Crestwood Midstream Partners 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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: 001-33631

Quicksilver Gas Services LP

(Exact name of registrant as specified in its charter)

Delaware	56-2639586
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
777 West Rosedale, Fort Worth, Texas	76104
(Address of principal executive offices)	(Zip Code)

817-665-8620
(Registrant’s telephone number, including area code)

None

(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. Yesþ Noo

     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):

Large accelerated filero Accelerated filero Non-accelerated filerþ
(Do not check if a smaller reporting company) Smaller reporting companyo

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The registrant has 12,269,714 Common Units, and 11,513,625 Subordinated Units outstanding as of October 31, 2008.

DEFINITIONS

As used in this report, unless the context otherwise requires:

“Bbl”or“Bbls”means barrel or barrels

“Btu”means British Thermal units, a measure of heating value

“LIBOR”means London Interbank Offered Rate

“Management”means management of the Partnership’s General Partner

“MMBtu”means million Btu

“MMBtud”means million Btu per day

“Mcf”means thousand cubic feet

“MMcf”means million cubic feet

“MMcfd”means million cubic feet per day

“MMcfe”means million cubic feet of natural gas equivalents, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of gas

“MMcfed”means MMcfe per day

“NGL”or“NGLs”means natural gas liquids

COMMONLY USED TERMS

Other commonly used terms and abbreviations include:

“FASB”means the Financial Accounting Standards Board, which promulgates accounting standards

“IPO”means our initial public offering completed on August 10, 2007

“Gas Gathering and Processing Agreement”means the Sixth Amended and Restated Gas Gathering and Processing Agreement, dated September 1, 2008, among Quicksilver Resources Inc., Cowtown Pipeline Partners L.P. and Cowtown Gas Processing Partners L.P.

“Lake Arlington Gas Gathering Agreement”means the Amended and Restated Gas Gathering Agreement, dated September 1, 2008, among Quicksilver Resources Inc. and Cowtown Pipeline L.P. and then assigned to Cowtown Pipeline Partners L.P.

“Omnibus Agreement”means the Omnibus Agreement, dated August 10, 2007, among Quicksilver Gas Services LP, Quicksilver Gas Services GP LLC and Quicksilver Resources Inc.

“Partnership Agreement”means the Second Amended and Restated Agreement of Limited Partnership of Quicksilver Gas Services LP, dated February 19, 2008

“Quicksilver”means, unless the context otherwise requires, Quicksilver Resources Inc. and its subsidiaries

“Quicksilver Counties”means Hood, Somervell, Johnson, Tarrant, Hill, Parker, Bosque and Erath Counties in North Texas

“SEC”means the United States Securities and Exchange Commission

“SFAS”means Statement of Financial Accounting Standards issued by the Financial Accounting Standards Board

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Explanatory Note

     On August 10, 2007, we completed our IPO, of 5,000,000 common units representing limited partnership interests. On September 7, 2007, we sold an additional 750,000 common units upon the exercise by the underwriters of the IPO of an over-allotment option that we had previously granted to them.

     Upon the completion of the IPO on August 10, 2007, our common units began trading under the ticker symbol “KGS” and we succeeded to the assets and operations of Cowtown Pipeline LP, Cowtown Pipeline Partners LP, Cowtown Gas Processing LP and Cowtown Gas Processing Partners LP, which we refer to collectively as the KGS Predecessor. Prior to the completion of the IPO, KGS Predecessor was owned indirectly by Quicksilver Resources Inc., which we refer to as Quicksilver or the Parent, and by two private investors.

     The information contained in this report includes the activity of KGS Predecessor prior to the completion of the IPO on August 10, 2007, and the activity of Quicksilver Gas Services LP subsequent to the IPO. Consequently, the unaudited condensed consolidated interim financial statements and related discussion of financial condition and results of operations contained in this report reflect the activity for the period after the change in ownership resulting from the IPO and the period prior to the IPO.

     The information contained in this report should be read in conjunction with the information contained in our 2007 Annual Report on Form 10-K.

Forward-Looking Information

     Certain statements contained in this report and other materials we file with the SEC, or in other written or oral statements made or to be made by us, other than statements of historical fact, are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our current expectations or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

• changes in general economic conditions;

• fluctuations in natural gas prices;

• failure or delays in the Parent and third parties achieving expected production from natural gas projects;

• competitive conditions in our industry;

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

• changes in the availability and cost of capital;

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

• construction costs or capital expenditures exceeding estimated or budgeted amounts;

• the effects of existing and future laws and governmental regulations; and

• the effects of future litigation.

     The list of factors is not exhaustive, and new factors may emerge or changes to these factors may occur that would impact our business. Additional information regarding these and other factors may be contained in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. All such risk factors are difficult to predict and are subject to material uncertainties that may affect actual results and may be beyond our control.

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QUICKSILVER GAS SERVICES LP
INDEX TO FORM 10-Q
For the Period Ended September 30, 2008

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)		5
Condensed Consolidated Statements of Income		5
Condensed Consolidated Balance Sheets		6
Condensed Consolidated Statements of Cash Flows		7
Condensed Consolidated Statement of Partners’ Capital		8
Notes to Condensed Consolidated Interim Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Securities and Use of Proceeds		29
Item 3. Defaults Upon Senior Securities		29
Item 4. Submission of Matters to a Vote of Security Holders		29
Item 5. Other Information		29
Item 6. Exhibits		30
Signatures		31
Sixth Amended and Restated Gas Gathering and Processing Agreement
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

QUICKSILVER GAS SERVICES LP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

In thousands, except for per unit data — Unaudited

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Revenues
Gathering and transportation revenue — parent	$	8,674	$	4,102	$	22,350	$	9,612
Gathering and transportation revenue		1,553		500		4,006		838
Gas processing revenue — parent		7,345		4,892		21,866		11,109
Gas processing revenue		1,507		521		3,797		912
Other revenue — parent		225		267		675		300
Total revenues		19,304		10,282		52,694		22,771
Expenses
Operations and maintenance — parent		4,772		3,072		15,034		8,063
General and administrative — parent		1,473		1,217		4,712		2,353
Depreciation and accretion		3,866		2,188		10,429		5,307
Total expenses		10,111		6,477		30,175		15,723
Operating income		9,193		3,805		22,519		7,048
Other income		4		114		10		149
Interest expense		2,703		1,728		7,542		1,939
Income before income taxes		6,494		2,191		14,987		5,258
Income tax provision		106		92		109		189
Net income	$	6,388	$	2,099	$	14,878	$	5,069
Net income attributable to the period from beginning of period to August 9, 2007			$	474			$	3,444
Net income attributable to the period from August 10, 2007 to September 30, 2007				1,625				1,625
Net income			$	2,099			$	5,069
General partner interest in net income(1)	$	137	$	32	$	314	$	32
Common and subordinated unitholders’ interest in net income(1)	$	6,251	$	1,593	$	14,564	$	1,593
Earnings per common and subordinated unit:(1)
Basic	$	0.26	$	0.07	$	0.61	$	0.07
Diluted	$	0.26	$	0.07	$	0.61	$	0.07
Weighted average number of common and subordinated units outstanding:(1)
Basic		23,783		23,777		23,783		23,777
Diluted		26,829		23,787		23,924		23,787

