##### Table of Contents



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 EXCHANGEACT OF 1934For the quarterly period ended June 30, 2010oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGEACT OF 1934For the transition period from to
 Commission file number: 001-33631
 Quicksilver Gas Services LP
  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
 None
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting company o(Do not check if a smaller reporting company)
 o þ
  Title of Class
    
    Outstanding as of July 30, 2010Common Units
    
    16,988,429




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##### Table of Contents



DEFINITIONS
  Bbl Bbls  Btu  EBITDA  LIBOR  Management  MMBtu  MMBtud  Mcf  MMcf  MMcfd  MMcfe  MMcfed  NGL NGLs  Oil
 COMMONLY USED TERMS
  Alliance Midstream Assets
 Alliance System
 Credit Facility
 Crestwood
 Crestwood Transaction
 Exchange Act
 FASB
 FASC Accounting Standards Codification
 GAAP
 General Partner
 HCDS
 IPO
 KGS
 LADS
 Partnership Agreement
 Quicksilver
 Quicksilver Counties
 Repurchase Obligation Waiver
 SEC
 SFAS
 2




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##### 



QUICKSILVER GAS SERVICES LP INDEX TO
FORM 10-Q
For the Period Ended June 30, 2010
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II. OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    (Removed and Reserved)Item 5.
    
    Other InformationItem 6.
    
    ExhibitsSignaturesCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906EX-31.1EX-31.2EX-32.1
  3




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##### Table of Contents



FORWARD-LOOKING INFORMATION
  
    changes in general economic conditions;
    fluctuations in natural gas prices;
    failure or delays by our customers in 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;
    fluctuations in the value of certain of our assets and liabilities;
    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, including environmental and climate change requirements;
    the effects of existing or future litigation; and
    certain factors discussed elsewhere in this Quarterly Report.
   4




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##### Table of Contents



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 June 30,
    
    Six Months Ended June 30,2010
    
    2009
    
    2010
    
    2009RevenueGathering
revenue - Quicksilver
    
    $
    18,405
    
    
    $
    13,731
    
    
    $
    34,794
    
    
    $
    27,259Gathering revenue
    
    
    1,340
    
    
    
    389
    
    
    
    2,455
    
    
    
    1,160Processing
revenue - Quicksilver
    
    
    6,774
    
    
    
    8,684
    
    
    
    13,253
    
    
    
    17,386Processing revenue
    
    
    675
    
    
    
    311
    
    
    
    1,431
    
    
    
    1,049Other
revenue - Quicksilver
    
    
    -
    
    
    
    225
    
    
    
    -
    
    
    
    450Total revenue
    
    
    27,194
    
    
    
    23,340
    
    
    
    51,933
    
    
    
    47,304ExpensesOperations and maintenance
    
    
    6,588
    
    
    
    5,950
    
    
    
    14,601
    
    
    
    11,171General and administrative
    
    
    1,833
    
    
    
    1,744
    
    
    
    4,274
    
    
    
    3,736Depreciation and accretion
    
    
    5,642
    
    
    
    5,321
    
    
    
    11,007
    
    
    
    9,845Total expenses
    
    
    14,063
    
    
    
    13,015
    
    
    
    29,882
    
    
    
    24,752Operating income
    
    
    13,131
    
    
    
    10,325
    
    
    
    22,051
    
    
    
    22,552Other income
    
    
    -
    
    
    
    1
    
    
    
    -
    
    
    
    1Interest expense
    
    
    2,945
    
    
    
    2,243
    
    
    
    5,623
    
    
    
    4,478Income from continuing operations before income taxes
    
    
    10,186
    
    
    
    8,083
    
    
    
    16,428
    
    
    
    18,075Income tax provision
    
    
    73
    
    
    
    248
    
    
    
    126
    
    
    
    211Net income from continuing operations
    
    
    10,113
    
    
    
    7,835
    
    
    
    16,302
    
    
    
    17,864Loss from discontinued operations
    
    
    -
    
    
    
    (819
    )
    
    
    -
    
    
    
    (1,454
    )Net income
    
    $
    10,113
    
    
    $
    7,016
    
    
    $
    16,302
    
    
    $
    16,410General partner interest in net income
    
    $
    677
    
    
    $
    225
    
    
    $
    778
    
    
    $
    497Common and subordinated unitholders interest
in net income
    
    $
    9,436
    
    
    $
    6,791
    
    
    $
    15,524
    
    
    $
    15,913Basic earnings (loss) per limited partner unit:From continuing operations per common and
subordinated unit
    
