under the Incentive Plan vest over a three year period in equal annual installments in either a common unit of the Partnership or an amount of cash equal to the fair market value of a common unit at the time of vesting, as determined by management at its discretion. These awards also include distribution equivalent rights which grant the holder the right to receive an amount equal to all or a portion of the cash distributions made on units during the period the unit remains outstanding.

21

Table of Contents

The following table summarizes information regarding awards under the Incentive Plan:

We granted awards under the Incentive Plan, which we have classified as equity awards, with a grant date fair value of approximately $15,000 for the three months ended March 31, 2013. As of March 31, 2013, we had total unamortized compensation expense of approximately $2.9 million related to these units, which we expect to be amortized over the three year vesting period. We recognized compensation expense of approximately $0.3 million for the three months ended March 31, 2013, which is included in general and administrative expense on our consolidated statements of operations. As of March 31, 2013, we had 1,609,900 units available for issuance under the Incentive Plan.

13. REVENUES

The Partnership had revenues consisting of the following categories (in thousands):

14. CONCENTRATION OF CREDIT RISK AND TRADE ACCOUNTS RECEIVABLE

The Partnership’s primary markets are in South Texas, Alabama and Mississippi. The Partnership has a concentration of revenues and trade accounts receivables due from customers engaged in the production, trading, distribution and marketing of natural gas and NGL products. These concentrations of customers may affect overall credit risk in that these customers may be similarly affected by changes in economic, regulatory or other factors. The Partnership analyzes the customers’ historical financial and operational information prior to extending credit.

Formosa and Sherwin Alumina Company (“Sherwin”) represent significant customers of the Partnership for each of the three months ended March 31, 2013 and 2012.  Formosa and Sherwin contributed $17.3 million and $16.9 million, or 12.0% and 11.7%, respectively, of revenues for the three months ended March 31, 2013, and $36.6 million and $11.7 million, or 30.3% and 9.7%, respectively, of revenues for the three months ended March 31, 2012.

The Partnership’s top ten customers represent 60.3% and 73.6% of consolidated revenue for the three months ended March 31, 2013 and 2012, respectively.

For the three months ended March 31, 2013 and 2012, we experienced no significant non-payment for services. At March 31, 2013, we have recorded no allowance for uncollectable accounts receivable.

22

Table of Contents

15. SUBSEQUENT EVENTS

Credit Facility

As discussed in Note 5, on April 12, 2013, we entered into the Second Amendment, which waived our defaults relating to financial covenants for the three months ending March 31, 2013 and provided us with more favorable financial covenants than were provided previously.  We believe these modified terms will allow us to operate our business and continue to meet our commitments.

Series A Convertible Preferred Units

As discussed in Note 11, on April 12, 2013, to satisfy our requirements under our Amended Credit Facility we entered into the Private Placement.

The Private Placement resulted in proceeds to us of $33.5 million. We also received a $0.7 million capital contribution from our General Partner to maintain its 2.0% general partner interest in us. When we sell the remaining 248,675 Series A Preferred Units to Southcross Energy LLC for $5.7 million, our General Partner will make an additional capital contribution to us of $0.1 million.

The total capital infusion to the Partnership of $40.0 million from all sales of Series A Preferred Units and General Partner capital contributions were and will be used to reduce borrowings under our Amended Credit Facility (See Note 5).

As of April 12, 2013, subsequent to the issuance of the Series A Preferred Units, our ownership structure is as follows:

Partnership Distribution

On April 30, 2013, we announced a cash distribution of $0.40 per common and subordinated unit attributable to the quarter ended March 31, 2013, which will be paid on May 15, 2013 to unitholders of record on May 10, 2013.

23

Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and How We Evaluate our Operations

Overview

Southcross Energy Partners, L.P. (the “Partnership,” “Southcross,” the “Company,” “we,” “our,” or “us”) is a Delaware limited partnership formed in April 2012 to own, operate, develop and acquire midstream energy assets. Our common units are listed on the New York Stock Exchange (“NYSE”) under the symbol “SXE.”