⁽¹⁾ Amounts for 2007 represent the period from August 10, 2007 to September 30, 2007

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except for unit data — Unaudited

	September 30,			December 31,
	2008			2007
ASSETS
Current assets
Cash and cash equivalents	$	342		$	1,125
Trade accounts receivable		1,883			882
Accounts receivable from parent		—			800
Prepaid expenses and other current assets		584			690
Total current assets		2,809			3,497
Property, plant and equipment, net		437,882			273,948
Other assets		1,084			965
	$	441,775		$	278,410
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities
Current maturities of debt	$	1,100		$	1,100
Accounts payable to parent		291			—
Accrued additions to property, plant and equipment		22,472			23,624
Accounts payable and other		3,704			2,700
Total current liabilities		27,567			27,424
Long-term debt		104,300			5,000
Note payable to parent		51,904			50,569
Repurchase obligations to parent		151,864			82,251
Asset retirement obligations		3,502			2,793
Deferred income tax liability		225			173
Commitments and contingent liabilities (Note 8)
Partners’ Capital
Common unitholders (12,269,714 and 12,263,625 units issued and outstanding at September 30, 2008 and December 31, 2007, respectively)		106,262			109,830
Subordinated unitholders (11,513,625 units issued and outstanding at September 30, 2008 and December 31, 2007)		(3,705	)		356
General Partner		(144	)		14
Total partners’ capital		102,413			110,200
	$	441,775		$	278,410

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands — Unaudited

	Nine Months Ended September 30,
	2008			2007
Operating activities:
Net income	$	14,878		$	5,069
Items included in net income not affecting cash:
Depreciation		10,297			5,253
Accretion of asset retirement obligation		132			54
Deferred income taxes		52			16
Equity-based compensation		758			45
Amortization of debt issuance costs		158			33
Non-cash interest expense on repurchase obligations to parent		4,663			1,228
Non-cash interest expense on note payable to parent		2,160			625
Changes in assets and liabilities:
Accounts receivable		(1,001	)		(858	)
Prepaid expenses and other assets		(171	)		(229	)
Accounts receivable from parent		3,435			—
Accounts payable and other		1,004			(57	)
Net cash provided by operating activities		36,365			11,179
Investing activities:
Capital expenditures		(112,200	)		(55,184	)
Net cash used in investing activities		(112,200	)		(55,184	)
Financing activities:
Proceeds from sale of assets to parent		—			29,508
Proceeds from revolving credit facility borrowings		99,300			—
Repayment of subordinated note to parent		(825	)		—
Debt issuance costs		—			(715	)
Net proceeds from issuance of equity units		—			112,108
Distribution of offering proceeds to partners		—			(119,806	)
Contributions by parent		—			38,045
Contributions by other partners		—			167
Distributions to unitholders		(23,423	)		—
Net cash provided by financing activities		75,052			59,307
Net (decrease) increase in cash		(783	)		15,302
Cash at beginning of period		1,125			2,797
Cash at end of period	$	342		$	18,099
Cash paid for interest	$	1,465		$	—
Income taxes paid	$	332		$	—
Non-cash investing and financing transactions:
Working capital related to capital expenditures	$	27,314		$	17,828
Prepaid insurance	$	—		$	(176	)
Debt issuance costs	$	—		$	(277	)
Cost in connection with the initial public offering	$	—		$	(2,465	)
Issuance of subordinated note payable to parent	$	—		$	50,000
Acquisition of property, plant and equipment under repurchase obligation	$	(64,950	)	$	(33,722	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

In thousands — Unaudited

	Partners’ Capital
	Limited Partners						General
	Common			Subordinated			Partner			Total
Balance at December 31, 2007	$	109,830		$	356		$	14		$	110,200
Equity-based compensation expense recognized		758			—			—			758
Distributions paid to partners		(11,840	)		(11,111	)		(472	)		(23,423	)
Net income		7,514			7,050			314			14,878
Balance at September 30, 2008	$	106,262		$	(3,705	)	$	(144	)	$	102,413

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUICKSILVER GAS SERVICES LP

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

UNAUDITED

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

     Organization— Quicksilver Gas Services LP (the “Partnership” or “KGS”) is a Delaware limited partnership formed in January 2007 for the purpose of completing a public offering of common units and concurrently acquiring the assets of Quicksilver Gas Services Predecessor (“KGS Predecessor”). KGS’ general partner is Quicksilver Gas Services GP LLC, a Delaware limited liability company, which is owned by Quicksilver Resources Inc. (“Quicksilver” or “Parent”).

     KGS Predecessor, since its inception in 2004, was comprised of entities under the common control of Quicksilver. The entities under common control, after having been formed by Quicksilver and giving effect to multiple contemporaneous transactions, were Cowtown Pipeline L.P., Cowtown Pipeline Partners L.P., Cowtown Gas Processing L.P. and Cowtown Gas Processing Partners L.P.

     Initial Public Offering— KGS’ initial public offering, or IPO, of 5,000,000 common units was completed on August 10, 2007, and the sale of an additional 750,000 common units was completed on September 7, 2007, pursuant to the underwriters’ option to purchase additional common units.

     As of September 30, 2008, the ownership of KGS is as follows:

	Percentage
	Ownership
Common unitholders:
Public		27.1	%
Quicksilver		23.5	%
Subordinated unitholders:
Quicksilver		47.5	%
Total limited partner interest		98.1	%
General Partner interest:
Quicksilver		1.9	%
Total		100.0	%

     Neither KGS nor the general partner has any employees. Employees of the Parent have been seconded to the general partner pursuant to a services and secondment agreement. The seconded employees, including field operations personnel, general and administrative personnel and an operational vice president, operate or directly support KGS’ pipeline system and natural gas processing facilities.

     Description of Business— KGS is engaged in the business of gathering and processing natural gas and NGLs, produced from the Barnett Shale formation in the Fort Worth Basin located in North Texas. KGS provides services under contracts, whereby it receives fees for performing the gathering and processing services. KGS does not take title to the natural gas or associated natural gas liquids that it gathers and processes and thus avoids direct commodity price exposure.

     KGS’ assets consist of the Cowtown System which includes:

• the Cowtown Pipeline, a pipeline system in the Fort Worth Basin, which consists of natural gas pipelines that gather natural gas produced by KGS’ customers and deliver it for processing;

• the Cowtown Plant, in Hood County, Texas, which consists of two natural gas processing units that extract NGLs from the natural gas stream and deliver customers’ residue gas to unaffiliated pipelines for transport and sale downstream; and

• the Corvette Plant, currently being constructed in Hood County, Texas, with a targeted in-service date during the first quarter 2009, which consists of a natural gas processing unit, that will extract NGLs from the natural gas stream and will deliver KGS customers’ residue gas to unaffiliated pipelines for transport and sale downstream.