    $
    0.33
    
    
    $
    0.32
    
    
    $
    0.54
    
    
    $
    0.73From discontinued operations per common and
subordinated unit
    
    $
    -
    
    
    $
    (0.03
    )
    
    $
    -
    
    
    $
    (0.06
    )Net earnings per common and subordinated unit
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.54
    
    
    $
    0.67Diluted earnings (loss) per limited partner unit:From continuing operations per common and
subordinated unit
    
    $
    0.31
    
    
    $
    0.29
    
    
    $
    0.52
    
    
    $
    0.65From discontinued operations per common and
subordinated unit
    
    $
    -
    
    
    $
    (0.03
    )
    
    $
    -
    
    
    $
    (0.05
    )Net earnings per common and subordinated unit
    
    $
    0.31
    
    
    $
    0.26
    
    
    $
    0.52
    
    
    $
    0.60Weighted average number of common and subordinated
units outstanding:Basic
    
    
    28,502
    
    
    
    23,827
    
    
    
    28,502
    
    
    
    23,827Diluted
    
    
    31,958
    
    
    
    28,395
    
    
    
    31,952
    
    
    
    28,488Distributions per unit
    
    $
    0.42
    
    
    $
    0.37
    
    
    $
    0.81
    
    
    $
    0.74
  5




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QUICKSILVER GAS SERVICES LP
CONDENSED CONSOLIDATED BALANCE SHEETS  In thousands, except for unit data - Unaudited
 June 30,
    
    December 31,2010
    
    2009ASSETSCurrent assetsCash and cash equivalents
    
    $
    556
    
    
    $
    746Accounts receivable
    
    
    1,201
    
    
    
    1,342Accounts receivable from Quicksilver
    
    
    2,038
    
    
    
    -Prepaid expenses and other
    
    
    1,140
    
    
    
    180Total current assets
    
    
    4,935
    
    
    
    2,268Property, plant and equipment, net
    
    
    508,850
    
    
    
    482,497Other assets
    
    
    2,417
    
    
    
    2,859Total assets
    
    $
    516,202
    
    
    $
    487,624LIABILITIES AND PARTNERS CAPITALCurrent liabilitiesCurrent maturities of debt
    
    $
    3,025
    
    
    $
    2,475Accounts payable to Quicksilver
    
    
    -
    
    
    
    1,727Accrued additions to property, plant and equipment
    
    
    7,396
    
    
    
    8,015Accounts payable and other
    
    
    5,755
    
    
    
    2,240Total current liabilities
    
    
    16,176
    
    
    
    14,457Long-term debt
    
    
    226,800
    
    
    
    125,400Note payable to Quicksilver
    
    
    53,927
    
    
    
    53,243Asset retirement obligations
    
    
    9,425
    
    
    
    8,919Deferred income taxes
    
    
    895
    
    
    
    768Commitments and contingent liabilities (Note 10)Partners capitalCommon unitholders (16,988,429 and 16,313,451 units issued and
outstanding at June 30, 2010 and December 31, 2009, respectively)
    
    
    208,209
    
    
    
    281,239Subordinated unitholders (11,513,625 units issued and outstanding at
June 30, 2010 and December 31, 2009)
    
    
    331
    
    
    
    3,040General partner
    
    
    439
    
    
    
    558Total partners capital
    
    
    208,979
    
    
    
    284,837$
    516,202
    
    
    $
    487,624
  6




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##### Table of Contents



QUICKSILVER GAS SERVICES LP  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  In thousands  Unaudited
 Six Months Ended June 30,2010
    
    2009Operating activities:Net income
    
    $
    16,302
    
    
    $
    16,410Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    10,765
    
    
    
    11,030Accretion of asset retirement obligations
    
    
    242
    
    
    
    178Deferred income taxes
    
    
    126
    
    
    
    211Equity-based compensation
    
    
    1,334
    
    
    
    870Non-cash interest expense
    
    
    2,709
    
    
    
    3,252Changes in assets and liabilities:Accounts receivable
    
    
    141
    
    
    
    1,499Prepaid expenses and other
    
    
    (1,011
    )
    
    
    32Accounts receivable and payable with Quicksilver
    
    
    (6,323
    )
    
    
    (2,284
    )Accounts payable and other
    
    
    2,464
    
    
    
    2,051Net cash provided by operating activities
    
    
    26,749
    
    
    