Southcross Energy LLC was formed in 2009 and is the predecessor of the Partnership. In connection with our initial public offering (“IPO”), Southcross Energy LLC contributed all of its operating subsidiaries (its net assets on a historical cost basis), excluding certain liabilities and all preferred units, and became the holding company of the Partnership. Southcross Energy LLC holds all of the equity interests in Southcross Energy Partners GP, LLC, a Delaware limited liability company and our general partner (“General Partner”), as well as all subordinated units and the series A convertible preferred units issued on April 12, 2013 and 7.5% of the common units of the Partnership.  Southcross Energy LLC is controlled through investment funds and entities associated with Charlesbank Capital Partners, LLC (“Charlesbank”). There was no change in the basis of accounting as a result of these transactions.

On November 7, 2012, we completed our IPO and after the completion of the IPO and full exercise of the underwriters’ option to purchase additional common units, Southcross Energy LLC’s direct and indirect equity ownership in the Partnership was 58.5%. The preceding condensed consolidated financial statements reflect the assets, liabilities, results of operations and cash flows of the Partnership beginning November 7, 2012 and Southcross Energy LLC for the periods ended prior to November 7, 2012.

See our 2012 Annual Report on Form 10-K for more information related to our organization.

Our Operations

Our integrated operations provide a full range of complementary services extending from wellhead to market, including gathering natural gas at the wellhead, treating natural gas to meet downstream pipeline and customer quality standards, processing natural gas to separate NGLs from natural gas, fractionating the resulting NGLs into the various components and selling or delivering pipeline quality natural gas and NGLs to various industrial and energy markets as well as large pipeline systems. Through our network of pipelines, we provide a means of connecting our suppliers of natural gas to our customers, which include industrial, commercial and power generation customers and local distribution companies.

Our results are determined primarily by the volumes of natural gas we gather and process, the efficiency of our processing plants and NGL fractionation plants, the commercial terms of our contractual arrangements, natural gas and NGL prices, and our operations and maintenance expense. We manage our business to attempt to maximize the gross operating margin we earn from contracts balanced against any risks we assume in our contracts. Our contracts vary in duration from one month to ten years and the pricing under our contracts varies depending upon several factors, including our competitive position, our acceptance of risks associated with longer-term contracts and our desire to recoup over the term of the contract any capital expenditures that we are required to incur in order to provide service to our customers. We purchase, gather, process, treat, compress, transport and sell natural gas and purchase, fractionate, transport and sell NGLs primarily pursuant to the following arrangements:

·                  Fixed-Fee.  We receive a fixed-fee per unit of natural gas volume that we gather at the wellhead, process, treat, compress and/or transport for our customers, or we receive a fixed-fee per unit of NGL volume that we fractionate. Some of our arrangements also provide for a fixed-fee for guaranteed transportation capacity on our systems.

·                  Fixed-Spread.  Under these arrangements, we purchase natural gas and NGLs from producers or suppliers at receipt points on our systems at an index price plus or minus a fixed price differential and sell these volumes of natural gas and NGLs at delivery points off our systems at the same index price, plus or minus a fixed price differential. By entering into such back-to-back purchases and sales, we are able to mitigate our risk associated with changes in the general commodity price levels of natural gas and NGLs.  We remain subject to variations in our fixed-spreads to the extent we are unable to precisely match volumes purchased and sold in a given time period or are unable to secure the supply or to produce or market the necessary volume of products at our anticipated differentials to the index price.

·                  Commodity-Sensitive.  In exchange for our processing services, we may remit to a customer a percentage of the proceeds from our sales, or a percentage of the physical volume, of residue natural gas and/or NGLs that result from our natural gas processing, or we may purchase NGLs from customers at set fixed NGL recoveries and retain the balance of the

24

Table of Contents

proceeds or physical commodity for our own account. These arrangements are generally combined with fixed-fee and fixed-spread arrangements for processing services and, therefore, represent only a portion of a processing contract’s value. The revenues we receive from these arrangements directly correlate with fluctuating general commodity price levels of natural gas and NGLs and the volume of NGLs recovered relative to the fixed recovery obligations.

We assess gross operating margin opportunities across our integrated value stream, so that processing margins may be supplemented by gathering and transportation fees and opportunities to sell residue gas and NGLs at fixed-spreads. Gross operating margin earned under fixed-fee and fixed-spread arrangements is directly related to the volume of natural gas that flows through our systems and is generally independent from general commodity price levels. A sustained decline in commodity prices could result in a decline in volumes entering our system and, thus, a decrease in gross operating margin for our fixed-fee and fixed-spread arrangements.

Below is a table summarizing our contract mix (in thousands):