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     As more fully described in Note 2, KGS’ financial statements also include the operations of a gathering system in the Lake Arlington area of Tarrant County, Texas (“Lake Arlington Dry System”) and a gathering system in Hill County, Texas (“Hill County Dry System”). Each of these systems gathers production from the Fort Worth Basin and delivers it to unaffiliated pipelines for sale downstream.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation— The accompanying unaudited condensed consolidated interim financial statements and related notes present the financial position, results of operations, cash flows and changes in partners’ capital of KGS’ natural gas gathering and processing assets. The financial statements include historical cost-basis accounts of the assets of KGS Predecessor, contributed to KGS by Quicksilver and two private investors in connection with the IPO, for the period prior to the closing date of the IPO.

     These unaudited condensed consolidated interim financial statements include the accounts of the Partnership and have been prepared in accordance with accounting principles generally accepted in the U.S. These financial statements should be read in conjunction with the audited financial statements included in our 2007 Annual Report on Form 10-K. In management’s opinion all adjustments and eliminations of intercompany balances necessary to present fairly the Partnership’s results of operations, financial position and cash flows for the periods presented have been made. All such adjustments are of a normal and recurring nature. As permitted by SEC rules, certain disclosures normally included in financial statements have been condensed or omitted. The results of operations for an interim period are not necessarily indicative of annual results.

     Use of Estimates —The preparation of financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities that exist at the date of the financial statements. Estimates and judgments are based on information available at the time such estimates and judgments are made. Although management believes the estimates are appropriate, actual results could differ from those estimates.

     Repurchase Obligations to Parent —On June 5, 2007, KGS Predecessor sold several pipeline and gathering assets to Quicksilver. These assets consist of:

• a portion of the gathering lines in the Cowtown Pipeline;

• the Lake Arlington Dry System; and

• the Hill County Dry System.

     At June 5, 2007, these assets were either constructed and in service or partially constructed. The selling price for these assets was approximately $29.5 million, which represented KGS Predecessor’s historical cost. KGS Predecessor collected the $29.5 million on August 9, 2007. All assets conveyed via the sales are subject to repurchase by KGS from Quicksilver as follows:

Cowtown Pipeline repurchase — In accordance with the Gas Gathering and Processing Agreement, KGS has the option to purchase portions of the Cowtown Pipeline from Quicksilver at historical cost within a two-year option period after written notice from Quicksilver that the assets have commenced commercial service. Some individual laterals subject to repurchase within the Cowtown Pipeline have commenced commercial service as of September 30, 2008.

Lake Arlington Dry System and Hill County Dry System repurchases — In accordance with the Omnibus Agreement, KGS is obligated to purchase the Lake Arlington Dry System and the Hill County Dry System from Quicksilver at fair market value within a two-year option period after written notice from Quicksilver that those assets are completed and commercial service has commenced. A portion of each system has commenced commercial service as of September 30, 2008. Quicksilver has not provided written notice of completion of construction and commencement of commercial service for Hill County Dry System as of September 30, 2008. During the fourth quarter, KGS expects to complete the acquisition of the Lake Arlington Dry System from Quicksilver for approximately $42 million, with an October 1, 2008 effective date. The purchase will be financed through use of the credit facility and consequently will reduce the repurchase obligation.

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     In conjunction with the purchase of the Lake Arlington Dry System, Quicksilver will assign to KGS its gas gathering agreement. Under the terms of the Lake Arlington Gas Gathering agreement, Quicksilver has agreed, for an initial term from the effective date through August 10, 2017, to dedicate and deliver all of the natural gas owned or controlled by Quicksilver and lawfully produced from existing and future wells drilled within the Lake Arlington area, as defined by the contract. Quicksilver has agreed to pay $0.62 per MMBtu gathered by KGS in the Lake Arlington Dry System.

     The following table summarizes the assets subject to repurchase obligation (in millions):

			Estimate of Total		Construction Costs
	June 5, 2007		Construction Costs as of		Recognized through
	Sales Price		September 30, 2008(1)		September 30, 2008			KGS Repurchase
Cowtown Pipeline	$	22.9	$	63.1	$	61.6		Optional at Cost
Lake Arlington Dry System		3.6		80.0		40.1		Obligatory at Fair Value
Hill County Dry System		3.0		78.0		42.9		Obligatory at Fair Value
Interest cost included in liability		—		—		7.3	(2)
	$	29.5	$	221.1	$	151.9

(1)	The estimates of total construction cost are subject to change based on changes in the producers’ drilling program, material and labor costs, easement costs and other factors.
(2)	Interest cost is allocated as follows: Cowtown Pipeline – $3.8M, Lake Arlington - $2.0M and Hill County – $1.5M

     The assets’ conveyance has not been treated as a sale for accounting purposes because KGS operates the assets subject to a repurchase obligation and presently intends to exercise its purchase rights. Accordingly, the original cost of $29.5 million and subsequently incurred costs of $115.1 million, excluding interest, are recognized in both KGS’ property, plant and equipment and its repurchase obligations to Quicksilver. Similarly, KGS’ results of operations include the revenues and expenses for these operations. For the nine months ended September 30, 2008, KGS recognized $4.7 million of interest expense associated with the repurchase obligations to Parent based on a weighted average interest rate of 5.4%.

     Net Income per Limited Partner Unit— KGS’ net income is allocated to the general partner and the limited partners, including the holders of the common and subordinated units, in accordance with their respective ownership percentages, after giving effect to incentive distributions paid to the general partner.

     Basic earnings per unit is computed by dividing net income attributable to unitholders by the weighted average number of units outstanding during each period. Diluted earnings per unit is computed using the treasury stock method, which considers the impact to net income and common equivalent units from the potential issuance of units and convertible debt.

     The following is a reconciliation of the weighted average common and subordinated units used in the basic and diluted earnings per unit calculations for the three-and-nine month periods ended September 30, 2008. The impact of the convertible debt is antidilutive for the nine months ended September 30, 2008 and for the three-and-nine month periods ended September 30, 2007.

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	Three Months		Period Ended		Nine Months		Period Ended
	Ended September 30,		September 30,		Ended September 30,		September 30,
	2008		2007 (1)		2008		2007(1)
	(In thousands, except per unit data)
Common and subordinated unitholders’ interest in net income	$	6,251	$	1,593	$	14,564	$	1,593
Impact of interest on convertible debt		659		—		—		—
Income available assuming conversion of convertible debt	$	6,910	$	1,593	$	14,564	$	1,593
Weighted average common and subordinated units — basic		23,783		23,777		23,783		23,777
Effect of restricted phantom units		141		10		141		10
Effect of convertible debt		2,905		—		—		—
Weighted average common and subordinated units — diluted		26,829		23,787		23,924		23,787
Earnings per common and subordinated unit:
Basic	$	0.26	$	0.07	$	0.61	$	0.07
Diluted	$	0.26	$	0.07	$	0.61	$	0.07

⁽¹⁾ Amounts for 2007 represent the period from August 10, 2007 to September 30, 2007

     Comprehensive Income— Comprehensive income is equal to net income for the periods presented due to the absence of any other comprehensive income.