    33,249Investing activities:Capital expenditures
    
    
    (34,845
    )
    
    
    (35,780
    )Distribution to Quicksilver
    
    
    (80,276
    )
    
    
    -Net cash used in investing activities
    
    
    (115,121
    )
    
    
    (35,780
    )Financing activities:Proceeds from revolving credit facility borrowings
    
    
    124,500
    
    
    
    31,500Repayments of credit facility
    
    
    (23,100
    )
    
    
    (10,500
    )Proceeds from issuance of equity
    
    
    11,088
    
    
    
    -Issuance costs of equity units paid
    
    
    (34
    )
    
    
    -Contributions by Quicksilver
    
    
    -
    
    
    
    37Distributions to unitholders
    
    
    (23,128
    )
    
    
    (18,165
    )Taxes paid for equity-based compensation vesting
    
    
    (1,144
    )
    
    
    (63
    )Net cash provided by financing activities
    
    
    88,182
    
    
    
    2,809Net cash increase (decrease)
    
    
    (190
    )
    
    
    278Cash at beginning of period
    
    
    746
    
    
    
    303Cash at end of period
    
    $
    556
    
    
    $
    581Cash paid for interest
    
    $
    2,914
    
    
    $
    2,745Cash paid for income taxes
    
    
    -
    
    
    
    -Non-cash transactions:Working capital related to capital expenditures
    
    
    12,112
    
    
    
    15,056Contribution of property, plant and equipment from Quicksilver
    
    
    -
    
    
    
    20,066Acquisition of property, plant and equipment under
repurchase obligation, net
    
    
    -
    
    
    
    (7,570
    )
  7




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QUICKSILVER GAS SERVICES LP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS CAPITAL
In thousands  Unaudited
 Limited PartnersGeneralCommon
    
    Subordinated
    
    Partner
    
    TotalBalance at December 31, 2009
    
    $
    281,239
    
    
    $
    3,040
    
    
    $
    558
    
    
    $
    284,837Equity-based compensation expense recognized
    
    
    1,334
    
    
    
    -
    
    
    
    -
    
    
    
    1,334Distributions paid to partners
    
    
    (13,251
    )
    
    
    (8,980
    )
    
    
    (897
    )
    
    
    (23,128
    )Distribution to Quicksilver for Alliance Midstream Assets
    
    
    (80,276
    )
    
    
    -
    
    
    
    -
    
    
    
    (80,276
    )Net income
    
    
    9,253
    
    
    
    6,271
    
    
    
    778
    
    
    
    16,302Public offering of units, net of offering costs
    
    
    11,054
    
    
    
    -
    
    
    
    -
    
    
    
    11,054Taxes paid for stock-based compensation vesting
    
    
    (1,144
    )
    
    
    -
    
    
    
    -
    
    
    
    (1,144
    )Balance at June 30, 2010
    
    $
    208,209
    
    
    $
    331
    
    
    $
    439
    
    
    $
    208,979
  8




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QUICKSILVER GAS SERVICES LP
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTSUNAUDITED
 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
 Organization
   Ownership PercentageQuicksilver
    
    Public
    
    TotalGeneral partner interest
    
    
    1.6
    %
    
    
    -
    
    
    
    1.6
    %Limited partner interest:Common unitholders
    
    
    19.7
    %
    
    
    39.0
    %
    
    
    58.7
    %Subordinated unitholders
    
    
    39.7
    %
    
    
    -
    
    
    
    39.7
    %Total interests
    
    
    61.0
    %
    
    
    39.0
    %
    
    
    100.0
    %
   
    recognition of approximately $4.4 million of unrecognized costs associated with
equity-based compensation of KGS phantom units;
    acceleration of amounts due under our Credit Facility, which we expect will be
replaced by another credit facility;
    termination of our omnibus agreement with Quicksilver;
    termination of our services and secondment agreement with Quicksilver which will be
replaced, on a temporary basis, with a transition services agreement;
    extension of the terms of all gathering agreements with Quicksilver to 2020;
    change to a fixed gathering rate of $0.55 per Mcf at the Alliance System to replace
the variable rate which has a range of $0.40 to $0.55 per Mcf.
  Description of Business
 9




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##### Table of Contents



Cowtown System
  -
    
    the Cowtown Pipeline, consisting of a gathering system and related gas compression
facilities. This system gathers natural gas produced by our customers and delivers it to
the Cowtown and Corvette Plants for processing;-
    
    the Cowtown Plant, consisting of two natural gas processing units with a total
capacity of 200 MMcfd that extract NGLs from the natural gas stream and deliver customers
residue gas and extracted NGLs to unaffiliated pipelines for sale downstream; and-
    
    the Corvette Plant, placed in service during 2009, consisting of a 125 MMcfd
natural gas processing unit that extracts NGLs from the natural gas stream and delivers
customers residue gas and extracted NGLs to unaffiliated pipelines for sale downstream.
 Lake Arlington Dry System
  Alliance System
  Three Months Ended June 30, 2009Quicksilver GasServices
    
    Alliance System
    
    Combined(In thousands)Revenue
    
    $
    23,108
    
    
    $
    232
    
    
    $
    23,340Operating expenses
    
    
    (12,387
    )
    
    
    (628
    )
    
    
    (13,015
    )Operating income (loss)
    
    $
    10,721
    
    
    $
    (396
    )
    
    $
    10,325Basic earnings (loss) per limited partner unit:
    
    $
    0.30
    
    
    $
    (0.01
    )
    
    $
    0.29Diluted earnings (loss) per limited partner unit:
    
    $
    0.27
    
    
    $
    (0.01
    )
    
    $
    0.26
 Six Months Ended June 30, 2009Quicksilver GasServices
    
    Alliance System
    
    Combined(In thousands)Revenue
    
    $
    46,820
    
    
    $
    484
    
    
    $
    47,304Operating expenses
    
    
    (23,832
    )
    
    
    (920
    )
    
    
    (24,752
    )Operating income (loss)
    
    $
    22,988
    
    
    $
    (436
    )
    
    $
    22,552Basic earnings (loss) per limited partner unit:
    
    $
    0.69
    
    
    $
    (0.02
    )
    
    $
    0.67Diluted earnings (loss) per limited partner unit:
    
    $
    0.61
    
    
    $
    (0.01
    )
    
    $
    0.60
 10




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##### Table of Contents



As of December 31, 2009Quicksilver GasServices
    
    Alliance System
    
    Combined(In thousands)AssetsProperty, plant and equipment, net
    
    $
    396,952
    
    
    $
    85,545
    
    
    $
    482,497Total assets
    
    $
    396,952
    
    
    $
    85,545
    
    
    $
    482,497LiabilitiesAccrued additions to property, plant and equipment
    
    $
    4,011
    
    
    $
    4,004
    
    
    $
    8,015Asset retirement obligations
    
    
    7,654
    
    
    
    1,265
    
    
    
    8,919Partners capital
    
    
    204,561
    
    
    
    80,276
    
    
    
    284,837Total liabilities and partners capital
    
    $
    216,226
    
    
    $
    85,545
    
    
    $
    301,771
 Hill County Dry System
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Use of Estimates 
  Discontinued Operations 
  11




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##### Table of Contents



Net Income per Limited Partner Unit
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009(In thousands, except per unit data)Common and subordinated unitholders interest in net income from continuing operations
    
    $
    9,436
    
    
    $
    7,595
    
    
    $
    15,524
    
    
    $
    17,340Common and subordinated unitholders interest in net loss from discontinued operations
    
    
    -
    
    
    
    (804
    )
    
    
    -
    
    
    
    (1,427
    )Common and subordinated unitholders interest in net income
    
    $
    9,436
    
    
    $
    6,791
    
    
    $
    15,524
    
    
    $
    15,913Impact of interest on subordinated note to Quicksilver
    
    
    627
    
    
    
    492
    
    
    
    1,213
    
    
    
    1,075Income available assuming conversion of convertible debt
    
    $
    10,063
    
    
    $
    7,283
    
    
    $
    16,737
    
    
    $
    16,988Weighted-average common and subordinated units - basic
    
    
    28,502
    
    
    
    23,827
    
    
    
    28,502
    
    
    
    23,827Effect of unvested phantom units
    
    
    517
    
    
    
    487
    
    
    
    517
    
    
    
    487Effect of subordinated note to Quicksilver (1)
    
    
    2,939
    
    
    
    4,081
    
    
    
    2,933
    
    
    
    4,174Weighted-average
common and subordinated units - diluted
    
    
    31,958
    
    
    
    28,395
    
    
    
    31,952
    
    
    
    28,488Basic earnings per unit:From continuing operations per common and subordinated unit
    