Recently Issued Accounting Standards

Pronouncements Implemented

     SFAS No. 157,Fair Value Measurements,was issued by the FASB in September 2006. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurement. No new requirements are included in SFAS No. 157, but application of the Statement has changed current practice. The Partnership adopted SFAS No. 157 on January 1, 2008 without significant impact.

     In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. While SFAS No. 159 became effective on January 1, 2008, the Partnership did not elect the fair value measurement option for any of its financial assets or liabilities.

     On April 30, 2007, the FASB issued FASB Staff Position No. 39-1,Amendment of FASB Interpretation No. 39. The FSP amends paragraph 3 of FIN No. 39 to replace the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” as defined in SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. It also amends paragraph 10 of Interpretation 39 to permit a reporting entity to offset fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with that paragraph. The Partnership adopted FSP No. 39-1 on January 1, 2008 without significant impact.

Pronouncements Not Yet Implemented

     SFAS No. 141 (revised 2007),Business Combinations, “SFAS No. 141(R)” was issued in December 2007. SFAS No. 141(R) replaces SFAS No. 141,Business Combinations, while retaining its fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) defines the acquirer as the entity that obtains control in the business combination and it

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establishes the criteria to determine the acquisition date. The Statement also requires an acquirer to recognize the assets acquired and liabilities assumed measured at their fair values as of the acquisition date. In addition, acquisition costs are required to be recognized separately from the acquisition. The Statement will apply to any acquisition completed by the Partnership on or after January 1, 2009, but may not be applied to any acquisition completed prior to January 1, 2009.

     SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51was issued in December 2007. The Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as “minority interest”) and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. The Statement also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the Parent and noncontrolling interest. Additionally, SFAS No. 160 establishes a single method for accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. The Statement is effective for the Partnership beginning January 1, 2009, and is not expected to have a significant impact.

     The FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, in March 2008. Under SFAS No. 161, companies are required to disclose the fair value of all derivative and hedging instruments and their gains or losses in tabular format and information about credit risk-related features in derivative agreements, counterparty credit risk, and its strategies and objectives for using derivative instruments. SFAS No. 161 is effective for the Partnership beginning January 1, 2009, and is not expected to have a significant impact.

     In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States of America (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.The Partnership does not expect the adoption of SFAS 162 to have an impact on our financial statements or related disclosures.

     Emerging Issues Task Force (“EITF”) Issued No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships” (“EITF 07-4”),in March 2008, the EITF ratified its consensus opinion on EITF 07-4. EITF 07-4 addresses how master limited partnerships should calculate earnings per unit using the two-class method in SFAS No. 128,“Earnings per Share”(“SFAS 128”) and how current period earnings of a master limited partnership should be allocated to the general partner, limited partners, and other participating securities. EITF 07-4 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. EITF 07-4 should be applied retrospectively for all periods presented. The Partnership is currently evaluating the impact that EITF 07-4 will have on its earnings per unit calculation.

     In May 2008, the FASB issued Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” In addition, FSP APB 14-1 indicates that issuers of such instruments generally should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Adoption of FSP APB 14-1 is effective beginning in the first quarter of fiscal 2009 and will be required to retroactively present prior period information. The Partnership is currently evaluating FSP APB 14-1 and the effect FSP APB 14-1 will have on our financial statements.

3. PARTNERS’ CAPITAL AND DISTRIBUTIONS

     The KGS partnership agreement requires that KGS distribute, within 45 days after the end of each quarter, all of its “available cash” (as defined in the KGS partnership agreement) to unitholders of record on the applicable record date selected by the general partner.

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The following table presents cash distributions for 2008 and 2007:

	Attributable to the	Per Unit		Total Cash
Payment Date	quarter ended	Distribution(1)		Distribution
				(in millions)
Pending Distributions(4)
November 14, 2008(2)	September 30, 2008	$	0.350	$	8.5
Completed Distributions
August 14, 2008(2)	June 30, 2008	$	0.350	$	8.5
May 15, 2008	March 31, 2008	$	0.315	$	7.6
February 14, 2008	December 31, 2007	$	0.300	$	7.3
November 14, 2007(3)	September 30, 2007	$	0.168	$	4.1

(1)	Represents common and subordinated unitholders.
(2)	Total cash distribution includes an Incentive Distribution Rights amount of approximately $20,000 to the general partner.
(3)	Represents the post-IPO period from August 10, 2007 to September 30, 2007.
(4)	Distributions are recognized as a reduction to partners’ capital upon payment.

4. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consisted of the following:

	September 30,			December 31,
	2008			2007
	(in thousands)
Gathering and transportation systems	$	168,259		$	106,478
Processing plants		144,105			117,571
Construction in progress — plant		76,639			12,636
Construction in progress — pipeline		29,723			20,046
Rights-of-way and easements		38,029			26,905
Land		1,144			952
Buildings and other		1,830			910
		459,729			285,498
Accumulated Depreciation		(21,847	)		(11,550	)
Net property, plant and equipment	$	437,882		$	273,948

     Construction in progress — plant has increased due to the construction of the Corvette Plant, a natural gas processing plant and natural gas compression facility attached to the Cowtown Pipeline. The Plant is expected to be completed during the first quarter of 2009.

5. RELATED-PARTY TRANSACTIONS

     KGS routinely conducts business with Quicksilver and its affiliates. For a more complete description of our agreements with Quicksilver, see Note 11,Transactions With Related Parties, to the consolidated financial statements in our 2007 Annual Report on Form 10-K.

     During the second quarter of 2008, KGS, through a wholly-owned subsidiary, agreed to purchase land and a warehouse located in Hood County, Texas, from Parent for a purchase price of $0.3 million and the reimbursement to Parent of $0.6 million of costs incurred in the third quarter of 2008.

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     The following table summarizes the general and administrative expenses, including Parent’s general and administrative expense allocated to KGS.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(in thousands)				(in thousands)
General and administrative expense — parent
Allocation of general and administrative overhead	$	607	$	606	$	1,733	$	1,576
Audit and tax services		197		269		673		435
Equity-based compensation expense		279		143		962		143
Legal services		92		37		417		37
Insurance expense		85		107		254		107
Salary and benefits		96		—		331		—
Other		117		55		342		55
Total general and administrative expense — parent	$	1,473	$	1,217	$	4,712	$	2,353

     During the second quarter of 2008, the Partnership obtained additional easement rights for a total cost of $0.2 million from an affiliate of an entity that beneficially owns more than 5% of KGS’ outstanding units.