    $
    0.33
    
    
    $
    0.32
    
    
    $
    0.54
    
    
    $
    0.73From discontinued operations per common and subordinated unit
    
    $
    -
    
    
    $
    (0.03
    )
    
    $
    -
    
    
    $
    (0.06
    )Net earnings per common and subordinated unit
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.54
    
    
    $
    0.67Diluted earnings per unit:From continuing operations per common and subordinated unit
    
    $
    0.31
    
    
    $
    0.29
    
    
    $
    0.52
    
    
    $
    0.65From discontinued operations per common and subordinated unit
    
    $
    -
    
    
    $
    (0.03
    )
    
    $
    -
    
    
    $
    (0.05
    )Net earnings per common and subordinated unit
    
    $
    0.31
    
    
    $
    0.26
    
    
    $
    0.52
    
    
    $
    0.60Conversion price of convertible debt (1)
    
    $
    19.38
    
    
    $
    13.41
    
    
    $
    19.42
    
    
    $
    13.11
 (1)
 Comprehensive Income
 Recently Issued Accounting Standards
  3. PARTNERS CAPITAL AND DISTRIBUTIONS
   12




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Attributable to the
    
    Per Unit
    
    
    Total CashPayment Date
    
    Quarter Ended
    
    Distribution (1)
    
    
    Distribution(In millions)Pending DistributionAugust 13, 2010 (2)
    
    June 30, 2010
    
    $
    0.420
    
    
    $
    12.7Completed DistributionsMay 14, 2010 (3)
    
    March 31, 2010
    
    $
    0.390
    
    
    $
    11.6February 12, 2010 (3)
    
    December 31, 2009
    
    $
    0.390
    
    
    $
    11.6November 13, 2009 (4)
    
    September 30, 2009
    
    $
    0.390
    
    
    $
    9.7August 14, 2009 (5)
    
    June 30, 2009
    
    $
    0.370
    
    
    $
    9.1May 15, 2009 (5)
    
    March 31, 2009
    
    $
    0.370
    
    
    $
    9.1
 (1)
    
    Represents common and subordinated unitholders(2)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $522,000 to the general partner(3)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $261,000 to the general partner(4)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $219,000 to the general partner(5)
    
    Total cash distribution includes an Incentive Distribution Rights amount of
approximately $90,000 to the general partner  4. DISCONTINUED OPERATIONS
  Three Months Ended
    
    Six Months EndedJune 30, 2009
    
    June 30, 2009(In thousands)
    
    (In thousands)Revenue
    
    $
    873
    
    
    $
    1,875Operating expenses
    
    
    (1,122
    )
    
    
    (2,121
    )Interest expense
    
    
    (570
    )
    
    
    (1,208
    )Loss from discontinued operations
    
    $
    (819
    )
    
    $
    (1,454
    )
 5. PROPERTY, PLANT AND EQUIPMENT
  June 30,
    
    December 31,2010
    
    2009(In thousands)Gathering systems
    
    $
    138,341
    
    
    $
    135,128Processing plants and compression facilities
    
    
    358,732
    
    
    
    332,053Construction
in progress - gathering
    
    
    23,533
    
    
    
    17,693Rights-of-way and easements
    
    
    29,061
    
    
    
    27,788Land
    
    
    4,251
    
    
    
    4,251Buildings and other
    
    
    2,843
    
    
    
    2,732556,761
    
    
    
    519,645Accumulated depreciation
    
    
    (47,911
    )
    
    
    (37,148
    )Net property, plant and equipment
    
    $
    508,850
    
    
    $
    482,497
 13




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##### Table of Contents



6. DEBT
  June 30,
    
    December 31,2010
    
    2009(In thousands)Credit Facility
    
    $
    226,800
    
    
    $
    125,400Subordinated Note to Quicksilver
    
    
    56,952
    
    
    
    55,718283,752
    
    
    
    181,118Current maturities of debt
    
    
    (3,025
    )
    
    
    (2,475
    )Debt
    
    $
    280,727
    
    
    $
    178,643
 Form 10-K.
  7. ASSET RETIREMENT OBLIGATIONS
  June 30, 2010(In thousands)Beginning asset retirement obligations as reported at December 31, 2009
    
    $
    7,654Alliance Midstream Asset obligations at December 31, 2009
    
    
    1,265Adjusted asset retirement obligations at December 31, 2009
    
    $
    8,919Incremental liability incurred
    
    
    264Accretion expense
    
    
    242Ending asset retirement obligations at June 30, 2010
    
    $
    9,425
  8. EQUITY-BASED COMPENSATION
  Payable in cash
    
    Payable in unitsWeighted
    
    
    
    
    
    WeightedAverage Grant
    
    
    
    
    
    Average GrantUnits
    
    Date Fair Value
    
    Units
    
    Date Fair ValueUnvested
phantom units - January 1, 2010
    
    
    33,240
    
    
    $
    20.90
    
    
    
    485,672
    
    
    $
    12.75Vested
    
    
    (1,956
    )
    
    
    18.94
    
    
    
    (179,886
    )
    
    
    13.74Issued
    
    
    -
    
    
    
    -
    
    
    
    211,600
    
    
    
    21.15Cancelled
    
    
    -
    
    
    
    -
    
    
    
    (763
    )
    
    
    17.52Unvested
phantom units - June 30, 2010
    
    
    31,284
    
    
    $
    20.82
    
    
    
    516,623
    
    
    $
    15.83
  14




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##### Table of Contents



9. INCOME TAXES
    Form 10-K.
 10. COMMITMENTS AND CONTINGENT LIABILITIES
 Form 10-K.
 11. RELATED-PARTY TRANSACTIONS
     15




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##### Table of Contents



ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Form 10-K.
 Overview
  Our Operations
  Operational Measurement
  Volume
 
    the level of successful drilling and production activity in areas where our systems
are located;
    our ability to compete with other midstream companies for production volumes; and
    our pursuit of new opportunities.
 Adjusted Gross Margin
 Operating
Expenses
 EBITDA
 16




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##### Table of Contents




    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 companies in the midstream
industry without regard to financing methods, capital structure or historical cost basis;
and
    the viability of acquisitions and capital expenditure projects and the rates of
return on investment opportunities.
 2010 Highlights
 
    During 2010, we completed the purchase of the Alliance Midstream Assets,
located in Tarrant and Denton counties of Texas, from Quicksilver for $84.4 million.  Gathered volumes on the Alliance System in the six months ended June 30, 2010
averaged 129 MMcfd.
    In January 2010, the underwriters of our secondary offering exercised their option
to purchase an additional 549,200 common units, which resulted in additional proceeds of
$11.1 million.  We used $11 million from the sale of the additional units to pay down our
Credit Facility.
    During July 2010, Quicksilver agreed to sell all of Quicksilvers interests in us
to Crestwood.  The acquired interests will include a 100% ownership interest in Quicksilver
Gas Services Holdings LLC, which owns (a) 5,696,752 common units of KGS, (b) 11,513,625
subordinated limited partner units of KGS and (c) 100% of the outstanding membership
interests in our General Partner including 469,944 general partner units in KGS and 100%
of the outstanding incentive distribution rights.  Crestwood will also acquire the
Subordinated Note to Quicksilver.  In exchange, Quicksilver will receive $701 million in
cash at closing and up to $72 million in future earn-out
payments due in 2012 and 2013.  The Crestwood Transaction is expected to close in October 2010, subject to customary
closing conditions.Under the agreements governing the Crestwood Transaction, Quicksilver has agreed for two
years not to solicit our employees and not to compete with us with respect to gathering,
treating and processing of natural gas and the transportation of natural gas liquids in
Denton, Hood, Somervell, Johnson, Tarrant, Parker, Bosque and Erath
Counties in Texas.  Quicksilver will be entitled to appoint a director to our General Partners Board of
Directors until the later of the second anniversary of the closing and such time as
Quicksilver generates less than 50% of our consolidated revenue in
any fiscal year.  We also
expect that our current independent directors will continue as directors after the closing
of the Crestwood Transaction.In connection with the closing of the Crestwood Transaction, Quicksilver will provide us
with transitional services on a temporary basis on customary
terms.  We expect that more
than 100 experienced midstream employees who had previously been seconded to us will become
our employees.  Quicksilver and we will also enter into an agreement for the joint
development of areas governed by certain of our existing commercial agreements and amend certain of our
existing commercial agreements, most significantly to extend the terms of all Quicksilver
gathering agreements to 2020 and to establish a fixed gathering rate of $0.55 Mcf at the
Alliance System.
 17




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##### Table of Contents



RESULTS OF OPERATIONS
 Three Months Ended June 30, 2010 Compared with Three Months Ended June 30, 2009
  Three Months Ended June 30,2010
    