     Gas Gathering and Processing Agreement— Effective September 1, 2008, Quicksilver and KGS, through its subsidiaries, entered into the Sixth Amended and Restated Gas Gathering and Processing Agreement. Under the Gas Gathering and Processing Agreement, Quicksilver has agreed, for an initial term from the effective date through August 10, 2017, to dedicate and deliver for processing all of the natural gas owned or controlled by Quicksilver and lawfully produced from existing and future wells drilled within the Quicksilver Counties or lands pooled therewith. The dedication does not oblige Quicksilver to develop the reserves subject to the Gas Gathering and Processing Agreement.

     Under the Gas Gathering and Processing Agreement, KGS provides gathering, processing, compression and treating services. Quicksilver has agreed to pay $0.4163 per MMBtu gathered by the Cowtown Pipeline and $0.5204 per MMBtu processed. Quicksilver has agreed to pay KGS a compression fee of up to $0.30 per MMBtu based on the average monthly operating pressure at the pipeline entry point. The compression fee payable by Quicksilver at a gathering system delivery point shall never be less than KGS’ actual cost to perform such compression service. Quicksilver may also pay KGS a treating fee based on carbon dioxide content at the pipeline entry point. The rates above are each subject to an annual escalation tied to the consumer price index.

     For a more complete description of the Fifth Amended and Restated Gas Gathering and Processing Agreement that was in effect prior to September 1, 2008, see Note 11,Transactions with Related Parties, in our 2007 Annual Report on Form 10-K.

6. LONG-TERM DEBT

     Long-term debt consisted of the following:

	September 30,			December 31,
	2008			2007
	(In thousands)
Revolving credit facility	$	104,300		$	5,000
Subordinated note to Parent		53,004			51,669
		157,304			56,669
Current maturities of debt		(1,100	)		(1,100	)
Long-term debt	$	156,204		$	55,569

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     At September 30, 2008, KGS’ borrowing capacity under the credit agreement was $150.0 million, as limited by the lender commitments to the facility, which resulted in available capacity of $45.7 million.

     On October 10, 2008, the lenders’ commitments under the credit agreement increased $85 million to $235 million. With this increase in commitments, KGS’ borrowing capacity was $168.8 million, as limited by the agreement’s leverage ratio test. The increase of the commitments was the result of an exercise of an accordion option in the facility. The lenders approved the reinstatement of the accordion at $115 million, to allow for the future expansion of the facility to $350 million, with appropriate lender consent. The facility, which matures August 10, 2012, can be extended up to two additional years with requisite lender consent.

     For a more complete description of our indebtedness, see Note 6,Long-Term Debt, to the consolidated financial statements in our 2007 Annual Report on Form 10-K.

7. ASSET RETIREMENT OBLIGATIONS

     Activity for KGS’ liability for asset retirement obligations is as follows:

	Nine Months Ended
	September 30, 2008
	(in thousands)
Beginning asset retirement obligations	$	2,793
Incremental liability incurred		577
Accretion expense		132
Ending asset retirement obligations	$	3,502

As of September 30, 2008, no assets are legally restricted for use in settling asset retirement obligations.

8. COMMITMENTS AND CONTINGENT LIABILITIES

     KGS has entered into agreements with third parties providing for natural gas compression equipment and the construction of the Corvette plant, with a targeted in-service date during the first quarter of 2009. Progress payments are due to the third parties upon completion of specified construction, manufacturing and delivery milestones. During the nine months ended September 30, 2008, $71.9 million was paid to the third parties related to the construction of facilities. KGS estimates additional payments of $33.1 million will be made upon completion of specified construction, manufacturing and delivery milestones.

9. INCOME TAXES

     During the third quarter of 2008, the Partnership paid $0.3 million related to its 2007 liability for Texas margin tax. The Parent does not expect to owe consolidated Texas margin tax for 2008, thus, KGS does not expect to make a cash payment for its 2008 liability for Texas margin tax, based upon Texas filing rules. All effects of the 2008 Texas margin tax calculation are captured in deferred income taxes.

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10. EQUITY-BASED COMPENSATION

     Awards of phantom units have been granted under KGS’ 2007 Equity Plan, which permits the issuance of up to 750,000 units. The following table summarizes information regarding the phantom unit activity:

	Payable in cash					Payable in units
				Weighted					Weighted
				Average Grant					Average Grant
				Date Fair					Date Fair
	Units			Value		Units			Value
Unvested phantom units — December 31, 2007		84,961		$	21.36		9,833		$	21.36
Vested		(27,330	)		21.36		(6,089	)		21.36
Issued		6,605			24.12		137,148			25.25
Cancelled		(3,000	)		21.36		(974	)		25.25
Unvested phantom units — September 30, 2008		61,236		$	21.66		139,918		$	25.15

     At January 1, 2008, KGS had total unvested compensation cost of $1.9 million related to unvested phantom units. KGS recognized compensation expense of approximately $1.1 million during the nine months ended September 30, 2008, including $0.4 million for remeasuring awards to be settled in cash to their revised fair value. Grants of phantom units during the nine months ended September 30, 2008 had an estimated grant date fair value of $3.6 million. During the nine months ended September 30, 2008, the fair value of grants of phantom units payable in cash has decreased approximately $0.5 million. KGS has unearned compensation expense of $3.0 million at September 30, 2008 that will be recognized in expense over the next 2.1 years. Phantom units that vested during the nine months ended September 30, 2008 had a fair value of $0.7 million on their vesting date.

     For a more complete description of KGS’ Equity Plan, see Note 10,Equity Plan,to the consolidated financial statements in our 2007 Annual Report on Form 10-K.

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

Overview

     We are a growth-oriented Delaware limited partnership engaged in the business of gathering and processing natural gas produced from the Barnett Shale geologic formation of the Fort Worth Basin located in North Texas. We began operations in 2004 to provide these services primarily to Quicksilver, the owner of our general partner, as well as other natural gas producers in this area. During the quarter ended September 30, 2008, approximately 81% of our total natural gas gathering and processing volumes were comprised of natural gas owned or controlled by Quicksilver.

Our Operations

     The results of our operations are significantly influenced by the volumes of natural gas gathered and processed through our systems. We gather and process natural gas pursuant to contracts under which we receive fees. We do not take title to the natural gas and associated NGLs that we gather and process, and therefore avoid direct commodity price exposure. However, a sustained decline in commodity prices could result in a decline in volumes produced by our customers and a resulting decrease in our revenues. Our contracts provide stable cash flows, but minimal, if any, upside in higher commodity price environments.

Operational Measurement

     Our management uses a variety of financial and operational measurements to analyze our performance. We view these as important factors affecting our profitability and review them monthly for consistency and trend analysis. On a KGS wide basis, these measures are outlined below.