    2009(In thousands)Total revenue
    
    $
    27,194
    
    
    $
    23,340Operations and maintenance expense
    
    
    6,588
    
    
    
    5,950General and administrative expense
    
    
    1,833
    
    
    
    1,744Adjusted gross margin
    
    
    18,773
    
    
    
    15,646Other income
    
    
    -
    
    
    
    1EBITDA
    
    
    18,773
    
    
    
    15,647Depreciation and accretion expense
    
    
    5,642
    
    
    
    5,321Interest expense
    
    
    2,945
    
    
    
    2,243Income tax provision
    
    
    73
    
    
    
    248Net income from continuing operations
    
    $
    10,113
    
    
    $
    7,835
  Gathering
    
    Processing2010
    
    2009
    
    2010
    
    2009(MMcf)Cowtown System
    
    
    11,613
    
    
    
    14,425
    
    
    
    11,494
    
    
    
    14,108Lake Arlington Dry System
    
    
    4,623
    
    
    
    4,657
    
    
    
    -
    
    
    
    -Alliance System
    
    
    13,373
    
    
    
    3,150
    
    
    
    -
    
    
    
    -Total
    
    
    29,609
    
    
    
    22,232
    
    
    
    11,494
    
    
    
    14,108
  Gathering
    
    Processing
    
    Other
    
    Total(In thousands)Revenue for the three months ended June 30, 2009
    
    $
    14,120
    
    
    $
    8,995
    
    
    $
    225
    
    
    $
    23,340Volume changes
    
    
    4,685
    
    
    
    (1,667
    )
    
    
    -
    
    
    
    3,018Price changes
    
    
    940
    
    
    
    121
    
    
    
    (225
    )
    
    
    836Revenue for the three months ended June 30, 2010
    
    $
    19,745
    
    
    $
    7,449
    
    
    $
    -
    
    
    $
    27,194
 Total Revenue Volumes 
 Operations and Maintenance Expense 
 General and Administrative Expense 
 18




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Adjusted Gross Margin EBITDA 
 Depreciation and Accretion Expense 
 Interest Expense
  Three Months Ended June 30,2010
    
    2009(In thousands)Interest cost:Revolving Credit Facility
    
    $
    2,308
    
    
    $
    1,119Repurchase obligation
    
    
    -
    
    
    
    622Subordinated note to Quicksilver
    
    
    637
    
    
    
    502Interest expense
    
    $
    2,945
    
    
    $
    2,243
 19




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Six Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009
  Six Months Ended June 30,2010
    
    2009(In thousands)Total revenue
    
    $
    51,933
    
    
    $
    47,304Operations and maintenance expense
    
    
    14,601
    
    
    
    11,171General and administrative expense
    
    
    4,274
    
    
    
    3,736Adjusted gross margin
    
    
    33,058
    
    
    
    32,397Other income
    
    
    -
    
    
    
    1EBITDA
    
    
    33,058
    
    
    
    32,398Depreciation and accretion expense
    
    
    11,007
    
    
    
    9,845Interest expense
    
    
    5,623
    
    
    
    4,478Income tax provision
    
    
    126
    
    
    
    211Net income from continuing operations
    
    $
    16,302
    
    
    $
    17,864
  Gathering
    
    Processing2010
    
    2009
    
    2010
    
    2009(MMcf)Cowtown System
    
    
    23,043
    
    
    
    29,532
    
    
    
    22,738
    
    
    
    28,760Lake Arlington Dry System
    
    
    9,033
    
    
    
    10,935
    
    
    
    -
    
    
    
    -Alliance System
    
    
    23,330
    
    
    
    6,735
    
    
    
    -
    
    
    
    -Total
    
    
    55,406
    
    
    
    47,202
    
    
    
    22,738
    
    
    
    28,760
  Gathering
    
    Processing
    
    Other
    
    Total(In thousands)Revenue for the six months ended June 30, 2009
    
    $
    28,419
    
    
    $
    18,435
    
    
    $
    450
    
    
    $
    47,304Volume changes
    
    
    4,939
    
    
    
    (3,860
    )
    
    
    -
    
    
    
    1,079Price changes
    
    
    3,891
    
    
    
    109
    
    
    
    (450
    )
    
    
    3,550Revenue for the six months ended June 30, 2010
    
    $
    37,249
    
    
    $
    14,684
    
    
    $
    -
    
    
    $
    51,933
 Total Revenue Volumes 
 Operations and Maintenance Expense 
 General and Administrative Expense 
 20