     Volume- We must continually obtain new supplies of natural gas to maintain or increase throughput volumes on our gathering and processing systems. Our ability to maintain existing supplies of natural gas and obtain new supplies is impacted by:

• the level of successful drilling and production activity in areas currently dedicated to our systems;

• our ability to compete with other midstream companies for volumes from successful new wells; and

• our pursuit of new opportunities where a limited number of midstream companies conduct business.

     We routinely monitor producer activity in the areas served by our operation to pursue new supply opportunities.

     Adjusted Gross Margin- Adjusted gross margin information is presented as a supplemental disclosure because it is a primary performance measure used by management to evaluate the relationship between our gathering and processing revenues and our cost of operating our facilities and our general and administrative overhead. Adjusted gross margin is not a measure calculated in accordance with GAAP as it does not include deductions for cash payments such as interest and capital expenditures which are necessary to maintain our business. As an indicator of our operating performance, adjusted gross margin should not be considered an alternative to, or more meaningful than, net income or operating cash flow determined in accordance with GAAP. Our adjusted gross margin may not be comparable to a similarly titled measure of other companies because other entities may not calculate adjusted gross margin in the same manner. A reconciliation of adjusted gross margin to amounts reported under GAAP is presented in “Results of Operations” below.

     Operating Expenses- Operating expenses are a separate measure that we use to evaluate performance of field operations. These expenses are comprised primarily of direct labor, insurance, property taxes, repair and maintenance expense, utilities and contract services, and are largely independent of the volumes through our systems, but may fluctuate depending on the scale of our operations during a specific period.

     EBITDA- We believe that EBITDA is a widely accepted financial indicator of a company’s operational performance and its ability to incur and service debt, fund capital expenditures and make distributions. EBITDA is not a measure calculated in accordance with GAAP, as it does not include deductions for items such as interest and capital expenditures which are necessary to maintain our business. EBITDA should not be considered as an alternative to net income, operating cash flow or any other measure of financial performance presented in accordance with GAAP. EBITDA calculations may vary among entities, so our computation of EBITDA may not be comparable to EBITDA or similar measures of other

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entities. In evaluating EBITDA, we believe that investors should consider, among other things, the amount by which EBITDA exceeds interest costs, how EBITDA compares to principal payments on debt and how EBITDA compares to capital expenditures for each period. A reconciliation of EBITDA to amounts reported under GAAP is presented in “Results of Operations” below.

     EBITDA is also used as a supplemental performance measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:

• financial performance of our assets without regard to financing methods, capital structure or historical cost basis;

• our operating performance as compared to those of other midstream companies without regard to financing methods, capital structure or historical cost basis; and

• the viability of acquisitions and capital expenditures and the rates of return on investment opportunities.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007

     The following table and discussion relates to our unaudited condensed consolidated results of operations for the three month periods ended September 30, 2008 and 2007:

	Three Months Ended September 30,
	2008		2007
	(In thousands, except volume data)
Total revenues	$	19,304	$	10,282
Operations and maintenance expense		4,772		3,072
General and administrative expense		1,473		1,217
Adjusted gross margin		13,059		5,993
Other income		4		114
EBITDA		13,063		6,107
Depreciation and accretion expense		3,866		2,188
Interest expense		2,703		1,728
Income tax provision		106		92
Net income	$	6,388	$	2,099
Volume Data:
Volumes gathered (MMcf)		19,591		9,554
Volumes processed (MMcf)		14,122		9,032

The following table summarizes our volumes for the three months ended September 30, 2008 and 2007:

	Gathering				Processing
	2008		2007		2008		2007
			(MMcf)
Cowtown Pipeline		15,130		9,415		14,122		9,032
Lake Arlington Dry System		3,174		—		—		—
Hill County Dry System		1,287		139		—		—
Total		19,591		9,554		14,122		9,032

The following table summarizes the changes in our revenues:

	Gathering		Processing		Other			Total
			(In thousands)
Revenue for the quarter ended September 30, 2007	$	4,602	$	5,413	$	267		$	10,282
Volume changes		5,239		3,191		—			8,430
Price changes		386		248		(42	)		592
Revenue for the quarter ended September 30, 2008	$	10,227	$	8,852	$	225		$	19,304

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     Total RevenuesandVolumes —Approximately $8.4 million of the increase was due to the increases in volumes that we gathered and processed in the Fort Worth Basin. This volume increase is due to increased well connections related to the continued development of the Fort Worth Basin, particularly in the Hood County and Lake Arlington areas. During September 2008, pipelines downstream of the Cowtown plant experienced disruptions related to Hurricane Ike which curtailed our gathering and processing. We estimate that average quarterly gathered and processed volumes were impacted by 10 MMcfd during the third quarter, resulting in an estimated $1.1 million in lost revenue for KGS.

     Operations and Maintenance Expense —The increase in operating expense is primarily due to the additional operating costs related to the continued expansion of our natural gas gathering systems, particularly in the Hood County and Lake Arlington areas. However, the increases in our operating and maintenance expense has been less significant than the increases in our throughput volumes and revenues. Operating expenses will likely increase in the future based on facility expansion and inflation, although we expect these costs to grow less than volume increases.

     General and Administrative Expense —The increase in general and administrative expense was primarily the result of the expansion of our operations and the resulting increase in administrative and managerial personnel and related expenses to support that growth, as well as costs recognized in 2008 in connection with being a publicly traded partnership for the entire reporting period. General and administrative expense includes equity-based compensation for the quarters ended September 30, 2008 and September 30, 2007 of $0.3 million and $0.1 million, respectively.

     Adjusted Gross MarginandEBITDA —Adjusted gross margin increased primarily as a result of the increase in revenues described above. As a percentage of revenues, adjusted gross margin has increased from 58% in the prior year quarter to approximately 68% in the current quarter, primarily due to the increase in revenues, which were partially offset by operations and maintenance expense associated with our current scale of operations and higher general and administrative expense.

     Depreciation and Accretion Expense —Depreciation and accretion expense increased primarily as a result of the higher gross cost of property, plant and equipment as a result of capital expenditures made subsequent to September 30, 2007 to expand our gathering network.

     Interest Expense— Interest expense increased primarily due to the increases in the repurchase obligation to Parent and borrowings under the revolving credit facility. Capitalized interest in 2008 reflects the construction of the Corvette plant.

The following table summarizes the details of interest expense for the three months ended September 30, 2008 and 2007:

	Three Months Ended September 30,
	2008		2007
	(In thousands)
Interest cost:
Repurchase obligation	$	1,736	$	1,016
Subordinated note to Parent		672		626
Revolving credit facility		847		86
Total cost		3,255		1,728
Less interest capitalized		552		—
Interest expense	$	2,703	$	1,728

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Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007

     The following table and discussion relates to our unaudited condensed consolidated results of operations for the nine month periods ended September 30, 2008 and 2007:

	Nine Months Ended September 30,
	2008		2007
	(In thousands, except volume data)
Total revenues	$	52,694	$	22,771
Operations and maintenance expense		15,034		8,063
General and administrative expense		4,712		2,353
Adjusted gross margin		32,948		12,355
Other income		10		149
EBITDA		32,958		12,504
Depreciation and accretion expense		10,429		5,307
Interest expense		7,542		1,939
Income tax provision		109		189
Net income	$	14,878	$	5,069
Volume Data:
Volumes gathered (MMcf)		51,269		21,685
Volumes processed (MMcf)		40,870		20,015

The following table summarizes our volumes for the nine months ended September 30, 2008 and 2007:

	Gathering				Processing
	2008		2007		2008		2007
			(MMcf)
Cowtown Pipeline		42,459		21,546		40,870		20,015
Lake Arlington Dry System		6,198		—		—		—
Hill County Dry System		2,612		139		—		—
Total		51,269		21,685		40,870		20,015

The following table summarizes the changes in our revenues:

	Gathering		Processing		Other		Total
			(In thousands)
Revenue for the nine months ended September 30, 2007	$	10,450	$	12,021	$	300	$	22,771
Volume changes		15,208		13,095		—		28,303
Price changes		698		547		375		1,620
Revenue for the nine months ended September 30, 2008	$	26,356	$	25,663	$	675	$	52,694

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     Total RevenuesandVolumes —Approximately $28.3 million of the increase was due to the increase in volumes that we gathered and processed in the Fort Worth Basin. This volume increase is due to increased well connections during the nine months ended September 30, 2008. Revenues are expected to increase as more of the Fort Worth Basin is developed and more reserves are produced. Further, our expanded facilities, including the additional processing facility to be placed into service in 2009, will likely result in more throughput and revenues for us. During September 2008, pipelines downstream of the Cowtown plant experienced disruptions related to Hurricane Ike which curtailed our gathering and processing. We estimate that average quarterly gathered and processed volumes were impacted by 10 MMcfd during the third quarter, resulting in an estimated $1.1 million in lost revenue for KGS.

     Operations and Maintenance Expense —The increase in operating expense is mainly due to the continued expansion of our natural gas gathering system and additional operating costs related to the natural gas processing facility placed in service in March 2007. However, the increases in our operating and maintenance expenses has been less significant than the increases in our throughput volumes and revenues. Operating expenses will likely increase in the future based on facility expansion and inflation, although we expect these costs to grow less than volume increases.

     General and Administrative Expense —The increase in general and administrative expense was primarily the result of the expansion of our operations and the resulting increase in administrative and managerial personnel and related expenses to support that growth, as well as costs recognized in 2008 in connection with being a publicly traded partnership. General and administrative expense includes equity-based compensation for the nine months ended September 30, 2008 and 2007 of $1.0 million and $0.1 million, respectively.

     Adjusted Gross MarginandEBITDA —Adjusted gross margin increased primarily as a result of the increase in revenues described above. As a percentage of revenues, adjusted gross margin has increased from 54% in the prior year nine-month period to approximately 63% in the current year nine-month period, primarily due to the increase in revenues, which were partially offset by operations and maintenance expense associated with our current scale of operations and higher general and administrative expense.

     Depreciation and Accretion Expense —Depreciation and accretion expense increased primarily as a result of the higher gross cost of property, plant and equipment due to capital expenditures made subsequent to September 30, 2007 to expand our gathering network.

     Interest Expense— Interest expense increased primarily due to the increases in the repurchase obligation to Parent, the subordinated note payable to Parent and the borrowings under the revolving credit facility. Capitalized interest in 2008 reflects the construction of the Corvette plant.

     The following table summarizes the details of interest expense for the nine months ended September 30, 2008 and 2007:

	Nine Months Ended September 30,
	2008		2007
	(In thousands)
Interest cost:
Repurchase obligation	$	4,663	$	1,227
Subordinated note to Parent		2,161		626
Revolving credit facility		1,691		86
Total cost		8,515		1,939
Less interest capitalized		973		—
Interest expense	$	7,542	$	1,939

Liquidity and Capital Resources

     The volumes of natural gas gathered and processed through our systems is dependent upon the natural gas volumes produced by our customers, which may be affected by natural gas price levels, the availability and cost of capital, the level of successful drilling activity and other factors beyond their control. Although our primary customer, Quicksilver, has

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mitigated their near-term exposure to price declines through the use of derivative financial instruments covering substantial portions of their expected near-term production, we cannot predict whether or when natural gas prices will increase or decrease. In addition, the turmoil in the credit and financial markets appears to have deepened significantly in recent weeks, and Quicksilver as well as other of our customers have announced reductions in their planned levels of capital expenditures and drilling activity for the remainder of 2008 and 2009. If these conditions were to persist or worsen over a prolonged period of time, we could experience a reduction in volumes through our system and therefore a reduction of revenues and cash flows.

     Prior to our IPO, our sources of liquidity were cash generated from operations and equity investments by our owners.

Our sources of liquidity after our IPO include:

• cash generated from operations;

• borrowings under our credit agreement; and

• future debt and equity offerings.

     We believe that the cash generated from these sources will be sufficient to meet our expected $0.35 per unit quarterly cash distributions and our requirements for short-term working capital and our long-term capital expenditures for the next 12 months.

Cash Flows

	For the Nine Months Ended
	September 30,
	2008			2007
	(In thousands)
Net cash provided by operating activities	$	36,365		$	11,179
Net cash used in investing activities		(112,200	)		(55,184	)
Net cash provided by financing activities		75,052			59,307

     KGS’ cash flows are significantly influenced by production growth in the Fort Worth Basin. As Quicksilver’s total production in the Fort Worth Basin has grown, we have expanded our gathering and processing capabilities to serve the increased production.

     Cash Flows Provided by Operating Activities —The increase in cash flows provided by operations resulted primarily from increased revenues and higher profitability associated with the services we provided to the customers whose wells are connected to our system.

     Cash Flows Used in Investing Activities —The increase in cash flows used in investing activities resulted from the higher capital expenditures used to expand our gathering system and processing capabilities. We have expended $85.3 million in 2008 on processing facilities and $26.9 million on gathering assets. We believe that these expenditures will be accretive to future operating results.

     Cash Flows Provided by Financing Activities —Cash flows provided by financing activities in 2008 consisted primarily of the proceeds from borrowings under our credit agreement of $99.3 million used to expand our gathering system and processing facilities, partially offset by distributions of $23.4 million to our unitholders.

     Information regarding cash distributions for 2008 and 2007 is included in Note 3 to our condensed consolidated interim financial statements included in Item 1 of Part I of this quarterly report.

     Working Capital (Deficit) —Working capital is a measure of our ability to pay our liabilities as they become due. Our working capital (deficit) was ($24.8) million at September 30, 2008, and ($23.9) million at December 31, 2007. However, excluding liabilities associated with capital expenditures, our working capital (deficit) was ($2.3) million and ($0.3) million at these two dates, respectively.