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Adjusted Gross Margin EBITDA 
 Depreciation and Accretion Expense 
 Interest Expense
  Six Months Ended June 30,2010
    
    2009(In thousands)Interest cost:Revolving Credit Facility
    
    $
    4,390
    
    
    $
    2,325Repurchase obligation
    
    
    -
    
    
    
    1,367Subordinated note to Quicksilver
    
    
    1,233
    
    
    
    1,096Total cost
    
    
    5,623
    
    
    
    4,788Less interest capitalized
    
    
    -
    
    
    
    (310
    )Interest expense
    
    $
    5,623
    
    
    $
    4,478
 21




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##### Table of Contents



Liquidity and Capital Resources
   
    cash generated from operations;
    borrowings under our Credit Facility; and
    future capital market transactions.
   Cash Flows
 Six Months Ended June 30,2010
    
    
    2009(In thousands)Net cash provided by operating activities
    
    $
    26,749
    
    
    $
    33,249Net cash used in investing activities
    
    
    (115,121
    )
    
    
    (35,780
    )Net cash provided by financing activities
    
    
    88,182
    
    
    
    2,809
 Cash Flows Used in Operating Activities 
 Cash Flows Used in Investing Activities 
 Cash Flows Provided by Financing Activities 
  22




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##### Table of Contents



Capital Expenditures
  
    expansion capital expenditures, which are made to construct additional assets,
expand and upgrade existing systems, 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.
    Other Matters
  Debt
 Credit Facility
  Our credit agreement contains various covenants that limit, among other things, our ability to:
 
    incur further indebtedness;
    grant liens;
    sell assets; and
    engage in transactions with affiliates.
  Subordinated Note
 As part of the Crestwood Transaction, Crestwood will acquire the Subordinated Note to
Quicksilver.
 23




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Off-Balance Sheet Arrangements
  Recently Issued Accounting Standards
  Critical Accounting Estimates
  
    depreciation expense for property, plant and equipment;
    asset retirement obligations; and
    equity-based compensation.
  24




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  Credit Risk
  Interest Rate Risk
  
 Item 4.
    
    Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  25




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##### Table of Contents



PART
II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Our ability to operate our business effectively may suffer if we do not, quickly and cost
effectively, establish our own operating, maintenance, general and administrative and other
functions to operate as a company not controlled by Quicksilver or if we are unable to replace the corporate services
Quicksilver provides us in a timely manner or on comparable terms.
    The sale by Quicksilver of its interests in us and our General Partner will trigger change in
control provisions in our long term incentive plan, our Credit Facility and certain agreements with
Quicksilver.  We may incur additional general and administrative costs as a result of the Crestwood
Transaction.
  Benefit Plans.
 General and Administrative Costs.
 26




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##### Table of Contents



Credit Facility.
 Other Agreements.
 As a result of the closing of the Crestwood Transaction, Crestwood will own 61% of our common units
outstanding and control our General Partner, which has sole responsibility for conducting our
business and managing our operations.
  
    neither our partnership agreement nor any other agreement will require Crestwood or
its affiliates to pursue a business strategy that favors us;
    our General Partner is allowed to take into account the interests of parties other
than us, such as Crestwood, in resolving conflicts of interest;
    our General Partner determines the amount and timing of asset purchases and sales,
capital expenditures, borrowings and repayments of debt, issuance of additional
partnership securities, and cash reserves, each of which can affect the amount of cash
available for distribution;
    our General Partner determines which costs incurred by it and its affiliates are
reimbursable by us;
    our partnership agreement does not restrict our General Partner from causing us to
pay it or its affiliates for any services rendered to us or entering into additional
contractual arrangements with any of these entities on our behalf;
    our General Partner intends to limit its liability regarding our contractual and
other obligations; and
    our General Partner controls the enforcement of obligations owed to us by our
General Partner and its affiliates.
 Crestwood and its affiliates may compete directly with us.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    (Removed and Reserved)
 27




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##### Table of Contents



Item 5.
    
    Other Information
  28




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##### Table of Contents



Item 6.
    
    Exhibits:
 Exhibit No.
    
    Description*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 29




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##### Table of Contents



SIGNATURES
   QUICKSILVER GAS SERVICES LP
By: QUICKSILVER GAS SERVICES GP LLC, its
General PartnerBy:
    /s/ Philip CookPhilip CookSenior Vice President  Chief Financial Officer 30




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description*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