     The change in working capital of ($0.9) million from December 31, 2007 to September 30, 2008, resulted primarily from a decrease in cash and cash equivalents and an increase in accounts payable and other. The net decrease was partially

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offset by a decrease in liabilities associated with capital expenditures. The net working capital deficit is expected to be funded by cash generated from operations and, to a lesser extent, available borrowings under the credit agreement.

Capital Expenditures

     The midstream energy business can be capital intensive, requiring significant investment for the acquisition or development of new facilities, particularly in emerging production areas such as the Fort Worth Basin. We categorize our capital expenditures as either:

• expansion capital expenditures, which are made to construct additional assets, expand and upgrade existing systems, including compression, and facilities or acquire additional assets; or

• maintenance capital expenditures, which are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and extend their useful lives, or to maintain existing system volumes and related cash flows.

     During 2008, we have increased gross property, plant and equipment by $174.2 million, including expansion capital expenditures of approximately $107.8 million, $1.4 million in maintenance capital expenditures and $65.0 million in capital expenditures related to assets subject to repurchase obligations. We expect remaining capital expenditures for 2008 to be approximately $38 million, excluding any expenditure to reacquire or develop assets subject to repurchase obligations. We expect these expenditures to be funded through a combination of borrowings under our revolving credit facility and operating cash flow.

Debt

     Revolving Credit Facility— Our revolving credit agreement required us to maintain, as of September 30, 2008, a ratio of our consolidated trailing 12-month EBITDA (as defined in our credit agreement) to our net interest expense, of not less than 2.5 to 1.0; and a ratio of total indebtedness to consolidated trailing 12-month EBITDA of not more than 4.75 to 1.0 for the quarter ending on September 30, 2008. Furthermore, this credit agreement contains various covenants that limit, among other things, our ability to:

• incur further indebtedness;

• grant liens;

• pay distributions; and

• engage in transactions with affiliates.

     Our repurchase obligations to Quicksilver, our obligations to Quicksilver under the subordinated note described below, and the capitalized or non-cash interest thereon, are excluded as indebtedness or interest expense for purposes of determining our covenant compliance.

     At September 30, 2008, KGS’ borrowing capacity under the credit agreement was $150.0 million, which resulted in available capacity of $45.7 million. As of September 30, 2008, KGS was in compliance with all of the covenants related to the credit agreement. Should our EBITDA continue to grow, we expect the borrowing capacity under the credit agreement to grow as well.

     On October 10, 2008, the lenders’ commitments under the credit agreement increased $85 million to $235 million. With this increase in commitments, KGS’ borrowing capacity was $168.8 million, as limited by the agreement’s leverage ratio test. The increase of the commitments was the result of the exercise of an accordion option in the facility. The lenders approved the reinstatement of the accordion at $115 million, to allow for the future expansion of the facility to $350 million, with appropriate lender consent. The facility, which matures August 10, 2012, can be extended up to two additional years with requisite lender consent.

     Subordinated Note— During the nine months ended September 30, 2008 we made three quarterly payments at the end of each quarter of $0.3 million in accordance with the agreement. Interest expense of $2.2 million recognized during the nine months ended September 30, 2008 was added to the outstanding principal amount.

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     Repurchase Obligations to Parent- The information regarding repurchase obligations to Parent is included in Note 2 to our condensed consolidated interim financial statements included in Item 1 of Part I of this quarterly report.

Commitments and Contingent Liabilities

     Information regarding commitments and contingent liabilities is included in Note 8 to our condensed consolidated interim financial statements included in Item 1 of Part I of this quarterly report.

Recently Issued Accounting Standards

     The information regarding recent accounting pronouncements is included in Note 2 to our condensed consolidated interim financial statements included in Item 1 of Part I of this quarterly report.

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Critical Accounting Estimates

     Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated interim financial statements and related footnotes contained within Item 1 of Part I of this quarterly report. Our critical accounting estimates used in the preparation of the consolidated financial statements were discussed in our 2007 Annual Report on Form 10-K. These critical estimates, for which no significant changes have occurred in the nine months ended September 30, 2008, include estimates and assumptions pertaining to:

• Depreciation expense and capitalization limits for property, plant and equipment;

• Repurchase obligations to Parent;

• Asset retirement obligations; and

• Equity-based compensation

     The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We have established policies and procedures for managing risk within our organization, including internal controls. The level of risk assumed by us is based on our objectives and capacity to manage risk.

  Credit Risk

     Our primary risk is that we are dependent on Quicksilver for the majority of our supply of natural gas volumes, and are consequently subject to the risk of nonpayment or late payment by Quicksilver for gathering and processing fees. Quicksilver’s credit ratings are below investment grade, where we expect them to remain for the foreseeable future. Accordingly, this risk is higher than it would be with a more creditworthy contract counterparty or with a more diversified group of customers. Unless and until we significantly increase our customer base, we expect to continue to be subject to significant and non-diversified risk of nonpayment or late payment of our fees. Additionally, broad market factors, including lower credit availability, require us to perform frequent credit analyses of our customers. We have not had any customers fail to perform on their financial obligations to us.

  Interest Rate Risk

     As base interest rates remain low, the credit markets have caused the spreads charged by lenders to increase. As base rate or spreads increase, our financing costs would increase accordingly. Although this could limit our ability to raise funds in the capital markets, we expect in this regard to remain competitive with respect to acquisitions and capital projects, as our competitors would face similar circumstances.

     We are exposed to variable interest rate risk as a result of borrowings we may have under our revolving credit agreement, our Subordinated Note and our repurchase obligations to the Parent.

Item 4. Controls and Procedures

  Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

     We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2008, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

  Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting during the quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     Our operations are subject to a variety of risks and disputes normally incident to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. However, we are not currently a party to any material litigation.

Item 1A. Risk Factors

     There have been no material changes in risk factors from those described in Part I, Item 1A, “Risk Factors” included in our 2007 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

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Item 6. Exhibits:

Exhibit No.	Description
*10.1	Sixth Amended and Restated Gas Gathering and Processing Agreement, dated September 1, 2008, among Quicksilver Resources Inc., Cowtown Pipeline Partners L.P. and Cowtown Gas Processing Partners L.P.
*31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

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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 thereunto duly authorized.

Dated: November 5, 2008

QUICKSILVER GAS SERVICES LP By: QUICKSILVER GAS SERVICES GP LLC, its General Partner
By:	/s/ Thomas F. Darden
	Thomas F. Darden
	President and Chief Executive Officer
By:	/s/ Philip Cook
	Philip Cook
	Senior Vice President - Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
*10.1	Sixth Amended and Restated Gas Gathering and Processing Agreement, dated September 1, 2008, among Quicksilver Resources Inc., Cowtown Pipeline Partners L.P. and Cowtown Gas Processing Partners L.P.
*31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith