AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 2014

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

AZURE MIDSTREAM PARTNERS, LP

(Exact Name of Registrant as Specified in Its Charter)

Delaware

4922

38-3941102

(State or Other Jurisdiction of

Incorporation or Organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

12377 Merit Drive, Suite 300

Dallas, Texas 75251

(972) 674-5200

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Eric T. Kalamaras

Chief Financial Officer

12377 Merit Drive, Suite 300

Dallas, Texas 75251

(972) 674-5200

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

Douglas E. McWilliams

Jeffrey K. Malonson

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

(713) 758-2222

Joshua Davidson

Andrew J. Ericksen

Baker Botts L.L.P.

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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 filer	¨	Accelerated filer	¨
Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	¨

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee
Common units representing limited partner interests	$175,000,000	$20,335

(1)	Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.

(2)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. The securities described herein may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy such securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED , 2015

PROSPECTUS

LOGO

Common Units

Representing Limited Partner Interests

Azure Midstream Partners, LP

This is the initial public offering of our common units representing limited partner interests of Azure Midstream Partners, LP. We were recently formed by Azure Midstream Holdings LLC. We are offering common units in this offering. Prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $ and $ per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “AZUR.”

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 23.

These risks include the following:

•

We may not generate sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

•

Our assets will consist of a 40% limited partner interest in Azure Midstream Operating Company, LP (“Azure Midstream Operating”), as well as the general partner interest in Azure Midstream Operating. Because our interest in Azure Midstream Operating represents our only cash-generating asset, our cash flow will depend entirely on the performance of Azure Midstream Operating and its ability to distribute cash to us.

•

We depend on a relatively small number of customers for a significant portion of our revenues. The loss of, or material nonpayment or nonperformance by, or the curtailment of production by, any one or more of these customers could materially adversely affect our financial condition, results of operations and cash flows.

•

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

•

Azure Midstream Holdings LLC will own a 60% limited partner interest in Azure Midstream Operating and will control our general partner, which has sole responsibility for conducting our business and managing our operations, and we will own the general partner of Azure Midstream Operating which is responsible for managing the operations of Azure Midstream Operating. Our general partner and its affiliates, including Azure Midstream Holdings LLC, have conflicts of interest with, and defined fiduciary duties with respect to, us and our unitholders and may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over Azure Midstream Holdings LLC’s business decisions and operations, and Azure Midstream Holdings LLC is under no obligation to adopt a business strategy that favors us.

•

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards governing its duties.

•

Unitholders have very limited voting rights and are not entitled to appoint or remove our general partner or elect the board of directors of our general partner.

•

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as Azure Midstream Operating and us not being subject to material incremental entity-level taxation. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, or if we or Azure Midstream Operating become subject to entity-level taxation for state tax purposes, our distributable cash flow would be substantially reduced.

In addition, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. Furthermore, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010. Please read “Summary—Emerging Growth Company Status” and “Risk Factors.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


	Per Common Unit	Total
Initial public offering price	$	$
Underwriting discounts and commissions(1)	$	$
Proceeds to Azure Midstream Partners, LP (before expenses)	$	$

(1)

Excludes a structuring fee of % payable to Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Please read “Underwriting.”

The underwriters may purchase up to an additional common units from Azure Midstream Partners, LP at the public offering price, less the underwriting discounts and commissions and the structuring fee, within 30 days from the date of this prospectus.

The underwriters expect to deliver the common units to purchasers on or about , 2015 through the book-entry facilities of The Depository Trust Company.


Citigroup		BofA Merrill Lynch

The date of this prospectus is , 2015.

Our Assets and Areas of Operations

LOGO

TABLE OF CONTENTS


SUMMARY			1
Overview			1
Our Assets			2
Business Strategies			4
Competitive Strengths			6
Our Sponsors			7
Risk Factors			7
Formation Transactions and Partnership Structure			8
Ownership Structure			10
Management of Our Partnership			11
Principal Executive Offices and Internet Address			12
Emerging Growth Company Status			12
Conflicts of Interest and Fiduciary Duties			12
Summary Historical and Pro Forma Financial Information			19
Non-GAAP Financial Measures			21
RISK FACTORS			23
Risks Related to Our Business			23
Risks Inherent in an Investment in Us			38
Tax Risks to Common Unitholders			49
USE OF PROCEEDS			54
CAPITALIZATION			55
DILUTION			56
OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS			57
General			57
Our Minimum Quarterly Distribution			59
Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended September 30, 2014 and the Year Ended December 31, 2013			60
Unaudited Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015			64
HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS			73
Distributions of Available Cash			73
Operating Surplus and Capital Surplus			74
Capital Expenditures			76
Subordination Period			77
Distributions of Available Cash From Operating Surplus During the Subordination Period			79
Distributions of Available Cash From Operating Surplus After the Subordination Period			79
General Partner Interest			79
Incentive Distribution Rights			79
Percentage Allocations of Available Cash From Operating Surplus			80
Azure Midstream Holdings’ Right to Reset Incentive Distribution Levels			80
Distributions From Capital Surplus			83
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels			83
Distributions of Cash Upon Liquidation			84
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA			87
Non-GAAP Financial Measures			89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			91
Overview			91
How We Generate Our Revenue			91
Our Operations			93
How We Evaluate Our Operations			93
Items Affecting Comparability of Our Financial Results			95


General Trends and Outlook			97
Results of Our Operations			100
Liquidity and Capital Resources			104
Quantitative and Qualitative Disclosures about Market Risk			108
Impact of Seasonality			109
Critical Accounting Policies and Estimates			109
INDUSTRY OVERVIEW			112
Contractual Arrangements			113
Transportation and Storage Services Contractual Arrangements			114
U.S. Natural Gas Market Fundamentals			114
NGLs Market Opportunity			117
LNG Market Opportunity			120
Overview of Areas of Operation			121
BUSINESS			124
Overview			124
Business Strategies			125
Competitive Strengths			126
Our Assets			128
Gas Gathering Agreements			131
Our Sponsors			132
Competition			132
Seasonality			133
Insurance			133
Safety and Maintenance Regulation			133
Regulation of Operations			135
Environmental Matters			137
Title to Properties and Rights of Way			140
Employees			140
Legal Proceedings			141
MANAGEMENT			142
Management of Azure Midstream Partners, LP			142
Director Independence			142
Committees of the Board of Directors			143
Directors and Executive Officers of Azure Midstream Partners GP, LLC			143
Board Leadership Structure			145
Board Role in Risk Oversight			146
Reimbursement of Expenses of Our General Partner			146
Compensation of Our Directors			146
Executive Compensation			146
Long-Term Incentive Plan			148
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			151
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			152
Distributions and Payments to Our General Partner and its Affiliates			152
Agreements Governing the Transactions			153
Competition			156
Procedures for Review, Approval and Ratification of Transactions with Related Persons			156
CONFLICTS OF INTEREST AND DUTIES			157
Conflicts of Interest			157
Duties			161
DESCRIPTION OF THE COMMON UNITS			164
The Units			164
Transfer Agent and Registrar			164
Transfer of Common Units			164


THE PARTNERSHIP AGREEMENT			166
Organization and Duration			166
Purpose			166
Cash Distributions			166
Capital Contributions			166
Voting Rights			167
Applicable Law; Forum, Venue and Exclusive Jurisdiction			168
Limited Liability			168
Issuance of Additional Interests			169
Amendment of the Partnership Agreement			170
Merger, Consolidation, Conversion, Sale or Other Disposition of Assets			172
Dissolution			172
Liquidation and Distribution of Proceeds			173
Withdrawal or Removal of Our General Partner			173
Transfer of General Partner Interest			174
Transfer of Ownership Interests in the General Partner			174
Transfer of Subordinated Units and Incentive Distribution Rights			174
Change of Management Provisions			175
Limited Call Right			175
Non-Taxpaying Holders; Redemption			175
Non-Citizen Assignees; Redemption			176
Meetings; Voting			176
Voting Rights of Incentive Distribution Rights			177
Status as Limited Partner			177
Indemnification			177
Reimbursement of Expenses			178
Books and Reports			178
Right to Inspect Our Books and Records			178
Registration Rights			179
UNITS ELIGIBLE FOR FUTURE SALE			180
Issuance of Additional Interests			180
Partnership Agreement and Registration Rights Agreement			180
Lock-up Agreement			181
Registration Statement on Form S-8			181
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES			182
Taxation of the Partnership			182
Tax Consequences of Unit Ownership			184
Tax Treatment of Operations			188
Disposition of Units			189
Uniformity of Units			191
Tax-Exempt Entities and Other Investors			192
Administrative Matters			193
State, Local and Other Tax Considerations			194
INVESTMENT BY EMPLOYEE BENEFIT PLANS			195
UNDERWRITING			196
LEGAL MATTERS			203
EXPERTS			203
WHERE YOU CAN FIND MORE INFORMATION			204
FORWARD-LOOKING STATEMENTS			205
INDEX TO FINANCIAL STATEMENTS			F-1
APPENDIX A—FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AZURE MIDSTREAM PARTNERS, LP			A-1
APPENDIX B—GLOSSARY OF TERMS			B-1

iii

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

Industry and Market Data

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our market position and market estimates are based on independent industry publications, government publications, third-party forecasts, management’s estimates and assumptions about our markets and our internal research. While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements” in this prospectus.

Trademarks and Trade Names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ^®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

Certain Terms Used in this Prospectus

Unless the context otherwise requires, references in this prospectus to the following terms have the meanings set forth below:

•

the “Acquisition” refers to our acquisition of TGGT and ETG in November 2013;

•

“Azure Energy” refers to Azure Midstream Energy LLC, the operating subsidiary of Azure Midstream Holdings prior to this offering that will be contributed to Azure Midstream Operating in connection with the closing of this offering;

•

“Azure GP” or our “general partner” refers to Azure Midstream Partners GP, LLC, a Delaware limited liability company and our general partner;

•

“Azure Midstream Holdings” refers to Azure Midstream Holdings LLC, a Delaware limited liability company owned by Energy Spectrum Partners, Tenaska Capital Management, BG, EXCO and other investors and certain members of our management. Azure Midstream Holdings owns a 60% limited partner interest in Azure Midstream Operating and 100% of our general partner;

•

“Azure Midstream Partners, LP,” “partnership,” “we,” “our,” “us” or like terms, when used in a historical context, refer to the natural gas gathering, compression, treating and processing business conducted by Azure Midstream Holdings through its operating subsidiary, Azure Energy. When used in the present tense or future tense, these terms refer to Azure Midstream Partners, LP, a Delaware limited partnership, and its subsidiaries, including Azure Midstream Operating and Azure Midstream Operating Company GP, LLC, the general partner of Azure Midstream Operating;

•

“Azure Midstream Operating” refers to Azure Midstream Operating Company, LP, a newly formed partnership owned by us and Azure Midstream Holdings, and its subsidiaries, of which we will own a 40% limited partner interest;

•

“Azure Midstream Predecessor” refers to the assets, liabilities and results of operations of TGGT prior to the Acquisition;

•

“BG” refers to BG Group, plc and its subsidiaries;

•

“Energy Spectrum Partners” refers to Energy Spectrum Partners VI, LP and its parallel and co-investment funds;

•

“ETG” refers to TPF II East Texas Gathering, LLC, which we acquired in November 2013;

•

“EXCO” refers to EXCO Resources, Inc. and its subsidiaries;

•

“MRC” refers to a contractual minimum revenue producer commitment;

•

“MVC” refers to a contractual minimum volume producer commitment;

•

our “Predecessor” refers to Azure Midstream Predecessor, our predecessor for accounting purposes;

•

“Tenaska Capital Management” refers to TPF II, L.P. and its parallel and co-investment funds; and

•

“TGGT” refers to TGGT Holdings, LLC, a joint venture formed in 2009 by BG and EXCO, which we acquired in November 2013.

In addition, we have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

SUMMARY

This summary provides a brief overview of information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical financial statements and related notes contained herein, before investing in our common units. Unless otherwise indicated, the information presented in this prospectus assumes (i) an initial public offering price of $ per common unit (the midpoint of the price range set forth on the cover page of this prospectus) and (ii) that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” for more information about important risks that you should consider carefully before investing in our common units.

We will own a 40% limited partner interest in Azure Midstream Operating and the general partner interest in Azure Midstream Operating. We will consolidate Azure Midstream Operating into our financial statements. Unless otherwise stated, financial results and operating data are shown on a 100% basis and are not adjusted for the 60% noncontrolling limited partner interest in Azure Midstream Operating owned by Azure Midstream Holdings. Azure Midstream Holdings owns a 60% limited partner interest in Azure Midstream Operating and 100% of our general partner.

Azure Midstream Partners, LP

Overview

We are a fee-based, growth-oriented Delaware limited partnership focused on owning, operating, developing and acquiring midstream energy infrastructure that is strategically located in core producing areas of unconventional resource basins in North America. We currently provide natural gas gathering, compression, treating and processing services in North Louisiana and East Texas in the prolific Haynesville and Bossier shale formations, the liquids-rich Cotton Valley formation and the shallower producing sands in the Travis Peak formation. According to the U.S. Energy Information Administration (the “EIA”), these formations comprise the third largest natural gas basin in the United States in terms of natural gas production.

At the consummation of this offering, our assets will consist of a 40% limited partner interest in Azure Midstream Operating, as well as the general partner interest in Azure Midstream Operating. Through our ownership of Azure Midstream Operating’s general partner, we will control all of Azure Midstream Operating’s assets and operations. We will have a right of first offer to acquire the remaining 60% limited partner interest in Azure Midstream Operating from Azure Midstream Holdings prior to that interest being sold to a third party. As of September 30, 2014, Azure Midstream Operating’s gathering systems included approximately 1,365 miles of pipeline, which gathered an average of approximately 991 MMcf/d of natural gas during the nine months ended September 30, 2014.

During the nine months ended September 30, 2014, we generated over 90% of our revenues under long-term, fixed-fee and fixed-spread natural gas gathering and sales agreements that are intended to mitigate our direct commodity price exposure and enhance the stability of our cash flows. Our customers include some of the largest natural gas producers in North America, such as BG, EXCO, BP plc, Chesapeake Energy Corporation, Devon Energy Corporation, Encana Corporation, EOG Resources, Inc. and EP Energy Corporation. Substantially all of our gas gathering revenue is underpinned by minimum volume commitments, minimum revenue commitments or acreage dedications, including life of lease arrangements. The contracted revenue under minimum volume and revenue commitments on our systems represented approximately 56.9% of our revenue for the nine months ended September 30, 2014. Our minimum volume and revenue commitments have original terms that range from five to ten years and, as of September 30, 2014, had a weighted average remaining term of 5.2 years. As of that date, our acreage dedications and life of lease arrangements with BG, BP plc and EXCO covered approximately 187,000 acres in the aggregate.

The following table sets forth the pro forma net income and pro forma Adjusted EBITDA of Azure Midstream Operating and the pro forma Adjusted EBITDA attributable to us for the periods indicated (in thousands).


	Nine Months Ended September 30, 2014		Year Ended December 31, 2013
Pro forma net income (loss) (100%)	$	16,182	$	(180,021	)
Pro forma Adjusted EBITDA attributable to Azure Midstream Operating (100%)	$	78,250	$	130,590
Pro forma Adjusted EBITDA attributable to us (40%)	$	31,300	$	52,236

For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated in accordance with United States generally accepted accounting principles (“GAAP”), please read “—Non-GAAP Financial Measures.”

Our Assets

We acquired a significant portion of our midstream assets through our November 15, 2013 acquisition of TGGT, a joint venture formed in 2009 by two of our largest customers, BG and EXCO. At the same time, we acquired ETG, which comprises the remainder of our initial assets, from Tenaska Capital Management. These assets comprise all of the assets of Azure Midstream Operating, and we classify them into three main systems: Holly, Center and Legacy. The following table provides information regarding the assets of Azure Midstream Operating. Unless otherwise noted, all information is as of or for the nine-month period ended September 30, 2014.


System	Formations Served	Approximate Length (Miles)		Approximate Number of Receipt Points(1)		Approximate Acreage Dedication (Acres)		Average Remaining Term of MVC/MRC (Years)		Average Daily Throughput (MMcf/d)(2)		Daily Throughput Capacity (MMcf/d)
Holly	Haynesville/ Bossier/ Cotton Valley		335		716		69,000		4.2		625		2,100

Center	Haynesville/ Bossier/ Cotton Valley		372		144		370,000		5.2		132		900

Legacy	Cotton Valley/ Haynesville/ Travis Peak		658		518		100,000		—		234		500

(1)

Receipt points include connections to individual wells, connections to batteries and pads containing multiple wells, and connections to central receipt points from producer and third party owned gathering systems.

(2)

The EXCO and BG contracts include an aggregate minimum volume commitment (“MVC”) of 600,000 MMbtu/d (584 MMcf/d) for the Holly and Center system. EXCO and BG have the right to ship any or all of this commitment on either or both of these systems in accordance with the contracts. Please read “Business—Gas Gathering Agreements.”

Detailed information regarding each of our operating systems is provided below.

•

Holly system. The Holly system is primarily located within the DeSoto, Red River and Caddo parishes of North Louisiana and currently serves the Haynesville and Bossier shale formations and the liquids-rich Cotton Valley formation. We believe this area is the “core of the core” of the Haynesville shale because of the quality of the geology and the high production profile of the wells drilled to date, with estimated ultimate recovery (“EUR”) approaching ten billion cubic feet per well, as estimated by Wood Mackenzie. As of September 30, 2014, the Holly system consisted of approximately 335 miles of high- and low-pressure pipeline serving approximately 69,000 dedicated gross acres, with throughput of approximately 625 MMcf/d for the preceding nine month period. The system also includes four amine treating plants with combined capacity of 920 MMcf/d and two 1,340 horsepower compressors. The Holly system has life of lease acreage dedications with BG and EXCO, as well as additional primary producer contracts with Chesapeake Energy Corporation, Encana Corporation and EP Energy Corporation. As of September 30, 2014, the system connected to eight downstream access points, providing shippers with access to significant off-take capacity. For the nine months ended September 30, 2014, natural gas gathered from BG and EXCO represented approximately 95% of the Holly system’s throughput.

•

Center system. The Center system is primarily located within the San Augustine, Nacogdoches, Sabine, Panola and Shelby counties in East Texas and currently serves multiple formations including the Haynesville, Bossier and the liquids-rich James Lime formation. As of September 30, 2014, the system consisted of approximately 372 miles of high-pressure pipeline serving approximately 370,000 dedicated gross acres. The Center system is designed to efficiently access large acreage positions held by major producers within the East Texas region. There are over 20 producers contracted on the Center system, with EUR potential from five to twelve billion cubic feet per well, as estimated by Wood Mackenzie. The Center system covers a wide range of undedicated and undeveloped acreage, and the system’s capacity is able to support incremental growth without deploying large amounts of additional capital. Approximately 98% of the natural gas transported on this system requires treating for carbon dioxide (“CO2”), which we treat for an additional fee. As of September 30, 2014, the system included six amine treating plants with combined capacity of 952 MMcf/d, two 1,340 horsepower compressors and access to five major interconnect access points that offer our customers superior deliverability. The system also includes our new Fairway processing plant with a processing capacity of 10 MMcf/d, which is designed to extract NGL content from natural gas ranging between 2.7 and 6.4 gallons per Mcf (“GPM”) from the James Lime formation for liquids processing. The major producers contracted on the Center system are BG, EXCO, EOG Resources, Inc., Samson Resources Corporation, SM Energy Company, Chesapeake Energy Corporation, Newfield Exploration Company, Devon Energy Corporation and Goodrich Petroleum Corp.

•

Legacy system. The Legacy system is primarily located within Harrison, Panola and Rusk counties in Texas and Caddo parish in Louisiana and currently serves the Cotton Valley formation, the Haynesville shale formation and the shallower producing sands in the Travis Peak formation. The Cotton Valley formation has historically been a natural gas play, although improvements in technology have increased production of oil and NGLs in the area. The Cotton Valley formation is productive when accessed through horizontal drilling and fracture stimulation technologies. We believe these qualities, when combined with the liquids-rich nature of the natural gas, concentrated oil content, high initial rates of production and competitive well costs, make the formation attractive for producers in the area. As of September 30, 2014, the Legacy system consisted of approximately 658 miles of high- and low-pressure gathering lines and served approximately 100,000 dedicated acres with access to seven major downstream markets, which we believe provides superior delivery capability compared to our competitors. As of September 30, 2014, the Legacy system had ten 1,340 horsepower compressors and two additional compressors comprising 870 horsepower, for a total of 14,270 horsepower of compression. The system has access to four third-party processing plants, including the Carthage Hub, which serves as a connection point for a number of intrastate and interstate pipelines. Our Legacy system gathers high-Btu natural gas with an NGL content

between 2.0 and 5.2 GPM. Our major customers contracted on the Legacy system are BG, BP plc, Devon Energy Corporation, Endeavor Energy Resources, L.P., EXCO, Sabine Oil & Gas LLC and Samson Resources Corporation.

Prior to the Acquisition, TGGT operated approximately 1,060 miles of gathering pipelines that transported natural gas from supply basins to major intrastate and interstate pipelines in the region. These gathering systems and treating facilities were operated primarily to provide midstream services to BG and EXCO to support their drilling and development programs. Consequently, TGGT’s management team did not pursue third-party volumes aggressively. As a result, our average daily throughput for the nine-month period ended September 30, 2014 of 625, 132 and 234 MMcf/d on our Holly, Center and Legacy systems, respectively, is currently below our daily throughput capacity by 1,475, 768 and 266 MMcf/d for our Holly, Center and Legacy systems, respectively. We believe this excess capacity creates an opportunity for us to significantly increase volumes on our existing systems with minimal incremental capital expenditures, thereby giving us substantial operating leverage. For additional information on our average daily throughput and daily throughput capacity of our existing assets, please see “—Our Assets.”

We intend to increase throughput volumes on our existing pipeline systems by continuing to work with our existing customers to enhance our service offerings to maximize the value of their production and our economics. Additionally, we intend to further increase throughput volumes and diversify our customer base over time by aggressively competing for contracted volumes with new customers as their existing contracts with other pipeline operators expire. We believe that our recently constructed pipeline systems allow us to offer producers in our basins customized services with greater flexibility than many of our competitors. In addition to our differentiated service offerings, we believe that the lower maintenance capital associated with our new pipeline systems, together with our available throughput capacity, allows us to offer more attractive economic terms to producers than competitors with older assets while achieving compelling margins from our services.

We believe recent improvements in permitting applications and rig counts demonstrate stability in drilling in the areas in which we operate. Drilling activity in our areas of operations, as measured by drilling permit applications and rig counts, has increased over the last 20 months. During October 2014, 53 drilling permit applications were filed in the counties and parishes in which we operate, up 43% from 37 in February 2013. An average of 61 permitting applications were filed per month for the six months ended October 31, 2014, representing a 15% increase from the 53 permitting applications filed per month for the six months ended February 28, 2013. Average rig counts in our areas of operations have increased 11% over the same time period, from 37 in February 2013 to 41 in October 2014.

Business Strategies

Our principal business objective is to increase the quarterly cash distribution that we pay to our unitholders over time while ensuring the ongoing stability of our cash flows. We expect to achieve this objective through the following business strategies:

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Increase capacity utilization and throughput volumes on our existing systems. Our systems are designed to benefit from incremental volumes arising from high-density, infill drilling on existing pad sites already connected to our systems and do not require significant additional capital expenditures to handle such volumes. We intend to continue to focus on the stability of cash flows that we generate by optimizing returns from our existing asset portfolio and maximizing the utilization of our assets by increasing throughput volumes from existing customers and connecting new customers to our systems. We continually monitor field development activity by our customers, and we work closely with customers to tailor and enhance our service offerings to maximize the efficiency and economics of their production. For example, we recently procured a contract to gather up to an additional 40 MMcf/d of throughput volumes on the Legacy system and are in discussions with potential customers regarding additional

volumes on our systems. Further, we are implementing a gas allocation process, often referred to as component balancing, which will ensure our producer customers receive an accurate portion of value for natural gas liquids. Other midstream providers may blend a producer’s NGL-rich gas with another producer’s lean gas thereby diluting value to the NGL-rich gas stream and accreting value to the leaner gas stream. We believe implementing component balancing will enable us to more effectively compete for third-party gas services, particularly those that require processing. As such, we expect to attract additional volumes of gas that may require processing to our systems.

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Execute on organic growth and development opportunities. While our existing gathering systems provide us with significant organic growth opportunities, we also intend to execute organic growth and development opportunities associated with increases in natural gas, NGLs and crude oil production by increasing our midstream service offerings with existing customers and obtaining new customers. Further, we intend to expand our operations into new basins with underserved crude oil and natural gas midstream infrastructure where we can serve as a key strategic provider to strong customers under long-term commitments. We believe such opportunities exist in unconventional resource plays that are well positioned for accelerated production growth, such as the Permian Basin and Marcellus shale, due to the inadequate level of existing natural gas transportation infrastructure in these plays relative to demand for such infrastructure as a result of increased drilling activity. We expect to accomplish these objectives by leveraging our management team’s expertise in successfully constructing, developing and optimizing midstream infrastructure assets. For example, members of our management team constructed and developed the Laser Northeast Gathering System, a 36-mile high pressure gathering system header pipeline in the Marcellus shale that was ultimately sold to Williams Partners, L.P. in 2012 for $750 million, and were the initial developers of Laser Midstream Energy that developed assets in South Texas, East Texas and North Louisiana and was sold to Eagle Rock Energy Partners, L.P. in 2007 for $140 million. We also are actively pursuing projects to increase throughput or increase margins on our existing systems. For example, we are evaluating opportunities to build a new cryogenic natural gas processing plant where we expect processing demand to exceed future supply, thereby offering us incremental margins for NGLs and additional natural gas throughput.

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Pursue accretive acquisitions from our sponsor and third parties. We intend to pursue acquisitions of additional ownership interests in Azure Midstream Operating from Azure Midstream Holdings over time. We also intend to pursue accretive acquisitions of complementary assets from third parties.

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Acquisitions from Azure Midstream Holdings. We believe that Azure Midstream Holdings’ economic interest in us incentivizes it to offer us acquisition opportunities, including additional interests in Azure Midstream Operating, although it is under no obligation to do so. We will have a right of first offer to acquire the remaining 60% limited partner interest in Azure Midstream Operating from Azure Midstream Holdings prior to that interest being sold to a third party. We believe that Azure Midstream Holdings is strongly positioned to continue pursuing and developing integrated midstream solutions projects, which may involve the development, construction and operation of pipelines, processing plants and associated infrastructure, which would allow customers to deliver crude oil and natural gas to transmission pipelines. Furthermore, we believe that the ability of Azure Midstream Holdings to pursue and develop integrated energy infrastructure projects will create potential acquisition opportunities for us in the future.

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Acquisitions from third parties. In the near term, we intend to pursue acquisition opportunities from third parties that we can finance on an accretive basis. Such acquisitions could be pursued independently by us or jointly with Azure Midstream Holdings.

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Diversify our assets through acquisitions of midstream assets with exposure to other basins and hydrocarbons. While our current operations represent our core business, we intend to diversify our basin exposure into new, high-growth regions, as well as expand our operational capabilities into natural gas processing and crude oil services, primarily through acquisitions. We expect to continue to pursue

opportunities to acquire crude oil, NGL and natural gas assets that (i) complement our existing business, (ii) allow us to integrate additional midstream services, (iii) balance our commodity profile and (iv) enhance our basin diversity. We anticipate that our highly qualified management team and energy-focused sponsors will provide us with an advantage in pursuing these acquisitions as compared to other competitors. We and our sponsors are frequently involved in discussions with third parties regarding the purchase of natural gas and crude oil midstream energy infrastructure assets. We intend to continue to evaluate opportunities to acquire or develop other midstream energy infrastructure assets that complement our existing business and allow us to leverage our management team’s development and industry expertise throughout the midstream value chain.

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Generate stable and predictable fee-based cash flows. We intend to continue pursuing accretive opportunities to provide fixed-fee and fixed-spread services to existing and new customers, limiting our direct exposure to commodity price volatility when possible. We plan to focus on obtaining additional long-term commitments from customers, which may include minimum volume and revenue commitments, acreage dedications or life of lease arrangements. The long-term, fixed-fee and and fixed-spread nature of our contracts reduces direct commodity exposure and provides relatively predictable revenue streams.

Competitive Strengths

We believe that we will be able to successfully execute our business strategies because of the following competitive strengths:

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Stable and predictable fee-based cash flows. During the nine months ended September 30, 2014, we generated over 90% of our revenues under long-term, fixed-fee and fixed-spread natural gas gathering and sales agreements that are intended to mitigate our direct commodity price exposure and enhance the stability of our cash flows. Contracted revenue under minimum volume and revenue commitments on our systems represented 56.9% of our revenue for the nine months ended September 30, 2014. Our minimum volume and revenue commitments have original terms that range from five to ten years and, as of September 30, 2014, had a weighted average remaining term of 5.2 years. Additionally, we believe the services we provide are critical to enhancing natural gas production and that we are able to provide the most economic transportation solution for our customers. As a result, our high-quality service results in recurring revenues and strong customer relationships, further supporting the stability of our cash flows. These relationships in turn result in organic growth opportunities as our customers expand their drilling operations or their field development creates the need for additional midstream services. We believe that our advantaged position in leading producing regions, our highly efficient operations and the long-term nature of our customer relationships enhance our ability to generate stable and growing cash flows.

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New and strategically located assets in core areas of a prolific unconventional basin. Our midstream energy infrastructure assets are strategically positioned within core areas of the Haynesville shale. The formations in the basins served by our assets have been accessed by experienced producers who have been able to achieve a high level of EURs on the wells completed. We believe that producers will continue their drilling and completion activities in our areas of operation in a variety of commodity price environments because the return economics associated with core-area wells remain favorable in lower pricing environments compared to less economic areas of production. We believe our core producers can earn acceptable rates of return above their cost of capital when natural gas prices are slightly above $3.00 per Mcf. Additionally, continued drilling activity in these formations positions us to pursue attractive growth opportunities by further developing and optimizing our systems and by developing or acquiring complementary systems within our geographic areas of operation. Our highly efficient, modern infrastructure provides us the ability to deliver throughput volumes with a lower amount of compression while reducing gas losses and to add additional throughput volumes with marginal incremental costs and capital expenditures.

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Experienced management team with proven record of asset acquisition, construction, development, operational efficiency and integration expertise with publicly traded partnerships. Our senior management team has an average of nearly 30 years of energy experience and a proven track record of identifying and consummating significant acquisitions, including partnering with major producers to construct and develop midstream infrastructure for natural gas, NGLs and crude oil. Members of our management team were the key developers of the Laser Northeast Gathering System in the Marcellus that was sold to Williams Partners, L.P. in 2012 and have been instrumental in developing other critical midstream assets across multiple basins. Further, our Chief Executive Officer, Chief Financial Officer and Vice President of Engineering and Construction have prior experience serving as senior officers of publicly traded limited partnerships, which affords us a competitive advantage versus many of our peers that have less or no experience managing public companies. We employ engineering, construction and operations teams that have significant experience in designing, constructing and operating large midstream energy projects and have demonstrated a continued focus on improving operational efficiency of our acquired assets. For example, since Azure Midstream Holdings’ acquisition of TGGT and ETG in November 2013, our management team has reduced or eliminated approximately 25% of the total operating and corporate cost structure within the first six months of operating the combined companies.

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Relationships with large and committed sponsors. Our sponsors, Energy Spectrum Partners and Tenaska Capital Management, are experienced energy investors with proven track records of making substantial, long-term investments in high-quality midstream energy assets. Further, our sponsors, either directly or indirectly, may be a source of accretive transactions that could provide substantial advantages in increasing our operating scale, expanding our geographic footprint or enhancing our midstream value chain service offerings. While there are no assurances that we will benefit from our relationship with our sponsors, we believe our relationship with them will be a competitive advantage, as they both bring not only significant financial and management experience, but also numerous relationships throughout the energy industry that we believe will benefit us as we seek to grow our business. In addition, we believe our sponsors, as the indirect owners of our incentive distribution rights and a significant portion of our limited partner interest, will be motivated to promote and support the successful execution of our business strategies.

Our Sponsors

Azure Midstream Holdings was formed in 2013 by members of our management team and our sponsors, Energy Spectrum Partners and Tenaska Capital Management. Energy Spectrum Partners, together with its affiliated funds, is an energy and midstream focused private equity firm that has raised over $3.5 billion in capital commitments focused on investing in North America’s energy infrastructure. Tenaska Capital Management, together with its affiliated funds, is a leading private equity firm focused on North America energy investments that has completed over $6.5 billion of acquisitions and development projects, primarily in the power and midstream sectors. Combined, our sponsors currently have an interest in 13 midstream companies representing over $2.5 billion of capital either invested in or targeting midstream energy investments.

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. The following list of risk factors should be read carefully in conjunction with the risks under the caption “Risk Factors.”

Risks Related to Our Business

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Our assets will consist of a 40% limited partner interest in Azure Midstream Operating, as well as the general partner interest in Azure Midstream Operating. Because our interest in Azure Midstream Operating represents our only cash-generating asset, our cash flow will depend entirely on the performance of Azure Midstream Operating and its ability to distribute cash to us.

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The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

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Risks Inherent in an Investment in Us

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Azure Midstream Holdings will own a 60% limited partner interest in Azure Midstream Operating and will control our general partner, which has sole responsibility for conducting our business and managing our operations, and we will own the general partner of Azure Midstream Operating, which is responsible for managing the operations of Azure Midstream Operating. Our general partner and its affiliates, including Azure Midstream Holdings, have conflicts of interest with, and defined fiduciary duties with respect to, us and our unitholders and may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over Azure Midstream Holdings’ business decisions and operations, and Azure Midstream Holdings is under no obligation to adopt a business strategy that favors us.

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Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards governing its duties.

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Unitholders have very limited voting rights and are not entitled to appoint or remove our general partner or elect the board of directors of our general partner.

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For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements that apply to other public companies, including those relating to auditing standards and disclosure about our executive compensation.

Tax Risks to Common Unitholders

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Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as Azure Midstream Operating and us not being subject to material incremental entity-level taxation. If the IRS were to treat us as a corporation for federal income tax purposes, or if we or Azure Midstream Operating become subject to entity-level taxation for state tax purposes, our distributable cash flow would be substantially reduced.

Formation Transactions and Partnership Structure

We are a Delaware limited partnership recently formed by Azure Midstream Holdings to own, operate, develop and acquire midstream assets. At the closing of this offering, the following transactions, which we refer to as the formation transactions, will occur:

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we and Azure Midstream Operating will enter into an omnibus agreement with Azure Midstream Holdings and certain of its affiliates that will govern our right of first offer to purchase Azure Midstream Holdings’ retained 60% limited partner interest in Azure Midstream Operating and certain related indemnification matters;

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we will acquire the general partner interest and a 40% limited partner interest in Azure Midstream Operating;

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we will issue common units and subordinated units to Azure Midstream Holdings, representing an aggregate % limited partner interest in us;

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we will issue to our general partner the general partner interest in us and all of our incentive distribution rights, which will entitle our general partner to increasing percentages of the cash that we distribute in excess of $ per unit per quarter;

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we will issue common units to the public, representing a % limited partner interest in us;

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we will enter into a $150 million new revolving credit facility that will be undrawn at closing; and

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we will use the net proceeds from this offering (including any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us) as described in “Use of Proceeds.”

Ownership Structure

The following is a simplified diagram of our ownership structure after giving effect to this offering and the related transactions.

LOGO


Public Common Units(1)		%(2)
Interests of Azure Midstream Holdings:
Common Units		%(2)
Subordinated Units		%
Incentive Distribution Rights	—	(3)
Non-economic General Partner Interest	0.0	%(4)

Total	100.0	%

(1)

Includes up to common units that may be purchased by certain of our officers, directors, employees and other persons associated with us pursuant to a directed unit program, as described in “Underwriting.”

(2)

The number of common units to be issued to Azure Midstream Holdings includes common units that will be issued at the expiration of the underwriters’ option to purchase additional common units, assuming the underwriters do not exercise their option. Any exercise of the underwriters’ option to purchase additional units would reduce the common units shown above as issued to Azure Midstream Holdings by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any such exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Azure Midstream Holdings at the expiration of the 30-day option period. All of the net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to make a cash distribution to Azure Midstream Holdings.

(3)

Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. Please read “How We Make Distributions to Our Partners—Incentive Distribution Rights.” Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests. All of our incentive distribution rights will be issued to our general partner, which is owned by Azure Midstream Holdings.

(4)

Our general partner owns the non-economic general partner interest in us. Please read “How We Make Distributions to Our Partners—General Partner Interest.”

Management of Our Partnership

Azure Midstream Partners GP, LLC, our general partner, has sole responsibility for conducting our business and for managing our operations and will be controlled by Azure Midstream Holdings. Neither our general partner, nor any of its affiliates, will receive any compensation in connection with the management of our business, but they will be entitled to reimbursement for all direct and indirect expenses they incur on our behalf. Some of Azure Midstream Holdings’ executive officers will also serve as executive officers and directors of our general partner. Neither our general partner nor the board of directors of our general partner will be elected by our unitholders. As a result of its ownership of our general partner, Azure Midstream Holdings will have the right to elect the entire board of directors of our general partner. Within twelve months of the date of this prospectus, we will have at least three directors who are independent as defined under the independence standards established by the NYSE. For more information about our current directors and executive officers, please read “Management—Directors and Executive Officers of Azure Midstream Partners GP, LLC.”

To maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by Azure Midstream Holdings or others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, including Azure Midstream Holdings, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

Principal Executive Offices and Internet Address

Our principal executive offices are located at 12377 Merit Drive, Suite 300, Dallas, Texas, and our telephone number is (972) 674-5200. Our website will be located at . We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (the “SEC”), available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Emerging Growth Company Status

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

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provide three years of audited financial statements and management’s discussion and analysis of financial conditions and results of operations;

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provide five years of selected financial data;

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provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;

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comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”);

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comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise;

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provide certain disclosure regarding executive compensation required of larger public companies; or

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obtain unitholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

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the last day of the fiscal year in which we have $1.0 billion or more in annual revenues;

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the last day of the fiscal year in which we have at least $700 million in market value of our common units held by non-affiliates as of the end of our second fiscal quarter;

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when we issue more than $1.0 billion of non-convertible debt over a three-year period; or

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the last day of the fiscal year following the fifth anniversary of this offering.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can, and we will, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

Conflicts of Interest and Fiduciary Duties

General. Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is not adverse to our interests. However, because our general partner is a wholly owned subsidiary of Azure Midstream Holdings, the officers and directors of our general partner also have a duty to manage our general partner in a manner that is beneficial to Azure Midstream Holdings. Consequently, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including Azure Midstream Holdings, on the other hand.

Partnership agreement modifications to fiduciary duties. Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to the limited partners and the partnership, provided that partnership agreements may not eliminate the implied contractual covenant of good faith and fair dealing. This implied covenant is a judicial doctrine utilized by Delaware courts in connection with interpreting ambiguities in partnership agreements and other contracts, and does not form the basis of any separate or independent fiduciary duty in addition to the express contractual duties set forth in our partnership agreement. Under the implied contractual covenant of good faith and fair dealing, a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action.

As permitted by Delaware law, our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including Azure Midstream Holdings, are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and pursuant to the terms of our partnership agreement each holder of common units consents to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law.

For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties.”

The Offering

Common units offered to the public

common units.

common units if the underwriters exercise their option to purchase an additional common units (the “option units”) in full.

Units outstanding after this offering

common units and subordinated units, for a total of limited partner units, regardless of whether or not the underwriters exercise their option to purchase any of the option units. Of this amount, common units will be issued to Azure Midstream Holdings at the closing of this offering and, assuming the underwriters do not exercise their option to purchase any of the option units, all such option units will be issued to Azure Midstream Holdings 30 days following this offering, upon the expiration of the underwriters’ option exercise period. However, if the underwriters exercise their option to purchase any portion of the option units, we will (i) issue to the public the number of option units purchased by the underwriters pursuant to such exercise and (ii) issue to Azure Midstream Holdings, upon the expiration of the option exercise period, all remaining option units. Any such option units issued to Azure Midstream Holdings will be issued for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. In addition, our general partner will own the non-economic general partner interest in us.

Use of proceeds

We intend to use the estimated net proceeds of approximately $ million from this offering, based upon the assumed initial public offering price of $ per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, the structuring fee and offering expenses, to make a cash contribution to Azure Midstream Operating of $ million, the entirety of which will be used to repay a portion of Azure Energy’s indebtedness.

Cash distributions

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $ per common unit and subordinated unit ($ per common unit and subordinated unit on an annualized basis) to the extent we have sufficient cash after establishment of reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash,” and it is defined in our partnership agreement included in this prospectus as Appendix A. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

For the first quarter that our common units are publicly traded, we will pay a prorated distribution covering the period from the completion of this offering through , 2015, based on the actual length of that period.

Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner:

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first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $ plus any arrearages from prior quarters;

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second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $ ; and

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third, to all unitholders, pro rata, until each unit has received a distribution of $ .

If cash distributions to our unitholders exceed $ per unit in any quarter, the holders of our incentive distribution rights will receive distributions according to the following percentage allocations:


	Marginal Percentage Interest in Distributions
Total Quarterly Distribution Target Amount	Unitholders		Holder of Our Incentive Distribution Rights
$		100.0%		—
above $ up to $		100.0%		—
above $ up to $		85.0%		15.0	%
above $ up to $		75.0%		25.0	%
above $		50.0%		50.0	%

We refer to these distributions as “incentive distributions.” Please read “How We Make Distributions to Our Partners.”

If we do not have sufficient available cash at the end of each quarter, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

We believe, based on our financial forecast and related assumptions included in “Our Cash Distribution Policy and Restrictions on Distributions,” that we will have sufficient available cash to pay the minimum quarterly distribution of $ per unit on all of our common units and subordinated units for each quarter in the twelve months ending December 31, 2015. However, we do not have a legal obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. There is no guarantee that we will distribute quarterly cash distributions to our unitholders in any quarter. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Subordinated units

Azure Midstream Holdings will initially indirectly own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

Conversion of subordinated units

The subordination period will end on the first business day after we have earned and paid distributions of available cash of at least (i) $ (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit for each of three consecutive, non-overlapping four-quarter periods ending on or after , 2018, or (ii) $ (150% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit and the related distributions on the incentive distribution rights for any four-quarter period ending on or after , 2016, in each case provided there are no arrearages in the payment of the minimum quarterly distributions on our common units at that time.

When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and thereafter common units will no longer be entitled to arrearages. Please read “How We Make Distributions to Our Partners—Subordination Period.”

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement—Issuance of Additional Interests.”

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed

except by a vote of the holders of at least 66²/₃% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, Azure Midstream Holdings will indirectly own an aggregate of % of our outstanding voting units (or % of our outstanding voting units, if the underwriters exercise their option to purchase additional common units in full). This will provide Azure Midstream Holdings the ability to prevent the removal of our general partner. In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. This will also provide Azure Midstream Holdings the ability to prevent the removal of our general partner. Please read “The Partnership Agreement—Voting Rights.”

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner will have the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (i) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (ii) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. Please read “The Partnership Agreement—Limited Call Right.”

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, , you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $ per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $ per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” for the basis of this estimate.

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

Directed unit program

At our request, the underwriters have reserved up to % of the common units for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us through a directed unit program. For further information regarding our directed unit program, please read “Underwriting.”

Exchange listing

We intend to apply to list our common units on the NYSE under the symbol “AZUR.”

Summary Historical and Pro Forma Financial and Operating Data

Azure Midstream Holdings acquired our initial assets through purchases of (i) 100% of the equity interest in TGGT from BG and EXCO and (ii) 100% of the equity interest in ETG from Tenaska Capital Management on November 15, 2013. Subsequent to the acquisitions of TGGT and ETG, Azure Midstream Holdings indirectly owned and operated TGGT and ETG through its wholly owned subsidiary, Azure Energy.

The summary historical consolidated financial data presented as of September 30, 2014 and for the nine-month period ended September 30, 2014 are derived from the unaudited historical condensed consolidated financial statements of Azure Midstream Holdings included elsewhere in this prospectus. The summary historical consolidated financial data presented for the nine-month period ended September 30, 2013 are derived from the unaudited historical condensed consolidated financial statements of the Azure Midstream Predecessor included elsewhere in this prospectus. The summary historical consolidated financial data presented as of December 31, 2013 and for the period from November 15, 2013 to December 31, 2013 are derived from the audited historical consolidated financial statements of Azure Midstream Holdings included elsewhere in this prospectus. The summary historical consolidated financial data presented as of December 31, 2012 and for the period from January 1, 2013 to November 14, 2013 and the year ended December 31, 2012 are derived from the audited historical consolidated financial statements of the Predecessor included elsewhere in this prospectus.

The summary unaudited pro forma consolidated financial data for the nine-month period ended September 30, 2014 and for the year ended December 31, 2013 have been derived from the unaudited pro forma consolidated financial statements of the partnership included elsewhere in this prospectus. The summary unaudited pro forma consolidated statement of operations data for the year ended December 31, 2013 include the pro forma effects of the TGGT and ETG acquisitions and the pro forma effects of the offering transaction described under the caption “Summary—Formation Transactions and Partnership Structure” as if the TGGT and ETG acquisitions and the offering transaction had occurred on January 1, 2013. The summary unaudited pro forma consolidated statement of operations data for the nine-month period ended September 30, 2014 include the pro forma effects of the offering transaction as if it had occurred on January 1, 2013. As part of the offering transaction, Azure Midstream Holdings will cause Azure Energy to be contributed to Azure Midstream Operating in exchange for all of the limited partner interests of Azure Midstream Operating. Azure Midstream Holdings will then contribute an approximate 40% limited partner interest in Azure Midstream Operating to the partnership.

The partnership will control Azure Midstream Operating through its ownership of Azure Midstream Operating’s general partner. Consequently, the partnership’s future consolidated financial statements will include Azure Midstream Operating as a consolidated subsidiary, and Azure Midstream Holdings’ 60% limited partner interest will be reflected as a non-controlling interest.

For a detailed discussion of the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table presents our summary historical and pro forma consolidated financial and operating data as of the dates and for the periods indicated and should also be read in conjunction with the historical audited and unaudited consolidated financial statements and related notes of Azure Midstream Holdings and the Predecessor included elsewhere in this prospectus. Among other things, those historical financial statements include more detailed information regarding the basis of presentation for the information below. For a reconciliation of Adjusted EBITDA to its most directly comparable financial measures

calculated in accordance with GAAP, please read “—Non-GAAP Financial Measures” below. We define distributable cash flow as Adjusted EBITDA less interest and income taxes paid and maintenance capital expenditures.


	Azure Midstream Holdings LLC			Predecessor				Azure Midstream Holdings LLC		Predecessor		Pro Forma Azure Midstream Partners, LP
	Period from November 15, 2013 to December 31, 2013			Period From January 1, 2013 to November 14, 2013		Year Ended December 31, 2012		Nine-Month Period Ended September 30, 2014		Nine-Month Period Ended September 30, 2013		Nine-Month Period Ended September 30, 2014		Year Ended December 31, 2013
	(in thousands, except for volumes)
Statement of Operations Data:
Total operating revenues	$	24,819		$	180,332	$	246,451	$	134,833	$	158,560	$	134,833	$	219,704
Operating expenses:
Cost of purchased gas and NGLs sold		4,505			21,054		22,794		30,095		18,239		30,095		25,812
Operating expense		5,455			33,850		48,586		23,685		28,993		23,685		48,693
General and administrative		458			11,166		17,514		10,760		9,820		10,760		14,719
Transaction costs		6,135			—		—		—		—		—		—
Asset impairments(1)		—			583		50,771		228		583		228		238,061
Depreciation and amortization		3,480			31,143		32,132		21,989		26,713		21,989		28,737

Total expenses		20,033			97,796		171,797		86,757		84,348		86,757		356,022

Income (loss) from operations		4,786			82,536		74,654		48,076		74,212		48,076		(136,318	)
Interest expense		5,046			10,321		16,145		31,145		9,331		31,145		40,304
Other expense		576			2,316		3,441		326		1,695		326		2,890
Income tax expense		106			361		425		423		317		423		509

Net income (loss) from continuing operations	$	(942	)	$	69,538	$	54,643	$	16,182	$	62,869	$	16,182	$	(180,021	)

Net (loss) income attributed to non-controlling interest													9,709		(108,013	)

Net (loss) income attributable to Azure Midstream Partners, LP(2)												$	6,473	$	(72,008	)

Net (loss) income per limited partner unit (basic and diluted):
Common units												$		$
Subordinated units												$		$
Balance Sheet Data (as of the period end):
Cash and cash equivalents	$	15,576				$	8,050	$	26,034			$	26,034
Property, plant and equipment—net		823,102					1,142,208		823,068				823,068
Total assets		1,080,340					1,201,634		1,074,563
Total debt		550,000					493,671		534,013
Members’ equity		499,058					678,608		515,240
Other Financial Data:
Adjusted EBITDA(3)	$	14,206		$	114,153	$	157,596	$	78,250	$	101,389	$	78,250	$	130,590
Adjusted EBITDA attributable to Azure Midstream Partners, LP(4)													31,300		52,236
Capital expenditures		5,326			29,208		191,001		16,363		27,604
Operating Data:
Average throughput volumes of natural gas (MMcf/d)		843			1,217		1,471		991		1,302

(1)

The unaudited pro forma statement of operations for the year ended December 31, 2013 includes an impairment charge of $238.1 million, of which $237.0 million is an impairment that was recognized by ETG prior to the Acquisition and is the result of adjusting the carrying value of the ETG assets to their net realizable fair value immediately prior to the Acquisition. The $237.0 million impairment was included within the ETG statement of operations for the period from January 1, 2013 to November 15, 2013. The remaining impairment charge of $1.1 million was recognized by our Predecessor and is the result of adjusting the carrying value of assets held for sale to their net realizable fair value.

(2)

Calculated as 40% of net income (loss) from continuing operations.

(3)

For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated in accordance with GAAP, please read “—Non-GAAP Financial Measures” below.

(4)

Calculated as 40% of Adjusted EBITDA.

Non-GAAP Financial Measures

We include in this prospectus the non-GAAP financial measures of EBITDA and Adjusted EBITDA. We provide a reconciliation of this non-GAAP financial measure to their most directly comparable financial measures as calculated and presented in accordance with GAAP.

EBITDA and Adjusted EBITDA

We define EBITDA as net income (loss), plus (1) interest expense, (2) income tax expense, and (3) depreciation and amortization expense. We define Adjusted EBITDA as EBITDA, plus (1) non-cash expenses, (2) adjustments related to deferred revenue and cash receipts under our minimum revenue producer commitments (“MRC”) and minimum volume producer commitments (“MVC”) and (3) adjustments associated with certain other and non-cash items.

EBITDA and Adjusted EBITDA are used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks and research analysts, to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing or capital structure; and the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities. Additionally, Adjusted EBITDA is used to assess the financial performance of our assets without the impact of non-cash expenses, adjustments associated with cash received under the MRC and MVC requirements of our gas gathering agreements and certain other items.

The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income. Our non-GAAP financial measures of EBITDA and Adjusted EBITDA should not be considered as an alternative to net income. You should not consider EBITDA and Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives to, or more meaningful than, performance measures calculated in accordance with GAAP. Some of these limitations are: certain items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing our financial performance, such as our cost of capital and tax structure; EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and our computations of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for each of the periods indicated:


	Azure Midstream Holdings LLC			Predecessor				Azure Midstream Holdings LLC		Predecessor		Pro Forma Azure Midstream Partners, LP
	Period from November 15, 2013 to December 31, 2013			Period from January 1, 2013 to November 14, 2013		Year Ended December 31, 2012		Nine-Month Period Ended September 30, 2014		Nine-Month Period Ended September 30, 2013		Nine-Month Period Ended September 30, 2014		Year Ended December 31, 2013
	(in thousands)
Reconciliation of EBITDA and Adjusted EBITDA to Net Income (Loss)
Net Income (Loss)	$	(942	)	$	69,538	$	54,643	$	16,182	$	62,869	$	16,182	$	(180,021	)

Add:
Depreciation and amortization		3,480			31,143		32,132		21,989		26,713		21,989		28,737
Interest expense		5,046			10,321		16,145		31,145		9,331		31,145		40,304
Income tax expense		106			361		425		423		317		423		509

EBITDA	$	7,690		$	111,363	$	103,345	$	69,739	$	99,230	$	69,739	$	(110,471	)

Add:
Impairment of assets(1)		—			583		50,771		228		583		228		238,061
Deferred revenue(2)		684			—		—		4,621		—		4,621		684
Other adjustments(3)		5,832			2,207		3,480		3,662		1,576		3,662		2,316

Adjusted EBITDA	$	14,206		$	114,153	$	157,596	$	78,250	$	101,389	$	78,250	$	130,590

Adjusted EBITDA attributable to Azure Midstream Partners, LP(4)												$	31,300	$	52,236

(1)

(2)

Adjustments related to deferred revenues associated with our MRC and MVC producer agreements account for our inclusion of expected cash receipts under these MRC and MVC agreements. With respect to our MRC agreement, the volumes supplied by the customer are currently less than the annual MRC requirement, and we are therefore entitled to receive an annual deficiency payment. The customer’s deficiency payment to us may be credited against future volumes supplied by the customer in excess of the annual MRC. We record the cash receipts associated with the deficiency payments as deferred revenue because the customer is entitled to utilize the deficiency payment to offset future volumes supplied in excess of the annual MRC over the term of the contract. We include a proportional amount of the expected MRC and MVC cash receipts in each quarter in respect of the annual period for which we actually receive the payment to ensure our Adjusted EBITDA reflects the amount of cash we are entitled to receive on an annual basis under these MRC and MVC agreements. For a discussion of adjustments related to deferred revenue associated with our minimum revenue commitments, please read “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015.”

(3)

Other adjustments are comprised of legal expenses and transaction expenses associated with the Acquisition, volumetric natural gas imbalance adjustments, gains and losses on sales of assets and non-cash compensation expense.

(4)

Calculated as 40% of Adjusted EBITDA.

RISK FACTORS

Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in similar businesses. You should consider carefully the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

If any of the following risks were actually to occur, our business, financial condition or results of operations could be materially adversely affected. In that case, we may not be able to pay the minimum quarterly distributions on our common units, the trading price of our common units could decline and you could lose all or part of your investment.

Risks Related to Our Business

In order to make our minimum quarterly distribution of $ per common unit and subordinated unit per quarter, or $ per unit per year, we will require available cash of approximately $ million per quarter, or approximately $ million per year, based on the common units and subordinated units outstanding immediately after completion of this offering. We may not generate sufficient cash flow each quarter to support the payment of the minimum quarterly distribution or to increase our quarterly distributions in the future.

Our ability to distribute cash to our unitholders is or may be limited by a number of factors, including, among others:

•

the level and timing of capital expenditures we make;

•

our debt service requirements and other liabilities;

•

our ability to make borrowings under our debt agreements to pay distributions;

•

fluctuations in our working capital needs;

•

restrictions on distributions contained in any of our debt agreements;

•

the cost of acquisitions, if any;

•

fees and expenses of our general partner and its affiliates we are required to reimburse;

•

the amount of cash reserves established by our general partner; and

•

other business risks affecting our cash levels.

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The assumptions underlying the forecast of distributable cash flow, as set forth in “Our Cash Distribution Policy and Restrictions on Distributions,” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

The forecast of distributable cash flow set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, Adjusted EBITDA and distributable cash flow for the twelve months ending December 31, 2015. Our ability to pay the full minimum quarterly distribution during the

forecast period is based on a number of assumptions that may not prove to be correct, which are discussed in “Our Cash Distribution Policy and Restrictions on Distributions.” Management has prepared the financial forecast and has not received an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. Even if our actual results are consistent with the forecasted results, we may not pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially.

Our only asset is a 40% limited partner interest in Azure Midstream Operating, over which we have operating control through our ownership of its general partner. Because our interest in Azure Midstream Operating represents our only cash-generating asset, our cash flow and ability to pay quarterly distributions on our units will depend entirely on the performance of Azure Midstream Operating and its ability to distribute cash to us.

We are a holding company with no material operations and only limited assets, and the source of our earnings and operating cash flow will consist exclusively of cash distributions from Azure Midstream Operating. Therefore, our ability to make quarterly distributions to our unitholders will be completely dependent on the performance of Azure Midstream Operating and its ability to distribute funds to us.

Azure Midstream Operating’s limited partnership agreement requires it to distribute all of its available cash each quarter, less the amounts of cash reserves that its general partner determines are necessary or appropriate in its reasonable discretion to provide for the proper conduct of Azure Midstream Operating’s business, to enable it to make distributions to us so that we can make timely distributions, or to comply with applicable law or any of Azure Midstream Operating’s debt or other agreements. For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The amount of cash Azure Midstream Operating generates from its operations will fluctuate from quarter to quarter based on, among other things:

•

the volume of natural gas it gathers, compresses, treats and processes;

•

the fees it charges and the margins it realizes for its services;

•

regulatory action affecting the supply of or demand for natural gas, its operations, the rates it can charge, how it contracts for services, its existing contracts, its operating costs or its operating flexibility;

•

the level of its operating, maintenance and general and administrative costs; and

•

prevailing economic conditions.

In addition, the actual amount of cash Azure Midstream Operating will have available for distribution to its partners, including us, also will depend on other factors, such as:

•

the level of capital expenditures it makes;

•

its debt service requirements and other liabilities;

•

restrictions contained in its debt agreements;

•

its ability to borrow funds;

•

fluctuations in its working capital needs;

•

the cost of acquisitions, if any; and

•

the amount of cash reserves established by the general partner.

Any decrease in the volumes of natural gas that Azure Midstream Operating gathers, compresses, treats or processes would adversely affect our financial condition, results of operations and cash flows to the extent not mitigated by minimum volume or revenue commitments.

Our financial performance depends to a large extent on the volumes of natural gas gathered, compressed, treated and processed on Azure Midstream Operating’s assets. To the extent not protected by minimum volume or revenue commitments, decreases in the volumes of natural gas gathered, compressed, treated and processed would directly and adversely affect our revenues and results of operations. These volumes can be influenced by factors beyond our control, including:

•

compliance with environmental or other governmental requirements;

•

adverse weather conditions and natural disasters;

•

increases in storage levels of natural gas;

•

increased use of alternative energy sources;

•

decreased demand for natural gas;

•

fluctuations in commodity prices, including the prices of natural gas;

•

economic conditions;

•

environmental hazards, such as natural gas leaks, oil spills, pipeline and tank ruptures, and unauthorized discharges of pollutants into the surface and subsurface environment;

•

supply disruptions;

•

availability of supply connected to Azure Midstream Operating’s systems; and

•

availability and adequacy of infrastructure to gather, compress, treat and process supply into and out of Azure Midstream Operating’s systems.

The volumes of natural gas gathered, compressed, treated and processed on Azure Midstream Operating’s assets also depend on the production of natural gas from the Haynesville, Bossier and Cotton Valley formations that these systems serve. Supply of natural gas can be affected by many of the factors listed above, including commodity prices and weather. In order to maintain or increase throughput levels on Azure Midstream Operating’s systems, it must obtain new sources of natural gas. The primary factors affecting Azure Midstream Operating’s ability to obtain non-dedicated sources of natural gas include (i) the level of successful leasing, permitting and drilling activity in its areas of operation, (ii) its ability to compete successfully for volumes from new wells and (iii) its ability to compete successfully for volumes from sources connected to other pipelines. Azure Midstream Operating has no control over the level of drilling activity in its areas of operation, the amount of reserves associated with wells connected to its systems or the rate at which production from a well declines. In addition, it has no control over producers or their drilling or production decisions, which are affected by, among other things, the availability and cost of capital, levels of reserves, availability of drilling rigs and other costs of production and equipment.

A significant percentage of our revenue is attributable to a relatively small number of customers. EXCO and BG each accounted for approximately 37.0% of our revenue for the year ended December 31, 2013 and each accounted for approximately 29.0% of our revenue for the nine months ended September 30, 2014. If our customers curtail or reduce production in our areas of operation it could reduce throughput on our systems and through our facilities and, therefore, adversely affect our financial condition, results of operations and cash flows.

Some of our customers may have material financial and liquidity issues or may, as a result of operational incidents or other events, be disproportionately affected as compared to larger, better-capitalized companies. Any material nonpayment or nonperformance by any of our key customers could have a material adverse effect on our financial condition, results of operations and cash flows. We expect our exposure to concentrated risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively small number of customers for a substantial portion of our revenue.

The lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

Our operations are focused on natural gas gathering, compression, treating and processing services. Our assets are located exclusively in the Haynesville and Bossier shale formations, the Cotton Valley formation and the shallower producing sands in the Travis Peak formation in North Louisiana and East Texas, and we intend to focus our future capital expenditures largely on developing our business in these areas. As a result, our financial condition, results of operations and cash flows depend upon the demand for our services in these regions. Due to our lack of industrial and geographic diversity, adverse developments in our current segment of the midstream industry or our existing areas of operation, including adverse developments due to catastrophic events, weather or regulatory action, could have a significantly greater impact on our financial condition, results of operations and cash flows than if we maintained more diverse assets and locations. For example, a significant portion of the gas we gather in the Haynesville shale formations and Bossier shale formations is dry gas. Due to declines in natural gas prices, some of our customers have substantially reduced their dry gas production in these regions and announced their intent to reduce capital expenditures for dry gas drilling activities.

We may be unable to renew or replace expiring contracts at favorable rates or on a long-term basis.

Our primary exposure to market risk occurs at the time our existing contracts expire and are subject to renegotiation and renewal. Our minimum volume and revenue commitments have original terms that range from five years to ten years and, as of September 30, 2014, had a weighted average remaining term of 5.2 years. The extension or replacement of existing contracts depends on a number of factors beyond our control, including:

•

the level of existing and new competition to provide services to our markets;

•

the macroeconomic factors affecting natural gas economics for our current and potential customers;

•

the balance of supply and demand, on a short-term, seasonal and long-term basis, in our markets;

•

the extent to which the customers in our markets are willing to contract on a long-term basis; and

•

the effects of federal, state or local regulations on the contracting practices of our customers.

Any failure to extend or replace a significant portion of our existing contracts, or extending or replacing them at unfavorable or lower rates, could have a material adverse effect on our business, results of operations, financial condition and ability to make quarterly cash distributions to our unitholders.

We may not be able to increase Azure Midstream Operating’s third-party gathering, compression, treating and processing volumes and resulting revenue due to competition and other factors, which could limit our ability to grow.

Part of our growth strategy includes maximizing the utilization of our assets by increasing volume throughput from existing customers and connecting new customers to our systems. Our ability to increase our throughput and resulting revenue is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when third-party shippers require it. Some of our competitors have greater financial resources and access to larger supplies of natural gas than those available to us, which could allow those competitors to price their services more aggressively than we do.

Our efforts to attract new customers may be adversely affected by our desire to provide services pursuant to fixed-fee and fixed-spread contracts. Our potential customers may prefer to obtain services pursuant to other forms of contractual arrangements under which we would be required to assume direct commodity exposure.

The amount of cash we have available for distribution to our unitholders depends primarily on our cash flow and not solely on profitability, which may prevent us from making distributions, even during periods in which we record net income.

You should be aware that the amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record a net loss for financial accounting purposes, and conversely, we may fail to make cash distributions during periods when we record net income for financial accounting purposes.

Our construction or purchase of new assets may not result in revenue increases and may be subject to numerous risks, which could adversely affect our cash flows, results of operations and financial condition and, as a result, our ability to distribute cash to our unitholders.

The construction of additions or modifications to Azure Midstream Operating’s existing systems and the construction or purchase of new midstream assets involve numerous uncertainties beyond our control. Financing may not be available on economically acceptable terms or at all. Furthermore, if we undertake projects, they may not be completed on schedule, at the budgeted cost, or at all. We may not receive any material increase in operating cash flow from a project for some time, particularly in the case of greenfield projects, or the cash flow we receive may not meet our expectations. If we experience unanticipated or extended delays in generating operating cash flow from construction projects, we may need to reduce or reprioritize our capital budget in order to meet our capital requirements,

We often rely on estimates of future production in deciding whether to construct additional or new pipelines or facilities. These estimates may prove to be inaccurate because of the numerous technological, economic and other uncertainties inherent in estimating quantities of future production. As a result, new facilities may not be able to attract sufficient volumes to achieve our expected investment return. We also may construct assets in reliance on firm capacity commitments by third-party facilities downstream of our facilities. If such third-party facilities are not available when we expect them, we could be adversely affected.

In addition, the construction of additions to our existing gathering and processing assets will generally require us to obtain new rights-of-way prior to constructing new pipelines or facilities. We may be unable to timely obtain such rights-of-way to connect new natural gas supplies to our existing gathering lines or capitalize on other attractive growth opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to expand or renew existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases, our cash flows could be adversely affected.

If any of the risks described above occur, it could have a material adverse effect on our results of operations, financial condition and cash flows and our ability to make distributions to our unitholders.

We may be unable to grow by acquiring the interest in Azure Midstream Operating owned by Azure Midstream Holdings, which could limit our ability to increase our distributable cash flow.

A portion of our strategy to grow our business and increase distributions to our unitholders is dependent on our ability to make acquisitions that result in an increase in our distributable cash flow. The acquisition component of our growth strategy is based, in large part, on our expectation of ongoing divestitures by Azure Midstream Holdings of portions of its remaining ownership interest in Azure Midstream Operating to us. We have only a right of first offer pursuant to an agreement to purchase the 60% limited partner interest in Azure Midstream Operating being retained by Azure Midstream Holdings at the closing of this offering. Azure

Midstream Holdings is not obligated to offer us the opportunity to purchase this interest. We may never purchase all or any portion of this interest for several reasons, including the following:

•

Azure Midstream Holdings may choose not to sell the interest;

•

We may decide not to make an offer for the interest;

•

We may be unable to agree on acceptable purchase terms with Azure Midstream Holdings; and

•

We may be unable to obtain financing for the purchase on acceptable terms, or we may be prohibited by the terms of credit facilities, indentures or other contracts from purchasing some or all of the interest, and Azure Midstream Holdings may be prohibited by the terms of its credit facilities, indentures or other contracts from selling some or all of such interest. If we or Azure Midstream Holdings must seek waivers of such provisions or refinance debt governed by such provisions in order to consummate a sale of the interest, we or Azure Midstream Holdings may be unable to do so in a timely manner or at all.

We do not know when or if any such interest will be offered to us to purchase, and we can offer no assurance that we will be able to successfully consummate any future acquisition of such interest in Azure Midstream Operating. Furthermore, if Azure Midstream Holdings reduces its ownership interest in us, it may be less willing to sell its remaining ownership interest in Azure Midstream Operating to us. In addition, there are no restrictions on Azure Midstream Holdings’ ability to transfer its ownership interest in Azure Midstream Operating to a third party. If we do not acquire a significant portion of Azure Midstream Holdings’ remaining 60% interest in Azure Midstream Operating, our ability to grow our business and increase our distributions to unitholders may be limited.

If we are unable to make acquisitions on economically acceptable terms from third parties, our future growth will be limited, and the acquisitions we do make may reduce, rather than increase, our cash generated from operations on a per unit basis.

Our ability to grow depends, in part, on our ability to make acquisitions that increase our cash generated from operations on a per unit basis. The acquisition component of our strategy is based, in large part, on our expectation of ongoing divestitures of midstream energy assets by industry participants. However, there can be no assurance that any such divestitures will be made, and a material decrease in divestitures of midstream energy assets would limit our opportunities for future acquisitions and could have a material adverse effect on our business, results of operations, financial condition and ability to make quarterly cash distributions to our unitholders.

If we are unable to make accretive acquisitions, whether because, among other reasons, (i) we are unable to identify attractive third-party acquisition opportunities, (ii) we are unable to negotiate acceptable purchase contracts, (iii) we are unable to obtain financing for these acquisitions on economically acceptable terms or (iv) we are unable to obtain necessary governmental or third-party consents, then our future growth and ability to increase distributions will be limited. Furthermore, even if we do make acquisitions that we believe will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations on a per unit basis.

Any acquisition involves potential risks, including, among other things:

•

mistaken assumptions about volumes, revenue and costs, including synergies and potential growth;

•

an inability to secure adequate customer commitments to use the acquired systems or facilities;

•

an inability to integrate successfully the assets or businesses we acquire;

•

the assumption of unknown liabilities for which we are not indemnified or for which our indemnity is inadequate;

•

the diversion of management’s and employees’ attention from other business concerns; and

•

unforeseen difficulties operating in new geographic areas or business lines.

If any acquisition eventually proves not to be accretive to our distributable cash flow per unit, it could have a material adverse effect on our business, results of operations, financial condition and ability to make quarterly cash distributions to our unitholders.

If third-party pipelines or other midstream facilities interconnected to Azure Midstream Operating’s gathering, compression, treating or processing systems become partially or fully unavailable, or if the volumes Azure Midstream Operating gathers, compresses, treats and processes does not meet the natural gas quality requirements of such pipelines or facilities, our operating margin and cash flow and our ability to make distributions to our unitholders could be adversely affected.

Azure Midstream Operating’s gathering, compression, treating and processing assets connect to other pipelines or facilities owned and operated by unaffiliated third parties, such as Regency Energy Partners, LP, Acadian Energy Inc., Gulf South Pipeline Company, LP, Natural Gas Pipeline of America, the Carthage Hub, Waskom Gas Processing Company and DCP Midstream Partners, LP. The continuing operation of such third-party pipelines, processing facilities and other midstream facilities is not within our control. These pipelines, plants and other midstream facilities may become unavailable because of testing, turnarounds, line repair, maintenance, reduced operating pressure, lack of operating capacity, regulatory requirements and curtailments of receipt or deliveries due to insufficient capacity or because of damage from severe weather conditions or other operational issues. If any of these pipelines or other midstream facilities become unable to receive, transport or process natural gas, or if the volumes Azure Midstream Operating gathers, compresses, treats or processes do not meet the natural gas quality requirements of such pipelines or facilities, our operating margin and ability to make cash distributions to our unitholders could be adversely affected.

Because of the natural decline in production from existing wells in Azure Midstream Operating’s areas of operation, our success depends, in part, on producers replacing declining production and also on our ability to secure new sources of natural gas. Any decrease in the volumes of natural gas that Azure Midstream Operating gathers, compresses, treats and processes could adversely affect our business and operating results.

The natural gas volumes that support our business depend on the level of production from natural gas wells connected to Azure Midstream Operating’s systems, which may be less than expected and will naturally decline over time. As a result, our cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on Azure Midstream Operating’s systems, we must obtain new sources of natural gas. The primary factors affecting our ability to obtain sources of natural gas include (i) the level of successful drilling activity in Azure Midstream Operating’s areas of operation, (ii) our ability to compete for volumes from successful new wells and (iii) our ability to compete successfully for volumes from sources connected to other pipelines.

We have no control over the level of drilling activity in Azure Midstream Operating’s areas of operation, the amount of reserves associated with wells connected to Azure Midstream Operating’s systems or the rate at which production from a well declines. In addition, we have no control over producers or their drilling or production decisions, which are affected by, among other things:

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the availability and cost of capital;

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prevailing and projected natural gas prices;

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demand for natural gas;

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levels of reserves;

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geologic considerations;

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compliance with environmental or other governmental requirements, including the permitting of drilling activity and the regulation of hydraulic fracturing; and

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the costs of producing the gas, the availability and costs of drilling rigs and other equipment.

Fluctuations in energy prices can also greatly affect the development of natural gas reserves. Drilling and production activity generally decreases as natural gas prices decrease. Declines in natural gas prices could have a negative impact on exploration, development and production activity, and if sustained, could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in Azure Midstream Operating’s areas of operation could lead to reduced utilization of its assets.

Due to these and other factors, even if oil, NGLs and natural gas reserves are known to exist in areas served by Azure Midstream Operating’s assets, producers may choose not to develop those reserves. If reductions in drilling activity result in our inability to maintain the current levels of throughput on our systems, those reductions could reduce our revenue and cash flow and adversely affect our ability to make cash distributions to our unitholders.

Our exposure to commodity price risk may vary over time.

For the nine months ended September 30, 2014, we generated over 90% of our revenues pursuant to fixed-fee and fixed-spread contracts under which we are paid based on the volumes of natural gas and NGLs that we gather, compress, treat and process, rather than the underlying value of the natural gas and NGLs. Consequently, our existing operations and cash flows have limited direct exposure to commodity price risk. Although we intend to enter into similar fixed-fee and fixed-spread contracts with new customers in the future, our efforts to negotiate such contractual terms may not be successful. In addition, we may acquire or develop additional midstream assets in a manner that increases our exposure to commodity price risk. Future exposure to the volatility of natural gas and NGLs prices could have a material adverse effect on our business, results of operations and financial condition.

A change in the jurisdictional characterization of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of such assets, which may cause our revenues to decline and our operating expenses to increase.

All of our natural gas gathering, compressing, treating and processing operations are exempt from Federal Energy Regulatory Commission, or FERC, regulation under the Natural Gas Act of 1938, or NGA. Section 1(b) of the Natural Gas Act of 1938, or NGA, exempts natural gas gathering facilities from regulation by FERC under the NGA. In a declaratory order dated May 4, 2007, FERC declared our subsidiary, TGG Pipeline, Ltd., to be a natural gas gathering facility and it is not subject to FERC regulation. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline is a gathering pipeline not subject to FERC jurisdiction. However, the classification and regulation of our natural gas gathering facilities may be subject to change based on future determinations by FERC, the courts, or Congress. If FERC were to consider the status of an individual facility and determine that the facility or services provided by it are not exempt from FERC regulation under the NGA, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by the FERC under the NGA or the Natural Gas Policy Act of 1978, or NGPA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, could adversely affect our results of operations and cash flows.

Other FERC regulations may indirectly impact our businesses and the markets for products derived from these businesses. FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on open access transportation, ratemaking, gas quality, capacity release and market center promotion, may indirectly affect the natural gas gathering market. Should Azure Midstream Operating fail to comply with all applicable FERC administered statutes, rules, regulations and orders, it could be subject to substantial penalties and fines, which could have a material adverse effect on our results of operations and cash

flows. FERC has civil penalty authority pursuant to the Energy Policy Act of 2005 to impose penalties for violations of the NGA and NGPA of up to $1,000,000 per day for each violation and disgorgement of profits associated with any violation.

State regulation of natural gas gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take and common purchaser requirements designed to prohibit discrimination in favor of one producer over another or one source of supply over another, as well as complaint-based rate regulation. The regulations can have the effect of imposing some restrictions on our ability as an owner of gathering facilities to decide with whom we contract to gather natural gas. Texas has adopted regulations that generally allow natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to gathering access and discrimination. Other state regulations may not directly apply to our business, but may nonetheless affect the availability of natural gas for purchase, processing and sale, including Texas’ regulation of production rates and maximum daily production allowable from natural gas wells.

Natural gas gathering may receive greater regulatory scrutiny at both the state and federal levels. Our gathering operations could be adversely affected in the future should they become subject to the application of state or federal regulation of rates and services. These operations may also be or become subject to safety and operational regulations relating to the design, installation, testing, construction, operation, replacement and management of such facilities. We cannot predict what effect, if any, such changes might have on our operations, but the industry could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes. For more information regarding federal and state regulation of our operations, please read “Business—Regulation of Operations.”

Increased regulation of hydraulic fracturing could result in reductions or delays in natural gas production by our customers, which could adversely impact our revenues by decreasing the volumes of natural gas that Azure Midstream Operating gathers, compresses, treats and processes.

An increasing percentage of our customers’ natural gas production is being developed from unconventional sources, such as deep natural gas shales. These reservoirs require hydraulic fracturing completion processes to release the natural gas from the rock so it can flow through casing to the surface. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate production. Several federal agency reviews have been conducted or are underway that focus on the environmental impacts of hydraulic fracturing activities including a current study by the U.S. Environmental Protection Agency (“EPA”) which is expected to be published in a draft report for public comment and peer review in 2014. At the same time, certain environmental groups have advocated for additional laws to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed from time to time by some members of Congress to provide for such regulation. In addition, some states have adopted and other states are considering adopting legal requirements imposing more stringent restrictions on hydraulic fracturing while local governments may also seek to adopt ordinances within their jurisdictions limiting aspects of fracturing activities. Additional regulation of hydraulic fracturing through the adoption of new laws, regulations and ordinances at the federal, state or local levels could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of natural gas that move through our gathering, compression, treating and processing systems, which would materially adversely affect our revenues and results of operations.

Our operations are subject to environmental laws and regulations that may expose us to significant costs and liabilities and have an adverse effect on our results of operations and cash flows.

Azure Midstream Operating’s gathering, compression, treating and processing operations are subject to stringent federal, state and local environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may impose numerous obligations that are applicable to Azure Midstream Operating’s operations including acquisition of a

permit before conducting regulated activities, restrictions on the types, quantities and concentration of materials that can be released into the environment; limitation or prohibition of construction and operating activities in environmentally sensitive areas such as wetlands, wilderness regions and other protected areas; requiring capital expenditures to comply with pollution control requirements and imposition of substantial liabilities for pollution resulting from Azure Midstream Operating’s operations. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, which can often require difficult and costly actions. Failure to comply with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties or other sanctions, the imposition of remedial obligations and the issuance of orders enjoining future operations or imposing additional compliance requirements on such operations.

Certain environmental laws impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances, petroleum hydrocarbons or wastes have been released, even under circumstances where the materials have been released by a predecessor operator. Moreover, private parties, including the owners of the properties through which Azure Midstream Operating’s gathering, compression, treating or processing systems pass and facilities where its wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as seek damages for personal injury and property damage allegedly caused by an accidental release of hazardous substances, petroleum substances or wastes. The adoption of stricter environmental laws, regulations or enforcement policies could significantly increase our operational or compliance costs and the cost of any remediation that may become necessary. Similarly, the adoption of environmental laws or regulations that result in more stringent drilling restrictions or prohibit the drilling of new natural gas wells for any extended period of time could increase our natural gas customers’ operating and compliance costs as well as reduce the rate of production of crude oil, NGLs or natural gas from operators with whom we have a business relationship, which could have a material adverse effect on our results of operations and cash flows.

The adoption of climate change legislation or regulations restricting emissions of GHGs could result in increased operating costs and reduced demand for the services we provide.

In December 2009, the EPA published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has adopted rules under the Clean Air Act that, among other things, establish construction and operating permit reviews for GHG emissions from certain large stationary sources that are potential major sources of certain principal, or criteria, pollutant emissions, which reviews could require meeting “best available control technology” standards for those GHG emissions. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified onshore and offshore production facilities and onshore processing, transmission and storage facilities in the United States on an annual basis, which includes certain assets we operate. While Congress has from time to time considered adopting legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions by means of cap and trade programs. The adoption of any legislation or regulation that requires reporting of GHGs or otherwise restricts emissions of GHGs from our equipment and operations could require us to incur significant added costs to reduce emissions of GHGs or could adversely affect demand for the natural gas Azure Midstream Operating gathers, compresses, treats or processes. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHG in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climate events that could have an adverse effect on our assets and operations.

Federal and state legislative and regulatory initiatives relating to pipeline safety that require the use of new or more stringent safety controls or result in more stringent enforcement of applicable legal requirements could subject us to increased capital costs, operational delays and costs of operation.

The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (“2011 Pipeline Safety Act”) is the most recent federal legislation to amend the Natural Gas Pipeline Safety Act of 1968 (“NGPSA”), requiring increased safety measures for natural gas transportation pipelines. Among other things, the 2011 Pipeline Safety Act directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation, pipeline material strength testing, and verification of the maximum allowable pressure of certain pipelines. The 2011 Pipeline Safety Act also increases the maximum penalty for violation of pipeline safety regulations from $100,000 to $200,000 per violation per day of violation and from $1 million to $2 million for a related series of violations. The safety enhancement requirements and other provisions of the 2011 Pipeline Safety Act as well as any implementation of PHMSA rules thereunder could require us to install new or modified safety controls, pursue additional capital projects, or conduct maintenance programs on an accelerated basis, any or all of which tasks could result in our incurring increased operating costs that could be significant and have a material adverse effect on our results of operations or financial position.

We may incur significant costs and liabilities resulting from pipeline integrity programs and related repairs.

Pursuant to authority under the NGPSA, as amended by the Pipeline Safety Improvement Act of 2002, the PIPES Act and the 2011 Pipeline Safety Act, PHMSA has established a series of rules requiring pipeline operators to develop and implement integrity management programs for natural gas transmission pipelines that, in the event of a pipeline leak or rupture, could affect “high consequence areas,” which are areas where a release could have the most significant adverse consequences, including high population areas, certain drinking water sources and unusually sensitive ecological areas. These regulations require the operators of covered pipelines to: (i) perform ongoing assessments of pipeline integrity; (ii) identify and characterize applicable threats to pipeline segments that could impact a high consequence area; (iii) improve data collection, integration and analysis; (iv) repair and remediate the pipeline as necessary; and (v) implement preventive and mitigating actions.

In addition, states have adopted regulations similar to existing PHMSA regulations for intrastate gathering and transmission lines. At this time, we cannot predict the ultimate cost of compliance with these regulations

Moreover, changes to pipeline safety laws by Congress and regulations by PHMSA that result in more stringent or costly safety standards could have a significant adverse effect on us and similarly situated midstream operators. For instance, in August 2011, PHMSA published an advance notice of proposed rulemaking in which the agency was seeking public comment on a number of changes to regulations governing the safety of gas transmission pipelines and gathering lines, including, for example, revising the definitions of “high consequence areas” and “gathering lines” and strengthening integrity management requirements as they apply to existing regulated operators and to currently exempt operators should certain exemptions be removed. PHMSA continues to evaluate the public comments received with respect to more stringent integrity management programs.

Restrictions in our new credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.

Upon the closing of the offering, we will enter into a $150 million revolving credit facility. Our new credit facility will contain various covenants and restrictive provisions that will limit our ability to, among other things:

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incur or guarantee additional debt;

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make distributions on or redeem or repurchase units;

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make certain investments and acquisitions;

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incur certain liens or permit them to exist;

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enter into certain types of transactions with affiliates;

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merge or consolidate with another company; and

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transfer, sell or otherwise dispose of assets.

Our new credit facility also will contain covenants requiring us to maintain certain financial ratios. Our ability to meet those financial ratios and tests can be affected by events beyond our control and we cannot provide assurance that we will meet those ratios and tests. In addition, our credit facility will contain events of default customary for transactions of this nature. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Azure Midstream Partners, LP Credit Agreement” for additional information regarding our revolving credit facility.

Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. The occurrence of a significant accident or other event that is not fully insured could curtail our operations and have a material adverse effect on our ability to distribute cash and, accordingly, the market price for our common units.

Azure Midstream Operating’s operations are subject to all of the hazards inherent in the gathering, compression, treating and processing of natural gas, including:

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damage to pipelines and processing facilities, related equipment and surrounding properties caused by natural disasters, acts of terrorism and acts of third parties;

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damage from construction, farm and utility equipment as well as other subsurface activity;

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leaks or losses of natural gas or as a result of the malfunction of equipment or facilities;

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fires, ruptures and explosions; and

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other hazards that could also result in personal injury and loss of life, pollution and natural resource damages, and suspension of operations.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental or natural resource damage, and they may result in curtailment or suspension of our related operations. A natural disaster or other hazard affecting the areas in which we operate could have a material adverse effect on our operations.

To mitigate financial losses resulting from these operational hazards, we maintain comprehensive general liability insurance, as well as insurance coverage against certain losses resulting from physical damages, business interruption and pollution events that are considered sudden and accidental. However, we are not fully insured against all risks inherent to our business and our insurance coverage does not provide 100 percent reimbursement of potential losses resulting from these hazards. Insurance coverage is generally not available to us for pollution events that are considered gradual, and we have limited or no insurance coverage for certain risks such as political risk, war and terrorism. Our insurance coverage does not cover penalties or fines assessed by governmental authorities. If a significant accident or unplanned event occurs that is not fully insured, it could adversely affect our revenues, earnings and cash flows and have a material adverse effect on our ability to make cash distributions to you.

In addition, we may not be able to maintain or obtain insurance of the type and amount we desire at acceptable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies may increase substantially. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage.

Some of Azure Midstream Operating’s facilities may be subject to claims by neighbors that the facilities interfere with the use or enjoyment of their property.

Although Azure Midstream Operating’s facilities are generally in rural areas, some may be in proximity to residences or other inhabited tracts. These neighbors may claim that Azure Midstream Operating’s gathering, compression, treating and processing assets interfere with their use or enjoyment of such property and its resale value. We may not be able to recover the costs to defend, settle or litigate these claims through insurance or increased revenues, which may materially reduce our revenues, earnings and cash flows and have a material adverse effect on our ability to make cash distributions to you.

Azure Midstream Operating does not own all of the land on which its pipelines and facilities are located, which could result in disruptions to its operations.

Azure Midstream Operating does not own all of the land on which its pipelines and facilities have been constructed, and it is, therefore, subject to the possibility of more onerous terms or increased costs to retain necessary land use if it does not have valid rights-of-way or if such rights-of-way lapse or terminate. Azure Midstream Operating obtains the rights to construct and operate its pipelines on land owned by third parties and governmental agencies for a specific period of time. Azure Midstream Operating’s loss of these rights, through its inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to you.

We are exposed to the credit risk of our customers in the ordinary course of our business.

We extend credit to our customers as a normal part of our business. As a result, we are exposed to the risk of loss resulting from the nonpayment and/or nonperformance of our customers. While we have established credit policies, including assessing the creditworthiness of our customers and requiring appropriate terms or credit support from them based on the results of such assessments, we may not have adequately assessed the creditworthiness of our existing or future customers. Furthermore, unanticipated future events could result in a deterioration of the creditworthiness of our contracted customers. Any resulting nonpayment and/or nonperformance by our customers could have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.

The loss of key personnel could adversely affect our ability to operate.

We depend on the leadership, involvement and services of a relatively small group of our general partner’s key executive management personnel, and other officers and key technical and commercial personnel. The services of these individuals may not be available to us in the future. Because competition for experienced personnel in the midstream industry is intense, we may not be able to find acceptable replacements with comparable skills and experience. Accordingly, the loss of the services of one or more of these individuals could have a material adverse effect on our ability to operate our business.

We do not have any officers or employees and rely solely on officers of our general partner and employees of Azure Midstream Holdings.

We are managed and operated by the board of directors and officers of our general partner. Affiliates of Azure Midstream Holdings conduct businesses and activities of their own in which we have no economic interest, including businesses and activities relating to Azure Midstream Holdings. As a result, there could be material competition for the time and effort of the officers and employees who provide services to our general partner and Azure Midstream Holdings. If the officers of our general partner and the employees of Azure Midstream Holdings do not devote sufficient attention to the management and operation of our business, our financial results may suffer, and our ability to make distributions to our unitholders may be reduced.

A shortage of skilled labor in the midstream natural gas industry could reduce employee productivity and increase costs, which could have a material adverse effect on our business and results of operations.

The gathering, compression, treating and processing of natural gas requires skilled laborers in multiple disciplines such as equipment operators, mechanics and engineers, among others. We have from time to time encountered shortages for these types of skilled labor. If we experience shortages of skilled labor in the future, our labor and overall productivity or costs could be materially and adversely affected. If our labor prices increase or if we experience materially increased health and benefit costs with respect to our general partner’s employees, our results of operations could be materially and adversely affected.

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

Our future level of debt could have important consequences to us, including the following:

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our ability to obtain additional financing, if necessary, for working capital, capital expenditures (including required drilling pad connections and well connections pursuant to our gas gathering agreements as well as acquisitions) or other purposes may be impaired or such financing may not be available on favorable terms;

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our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt;

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we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

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our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all.

Increases in interest rates could adversely affect our business.

We will have negative exposure to a material increase in interest rates. In connection with this offering we will enter into a $150 million revolving credit facility. Immediately after the consummation of this offering on a pro forma basis, we do not expect to have any outstanding indebtedness. However, we may in the future make borrowings under our new revolving credit facility or other debt agreements that we may enter into in the future. As a result, our results of operations, cash flows and financial condition could be materially adversely affected by a material increase in interest rates.

Our industry is highly competitive, and increased competitive pressure could adversely affect our business and operating results.

We compete with similar enterprises in the Haynesville, Bossier and Cotton Valley formations for production from third parties. Some of our competitors may expand or construct gathering, compression, treating and processing systems facilities that would create additional competition for the activities we perform. In addition, our customers who are significant producers of natural gas may develop their own gathering, compression, treating and processing systems facilities in lieu of using Azure Midstream Operating’s systems. Our ability to renew or replace existing contracts with our customers at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of our competitors and our customers. All of these competitive pressures could have a material adverse effect on our business, results of operations, financial condition and, as a result, our ability to make cash distributions to our unitholders.

A natural disaster, catastrophe or other event could result in severe personal injury, property damage and environmental damage, which could curtail our operations and otherwise materially adversely affect our cash flow and, accordingly, affect the market price of our common units.

Some of our operations involve risks of personal injury, property damage and environmental damage, which could curtail our operations and otherwise materially adversely affect our cash flow. For example, natural gas facilities operate at high pressures, sometimes in excess of 1,100 pounds per square inch. Pipelines may suffer inadvertent damage from construction, farm and utility equipment. Virtually all of our operations are exposed to potential natural disasters, including hurricanes, tornadoes, storms and floods. The location of our assets and our customers’ assets in the U.S. Gulf Coast region makes them particularly vulnerable to hurricane or tropical storm risk.

If one or more facilities that we own or that deliver natural gas or other products to us are damaged by severe weather or any other disaster, accident, catastrophe or event, our operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that supply our facilities or other stoppages arising from factors beyond our control. These interruptions might involve significant damage to people, property or the environment, and repairs might take from a week or less for a minor incident to six months or more for a major interruption. Any event that interrupts the revenues generated by our operations, or which causes us to make significant expenditures not covered by insurance, could reduce our cash available for paying distributions and, accordingly, adversely affect the market price of our common units.

We believe that we maintain adequate insurance coverage, although insurance will not cover many types of interruptions that might occur and will not cover amounts up to applicable deductibles. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. For example, changes in the insurance markets subsequent to the hurricanes in 2005 and 2008 have made it more difficult for us to obtain certain types of coverage. As a result, we may not be able to renew existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position, results of operations and cash flows. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.

Terrorist attacks or cyber-attacks could have a material adverse effect on our business, financial condition or results of operations.

Terrorist attacks or cyber-attacks may significantly affect the energy industry, including our operations and those of our customers, as well as general economic conditions, consumer confidence and spending and market liquidity. Strategic targets, such as energy-related assets, may be at greater risk of future attacks than other targets in the United States. Our insurance may not protect us against such occurrences. Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.

Risks Inherent in an Investment in Us

Azure Midstream Holdings will own a 60% limited partner interest in Azure Midstream Operating and will control our general partner, which has sole responsibility for conducting our business and managing our operations, and we will own the general partner of Azure Midstream Operating, which is responsible for managing the operations of Azure Midstream Operating. Our general partner and its affiliates, including Azure Midstream Holdings, have conflicts of interest with, and limited duties with respect to, us and our unitholders, and may favor their own interests to our detriment and that of our unitholders. Additionally we have no control over Azure Midstream Holdings’ business decisions and operations, and Azure Midstream Holdings is under no obligation to adopt a business strategy that favors us.

Following the offering, Azure Midstream Holdings will own and control our general partner. Some of the directors and all of the executive officers of our general partner are officers of Azure Midstream Holdings. Although our general partner has a duty to manage us in a manner it believes is not adverse to our interests, the directors and officers of our general partner have duties to manage our general partner in a manner beneficial to Azure Midstream Holdings. Conflicts of interest may arise between Azure Midstream Holdings and its affiliates, including our general partner, on the one hand, and us or any of our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

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neither our partnership agreement nor any other agreement requires Azure Midstream Holdings to pursue a business strategy that favors us. Azure Midstream Holdings’ directors and officers have a fiduciary duty to make these decisions in a manner that is beneficial to the owners of Azure Midstream Holdings and affiliated entities, which may be contrary to our interests;

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our general partner is allowed to take into account the interests of parties other than us in exercising certain rights under our partnership agreement, including with respect to resolving conflicts of interest;

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Azure Midstream Holdings is not limited in its ability to compete with us;

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Azure Midstream Holdings may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to Azure Midstream Holdings’ incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations;

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Azure Midstream Holdings is under no obligation to offer us any additional interest in Azure Midstream Operating;

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some officers of Azure Midstream Holdings who provide services to us also will devote significant time to the business of Azure Midstream Holdings, and will be compensated by Azure Midstream Holdings for the services rendered to it;

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our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty. By purchasing common units, unitholders will be deemed to have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable law;

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our general partner determines the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and reserves, each of which can affect the amount of cash that is distributed to unitholders;

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our general partner determines the amount of our estimated maintenance capital expenditures, which reduces operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and the ability of the subordinated units to convert to common units;

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our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

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our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;

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our partnership agreement permits us to distribute up to $ million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or the incentive distribution rights;

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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;

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our general partner intends to limit its liability regarding our contractual and other obligations and, in some circumstances, is entitled to be indemnified by us;

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our general partner may exercise its limited right to call and purchase common units if it and its affiliates own more than 80% of the common units;

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our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates; and

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our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

Please read “Conflicts of Interest and Fiduciary Duties.”

Azure Midstream Holdings and other affiliates of our general partner are not restricted in their ability to compete with us.

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. Affiliates of our general partner, including Azure Midstream Holdings, are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us. Azure Midstream Holdings will be under no obligation to make any acquisition opportunities available to us. Moreover, while Azure Midstream Holdings may offer us the opportunity to buy additional assets from it, it is under no contractual obligation to accept any offer we might make with respect to such opportunity.

Azure Midstream Holdings currently holds interests in, and may make investments in and purchases of, entities that acquire, own and operate other natural gas midstream assets. Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers and directors and Azure Midstream Holdings. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our common unitholders. Please read “Conflicts of Interest and Fiduciary Duties.”

Ongoing cost reimbursements due to our general partner and its affiliates for services provided, which will be determined by our general partner, will be substantial and will reduce our distributable cash flow.

Prior to making distributions on our common units, we will reimburse our general partner and its affiliates for all expenses they incur on our behalf. These expenses will include all costs incurred by our general partner and its affiliates in managing and operating us, including costs for rendering corporate staff and support services to us. There is no limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us. In addition, under Delaware partnership law, our general partner has unlimited liability for our obligations, such as our debts and environmental liabilities, except for our contractual obligations that are expressly made without recourse to our general partner. To the extent our general partner incurs obligations on our behalf, we are obligated to reimburse or indemnify it. If we are unable or unwilling to reimburse or indemnify our general partner, our general partner may take actions to cause us to make payments of these obligations and liabilities. Any such payments could reduce the amount of cash otherwise available for distribution to our unitholders.

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Because we distribute all of our available cash to our unitholders, we expect that we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our share of Azure Midstream Operating’s growth capital expenditures and acquisitions. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. Furthermore, we anticipate using the net proceeds of this offering to make a cash contribution to Azure Midstream Operating of $ million, the entirety of which will be used to repay a portion of Azure Energy’s indebtedness. As a result, the net proceeds of this offering will not be used to grow our business.

In addition, because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.

We will be required to deduct estimated maintenance capital expenditures from operating surplus, which may result in less distributable cash flow than if actual maintenance capital expenditures were deducted.

Our partnership agreement requires us to deduct estimated, rather than actual, maintenance capital expenditures from our operating surplus. The amount of estimated maintenance capital expenditures deducted from operating surplus will be subject to review and change by our conflicts committee at least once a year. In years when our estimated maintenance capital expenditures are higher than actual maintenance capital expenditures, the amount of distributable cash flow will be lower than if actual maintenance capital expenditures were deducted from our operating surplus. If we underestimate the appropriate level of estimated maintenance capital expenditures, we may have less distributable cash flow in future periods when actual capital expenditures begin to exceed our previous estimates. Over time, if we do not set aside sufficient cash reserves or have available sufficient sources of financing and make sufficient expenditures to maintain our asset base, we will be unable to pay distributions at the anticipated level and could be required to reduce our distributions.

If you are not an eligible taxable holder, you will not be entitled to allocations of income or loss or distributions or voting rights on your common units and your common units will be subject to redemption.

In order to avoid any material adverse effect on the maximum applicable rates that can be charged to customers by our subsidiaries on assets that are subject to rate regulation by FERC or analogous regulatory body, we have adopted certain requirements regarding those investors who may own our common units. Eligible holders are individuals or entities subject to United States federal income taxation on the income generated by us or entities not subject to United States federal income taxation on the income generated by us, so long as all of the entity’s owners are subject to such taxation. Please read “Description of the Common Units—Transfer of Common Units.” If you are not a person who fits the requirements to be an eligible taxable holder, you will not receive allocations of income or loss or distributions or voting rights on your units and you run the risk of having your units redeemed by us at the market price calculated in accordance with our partnership agreement as of the date of redemption. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “The Partnership Agreement—Non-Citizen Assignees; Redemption.”

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions, in its individual capacity, as opposed to in its capacity as our general partner, or otherwise, free of fiduciary duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the parties where the language in our partnership agreement does not provide for a clear course of action. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

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how to allocate business opportunities among us and its other affiliates;

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whether to exercise its call right;

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how to exercise its voting rights with respect to the units it owns;

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whether to exercise its registration rights;

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whether to elect to reset target distribution levels; and

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whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Unitholders have very limited voting rights and are not entitled to appoint or remove our general partner or elect the board of directors of our general partner, which could reduce the price at which our common units will trade.

Unitholders have only limited voting rights and, therefore, limited ability to influence management’s decisions regarding our business. Unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The directors of our general partner are chosen by Azure Midstream Holdings. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon the closing of this offering to prevent its removal. The vote of the holders of at least 66²/₃% of all outstanding common units and subordinated units voting together as a single class is required to remove our general partner. At the closing of this offering, our general partner and its affiliates will own approximately % of the total outstanding common units and subordinated units on an aggregate basis (or % of our total outstanding common units and subordinated units on an aggregate basis if the underwriters’ option to purchase additional common units is exercised in full), in each case, excluding common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program.

In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. This will provide Azure Midstream Holdings the ability to prevent the removal of our general partner.

Our partnership agreement restricts the remedies available to holders of our units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:

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whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, meaning that it did not act, or omit from acting, with the belief that such act or omission was adverse to the interest of the partnership, and will not be subject to any higher standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

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our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or, in the case of a criminal matter, acted with knowledge that the conduct was unlawful; and

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our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

(i)

approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or

(ii)

approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, other than one where our general partner is permitted to act in its sole discretion, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties.”

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Azure Midstream Holdings may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of our general partner’s board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.

Azure Midstream Holdings has the right, as the initial indirect holder of our incentive distribution rights, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distribution levels at the time of the exercise of the reset election. Following a reset election by Azure Midstream Holdings, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

If Azure Midstream Holdings elects to reset the target distribution levels, it will be entitled to receive common units as consideration for such election. The number of common units to be issued to Azure Midstream Holdings will equal the number of common units that would have entitled Azure Midstream Holdings to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to Azure Midstream Holdings on the incentive distribution rights in the quarter prior to the reset election. We anticipate that Azure Midstream Holdings would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that Azure Midstream Holdings could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that our common unitholders would have otherwise received had we not issued new common units to Azure Midstream Holdings in connection with resetting the target distribution levels. Please read “How We Make Distributions to Our Partners—Azure Midstream Holdings’ Right to Reset Incentive Distribution Levels.”

Increases in interest rates could adversely impact our unit price and our ability to issue additional equity, to incur debt to capture growth opportunities or for other purposes, or to make cash distributions at our intended levels.

If interest rates rise, the interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and our ability to issue additional equity, to incur debt to expand or for other purposes, or to make cash distributions at our intended levels.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person or group that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of the owners of our general partner from transferring all or a portion of their respective ownership interest in our general partner to a third party. The new owners of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices and thereby exert significant control over the decisions made by the board of directors and officers. This effectively permits a “change of control” without the vote or consent of the unitholders.

The incentive distribution rights may be transferred by Azure Midstream Holdings to a third party without unitholder consent.

Azure Midstream Holdings may transfer all or a portion of its incentive distribution rights to a third party at any time without the consent of our unitholders. If Azure Midstream Holdings transfers the incentive distribution rights to a third party but retains its ownership interest in our general partner, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if Azure Midstream Holdings had retained ownership of the incentive distribution rights. For example, a transfer of incentive distribution rights by Azure Midstream Holdings could reduce the likelihood of Azure Midstream Holdings accepting offers made by us relating to assets owned by it, as it would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

Immediately effective upon closing, you will experience substantial dilution of $ in tangible net book value per common unit.

The assumed initial public offering price of $ per unit exceeds our pro forma net tangible book value of $ per unit. Based on the assumed initial public offering price of $ per unit, you will incur immediate and substantial dilution of $ per common unit after giving effect to the offering of common units and the application of the related net proceeds. Dilution results primarily because the assets being contributed by our general partner and its affiliates are recorded in accordance with GAAP at their historical cost and not their fair value. Please read “Dilution.”

We may issue additional units, including units that are senior to the common units, without your approval, which would dilute your existing ownership interests.

Our partnership agreement does not limit the number of additional limited partner interests that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

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each unitholder’s proportionate ownership interest in us will decrease;

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the amount of distributable cash flow on each unit may decrease;

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because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

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the ratio of taxable income to distributions may increase;

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the relative voting strength of each previously outstanding unit may be diminished; and

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the market price of the common units may decline.

There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.

In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of units of senior rank may, among other adverse effects, (i) reduce or eliminate the amount of distributable cash flow to our common unitholders; (ii) diminish the relative voting strength of the total common units outstanding as a class; or (iii) subordinate the claims of the common unitholders to our assets in the event of our liquidation.

Azure Midstream Holdings may sell common units in the public markets or otherwise, which sales could have an adverse impact on the trading price of the common units.

After the sale of the common units offered hereby, Azure Midstream Holdings will hold common units and subordinated units, assuming the underwriters’ option to purchase additional common units is not exercised. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier. Additionally, we have agreed to provide Azure Midstream Holdings with certain registration rights. Please read “Units Eligible for Future Sale.” The sale of these units in public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price equal to the greater of (i) the average of the daily closing price of the common units over the 20 trading days preceding the date three days before notice of exercise of the call right is first mailed and (ii) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act. Upon consummation of this offering, and assuming the underwriters do not exercise their option to purchase additional common units, our general partner and its affiliates will own an aggregate of % of our common and subordinated units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), our general partner and its affiliates will own % of our common units. For additional information about the limited call right, please read “The Partnership Agreement—Limited Call Right.”

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we will initially own assets and conduct business in Texas and Louisiana. You could be liable for any and all of our obligations as if you were a general partner if:

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a court or government agency determined that we were conducting business in a state but had not complied with that particular state’s partnership statute; or

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your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.

For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement—Limited Liability.”

Unitholders may have liability to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act the (“Delaware Act”), we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the substituted limited partner at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, which could cause you to lose all or part of your investment.

Prior to the offering, there has been no public market for the common units. After the offering, there will be only publicly-traded common units, including common units purchased by certain of our officers, directors, employees and certain other persons affiliated with us under our directed unit program. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, a lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

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our quarterly distributions;

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our quarterly or annual earnings or those of other companies in our industry;

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events affecting Azure Midstream Holdings;

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announcements by us or our competitors of significant contracts or acquisitions;

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changes in accounting standards, policies, guidance, interpretations or principles;

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general economic conditions;

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the failure of securities analysts to cover our common units after the consummation of this offering or changes in financial estimates by analysts;

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future sales of our common units; and

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other factors described in these “Risk Factors.”

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to auditing standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, (2) comply with any new requirements adopted by the PCAOB, (3) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise or (4) provide certain disclosure regarding executive compensation required of larger public companies.

If we fail to establish and maintain effective internal controls over financial reporting, our ability to accurately report our financial results could be adversely affected.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes- Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a publicly traded partnership, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal controls over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal controls over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we may need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Furthermore, while we generally must comply with Section 404 of the Sarbanes-Oxley Act of 2002 for our fiscal year ending December 31, 2015, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our annual report for the fiscal year ending December 31, 2019. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

The New York Stock Exchange does not require a publicly-traded partnership like us to comply with certain of its corporate governance requirements.

We intend to apply to list our common units on the NYSE. Because we will be a publicly-traded partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance

committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Azure Midstream Partners, LP.”

We will incur increased costs as a result of being a publicly-traded partnership.

We have no history operating as a publicly-traded partnership. As a publicly-traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly-traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly-traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a publicly-traded partnership.

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly-traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

We estimate that we will incur approximately $3.0 million of incremental costs per year associated with being a publicly-traded partnership; however, it is possible that our actual incremental costs of being a publicly-traded partnership will be higher than we currently estimate.

Our partnership agreement will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings.

Our partnership agreement requires that any claims, suits, actions or proceedings: (1) arising out of or relating in any way to the partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of the partnership agreement or the duties, obligations or liabilities among limited partners or of limited partners to us, or the rights or powers of, or restrictions on, the limited partners or us); (2) brought in a derivative manner on our behalf; (3) asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of us or our general partner, or owed by our general partner, to us or the limited partners; (4) asserting a claim arising pursuant to any provision of the Delaware Act; or (5) asserting a claim governed by the internal affairs doctrine shall be exclusively brought in the Court of Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with subject matter jurisdiction), regardless of whether such claims, suits, actions or proceedings sound in contract, tort, fraud or otherwise, are based on common law, statutory, equitable, legal or other grounds, or are derivative or direct claims. By purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware (or such other Delaware courts) in connection with any such claims, suits, actions or proceedings. Please read “The Partnership Agreement—Applicable Laws; Forum, Venue and Exclusive Jurisdiction.”

This choice of forum provision may limit a unitholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our partnership

agreement inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

Tax Risks to Common Unitholders

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as Azure Midstream Operating and us not being subject to material incremental entity-level taxation. If the IRS were to treat us as a corporation for federal income tax purposes, or if we or Azure Midstream Operating become subject to entity-level taxation for state tax purposes, our distributable cash flow would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, we would be treated as a corporation for U.S. federal income tax purposes unless we satisfy a “qualifying income” requirement. Based upon our current operations, we believe we satisfy the qualifying income requirement. However, we have not requested, and do not plan to request, a ruling from the IRS on this or any other matter affecting us. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.

If we or Azure Midstream Operating were treated as a corporation for federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us or Azure Midstream Operating as a corporation, our distributable cash flow would be substantially reduced. Therefore, treatment of us or Azure Midstream Operating as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us or Azure Midstream Operating to entity-level taxation for U.S. federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us. At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Specifically, we and Azure Midstream Operating will initially own assets and conduct business in Texas, which imposes a franchise tax at a maximum effective rate of 0.7% of our gross income apportioned to Texas. In the future, we or Azure Midstream Operating may expand our operations. Imposition of a similar tax on us or Azure Midstream Operating in other jurisdictions that we may expand to could substantially reduce our distributable cash flow.

The tax treatment of publicly-traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

The present U.S. federal income tax treatment of publicly-traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider

substantive changes to the existing U.S. federal income tax laws that affect publicly-traded partnerships. One such legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly-traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes, or other proposals, will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modification to U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes. For a discussion of the importance of our treatment as a partnership for federal income purposes, please read “Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status” for a further discussion.

If the IRS were to contest the federal income tax positions we take, it may adversely impact the market for our common units, and the costs of any such contest would reduce our distributable cash flow.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. Moreover, the costs of any contest between us and the IRS will result in a reduction in our distributable cash flow and thus will be borne indirectly by our unitholders.

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

You will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax due from you with respect to that income.

Tax gain or loss on disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your common units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other

retirement plans, will be unrelated business taxable income and will be taxable to them. Allocations and/or distributions to non-U.S. persons will be subject to withholding taxes imposed at the highest effective tax rate applicable to such non-U.S. persons, and each non-U.S. person will be required to file United States federal tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units. Please read “Material U.S. Federal Income Tax Consequences—Tax-Exempt Entities and Other Investors.”

We will treat each purchaser of common units as having the same tax benefits without regard to the common units actually purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of our common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. Our counsel is unable to opine as to the validity of this approach. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences —Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopted.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department has issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly-traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Allocations Between Transferors and Transferees.”

A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered to have disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and could recognize gain or loss from the disposition.

Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered to have disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We may adopt certain valuation methodologies that could result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Immediately following this offering, Azure Midstream Holdings will indirectly own % of the total interests in our capital and profits. Therefore, a transfer by Azure Midstream Holdings of all or a portion of its interests in us could, in conjunction with the trading of common units held by the public, result in a termination of our partnership for federal income tax purposes. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once.

Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns for one calendar year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in taxable income for the unitholder’s taxable year that includes our termination. Our termination would not affect our classification as a partnership for federal income tax purposes, but it would result in our being treated as a new partnership for U.S. federal income tax purposes following the termination. If we were treated as a new partnership, we would be required to make new tax elections and could be subject to penalties if we were unable to determine that a termination occurred. The IRS recently announced a relief procedure whereby if a publicly-traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to provide only a single Schedule K-1 to unitholders for the two short tax periods included in the year in which the termination occurs. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

You will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where you do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, you may be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various

jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. You will likely be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements.

We will initially own assets and conduct business in Texas. Texas currently does not impose a personal income tax on individuals, but does impose an income tax on corporations and other entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all United States federal, foreign, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

USE OF PROCEEDS

Immediately following the repayment of a portion of the outstanding balance under the Azure Energy credit agreement, we will enter into a new $150 million revolving credit facility that will be undrawn at closing and Azure Midstream Holdings will refinance the existing Azure Energy credit agreement. As of September 30, 2014, the Azure Energy credit agreement had an outstanding balance of $529.4 million and bore interest at a rate of 6.5%. Borrowings under the Azure Energy credit agreement incurred within the last year were used to finance the Acquisition.

The net proceeds from any exercise of the underwriters’ option to purchase additional common units (approximately $ million based on an assumed initial offering price of $ per common unit, if exercised in full) will be used to make a cash distribution to Azure Midstream Holdings. If the underwriters do not exercise their option to purchase additional common units, we will issue common units to Azure Midstream Holdings at the expiration of the option period for no additional consideration to us. If and to the extent the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder, if any, will be issued to Azure Midstream Holdings at the expiration of the option exercise period. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding. Please read “Underwriting.”

An increase or decrease in the assumed initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, commissions and structuring fees, to increase or decrease by approximately $ million.

CAPITALIZATION

The following table shows:

•

the historical cash and cash equivalents and capitalization of Azure Midstream Holdings as of September 30, 2014; and

•

our pro forma capitalization as of September 30, 2014, as adjusted to reflect this offering, the other transactions described under “Summary—Formation Transactions and Partnership Structure” and the application of the net proceeds from this offering as described under “Use of Proceeds.”

We derived this table from, and it should be read in conjunction with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	As of September 30, 2014
	Historical		Pro Forma, as adjusted(1)
	(in thousands)
Cash and cash equivalents	$	26,034	$

Long-term debt(2)	$	534,013	$

Owner/Partners’ equity:
Azure Midstream Holdings equity		515,240
Public—common units		—
Azure Midstream Holdings—common units(3)		—
Azure Midstream Holdings—subordinated units(3)		—

Total members’/partners’ equity attributable to Azure Midstream Partners, LP		—
Non-controlling interest		—

Total members’/partners’ equity		515,240

Total capitalization	$	1,049,253	$

(1)

Assumes the issuance of common units at the midpoint of the price range set forth on the cover of this prospectus.

(2)

As of September 30, 2014, the long-term debt included within the balance sheet of Azure Midstream Holdings consisted of $529.4 million outstanding borrowings under the Azure Energy credit agreement, $3.6 million under capital leases and $1.0 million of other long-term debt.

(3)

Subsequent to the offering, Azure Midstream Holdings will own the non-economic general partner interest in Azure Midstream Partners, LP.

DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of September 30, 2014, after giving effect to the offering of common units at an assumed initial public offering price of $ per common unit (the midpoint of the price range set forth on the cover of this prospectus) and the application of the related net proceeds, and assuming the underwriters’ option to purchase additional common units is not exercised, our net tangible book value was $ million, or $ per unit. Net tangible book value excludes $ million of net intangible assets. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table:


Assumed initial public offering price per common unit		$
Pro forma net tangible book value per unit before the offering(1)	$
Increase in net tangible book value per unit attributable to purchasers in the offering

Less: Pro forma net tangible book value per unit after the offering(2)

Immediate dilution in tangible net book value per common unit to new investors(3)(4)		$

(1)

Determined by dividing the number of common and subordinated units to be issued to Azure Midstream Holdings for its contribution of assets and liabilities to Azure Midstream Operating into the net tangible book value of the contributed assets and liabilities.

(2)

Determined by dividing the total number of units to be outstanding after the offering ( common units and subordinated units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the expected net proceeds of the offering.

(3)

If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $ and $ , respectively.

(4)

Because the total number of units outstanding after this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and we will not retain any proceeds from such exercise, there will be no change to dilution in net tangible book value per common unit to purchasers in the offering due to any such exercise of the option.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by affiliates of our general partner and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus (assuming the underwriters do not exercise their option to purchase additional common units):


	Units Acquired				Total Consideration
	Number	Percent			Number	Percent
General partner and affiliates(1)(2)				%	$			%
New investors				%				%

Total			100.0	%	$		100.0	%

(1)

The units to be acquired by our general partner and its affiliates consist of common units and subordinated units.

(2)

The assets being contributed by our general partner and its affiliates were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of September 30, 2014, after giving effect to the application of the net proceeds of this offering is as follows (in millions):


Book value of net assets contributed		$
Less: Contribution to Azure Midstream Operating from net proceeds of this offering

Total consideration		$

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “Assumptions and Considerations” below. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

For additional information regarding our historical and pro forma operating results, you should refer to our historical and pro forma financial statements included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy. Our cash distribution policy reflects a basic judgment that our unitholders will be better served if we distribute our cash available after expenses and reserves rather than retaining it. Because we believe we will generally finance capital investments from external financing sources, we believe that our investors are best served by our distributing all of our available cash. Because we are not subject to an entity-level federal income tax, we have more cash to distribute to you than would be the case were we subject to such tax. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly.

Available Cash. Available cash, for any quarter, consists of all cash on hand at the end of that quarter:

•

less the amount of cash reserves established by our general partner to:

•

provide for the proper conduct of our business;

•

comply with applicable law, any of our debt instruments or other agreements or any other obligation; or

•

provide funds for distributions to our partners for any one or more of the next four quarters;

•

plus, if our general partner so determines, all or a portion of cash on hand immediately prior to the date of determination of available cash for the quarter, including cash on hand, resulting from working capital borrowings made subsequent to the end of such quarter.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy. There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy may be changed at any time and is subject to certain restrictions, including:

•

Our cash flow initially will depend completely on Azure Midstream Operating’s distributions to us as one of its partners. Because we control Azure Midstream Operating’s general partner, we have the authority to determine the amount of Azure Midstream Operating’s distributions, including the amount of cash reserved by Azure Midstream Operating and not distributed. We have duties to make decisions with respect to Azure Midstream Operating in the interests of all of its partners, including Azure Midstream Holdings. Our decision to make distributions, if any, and the amount of those distributions, if any, could result in a reduction in cash distributions to our unitholders from levels we currently anticipate pursuant to our stated distribution policy.

•

Our distribution policy may be affected by restrictions on distributions under the revolving credit facility that we will enter into at the closing of this offering. One such restriction would prohibit us from making cash distributions while an event of default has occurred and is continuing under the revolving credit facility. The revolving credit facility will contain covenants requiring us to maintain certain financial ratios and tests. Should we be unable to satisfy these restrictions or otherwise be in default under the revolving credit facility, we would be prohibited from making cash distributions to our unitholders, notwithstanding our stated cash distribution policy.

•

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period, our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. For a description of these limited circumstances, please read “The Partnership Agreement—Amendment of the Partnership Agreement—No Unitholder Approval.” However, after the subordination period has ended, our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by our general partner and its affiliates. At the closing of this offering, Azure Midstream Holdings will own our general partner and will own approximately % of our total outstanding common units and subordinated units on an aggregate basis (or % of our total outstanding common units and subordinated units on an aggregate basis if the underwriters’ option to purchase additional common units is exercised in full). Please read “The Partnership Agreement—Amendment of the Partnership Agreement.”

•

If, and to the extent, our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund growth capital expenditures.

•

Our general partner will have the authority to establish reserves for the prudent conduct of our business and for future cash distributions to our unitholders, the establishment of which could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated distribution policy.

•

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.

•

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets.

•

We may lack sufficient cash to pay distributions to our unitholders due to increases in our general and administrative expense, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs. Our available cash is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such expenses increase. Please read “How We Make Distributions to Our Partners—Distributions of Available Cash.”

Our Ability to Grow is Dependent on Our Ability to Access External Growth Capital. Azure Midstream Operating will distribute all of its cash after reserves and expenses to its partners, including us. Accordingly, we expect Azure Midstream Operating to fund its growth capital expenditures or acquisitions through capital contributions from us and from Azure Midstream Holdings. We will distribute all of our available cash to our unitholders. As a result, we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our capital contributions to Azure Midstream Operating. To the extent we are unable to finance capital contributions to Azure Midstream Operating externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we and Azure Midstream Operating distribute substantially all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may impact the available cash that we have to distribute on each unit. Our partnership agreement does not limit our ability to issue additional units, including units ranking senior to the common units. Commercial borrowings or the incurrence of other debt by us or Azure Midstream Operating to finance our growth strategy will result in increased interest expense, which in turn may impact the available cash that Azure Midstream Operating has to distribute to its partners, including us, and that we have to distribute to our unitholders.

Our Minimum Quarterly Distribution

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $ per unit per whole quarter, or $ per unit per whole year, to be paid no later than 45 days after the end of each fiscal quarter. This equates to an aggregate cash distribution of approximately $ million per whole quarter or approximately $ million per whole year, in each case based on the number of common units and subordinated units outstanding immediately after completion of this offering. If the underwriters exercise their option to purchase additional common units, the net proceeds will be used to pay a distribution to Azure Midstream Holdings. Our ability to make cash distributions at the minimum quarterly distribution rate pursuant to this policy will be subject to the factors described above under the caption “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.”

The subordination period will terminate automatically if (i) we have earned and paid at least $ per quarter on each outstanding common unit and subordinated unit for any three consecutive, non-overlapping four-quarter periods ending on or after , 2018 or (ii) we have earned and paid at least $ per quarter (150% of the minimum quarterly distribution) on each outstanding common and subordinated unit for any four-quarter period on or after , 2016. Upon the termination of the subordination period, all remaining subordinated units will convert into common units on a one-for-one basis and the common units will no longer be entitled to arrearages. Please read “How We Make Distributions to Our Partners—Subordination Period.”

If distributions on our common units are not paid with respect to any fiscal quarter at the minimum quarterly distribution rate, our unitholders will not be entitled to receive such payments in the future except that, to the extent we have available cash in any future quarter during the subordination period in excess of the amount necessary to make cash distributions to holders of our common units at the minimum quarterly distribution rate, we will use this excess available cash to pay these deficiencies related to prior quarters before any cash distribution is made to holders of our subordinated units. Please read “How We Make Distributions to Our Partners—Subordination Period.”

We do not have a legal or contractual obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. Our distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Under our partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from our business in excess of the amount of reserves our general partner determines is necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements, or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters.

Our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any higher standard imposed by our partnership agreement, the Delaware limited partnership statute or any other law, rule or regulation or at equity. Holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above. However, our partnership agreement provides that our general partner is entitled to make the determinations described above without regard to any standard other than the requirement to act in good faith. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must not act, or omit from acting, with the belief that such act or omission was adverse to the interest of the partnership. Please read “How We Make Distributions to Our Partners.”

Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement. However, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of

reserves our general partner establishes in accordance with our partnership agreement as described above. Our partnership agreement may be amended with the approval of our general partner and holders of a majority of our outstanding common units and any units issued upon the reset of the incentive distribution rights, voting together as a class.

We expect to pay our distributions on or about the 15th of February, May, August and November to holders of record on or about the 1st of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. We will adjust the quarterly distribution for the period from the closing of this offering through , 2015 based on the actual length of the period.

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our minimum quarterly distribution of $ per unit each quarter through the quarter ending December 31, 2015. In those sections, we present two tables, consisting of:

•

“Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended September 30, 2014 and the Year Ended December 31, 2013,” in which we present the amount of cash we would have had available for distribution for the twelve months ended September 30, 2014 and for our fiscal year ended December 31, 2013. This table is derived from our unaudited pro forma financial statements that are included in this prospectus beginning on page F-2. The unaudited pro forma financial statements are based on our historical financial statements for the nine months ended September 30, 2014 and the year ended December 31, 2013, as adjusted to give pro forma effect to:

•

the transactions to be completed as of the closing of this offering as described under “Summary—Formation Transactions and Partnership Structure”; and

•

the application of the net proceeds of this offering as described under “Use of Proceeds.”

•

“Unaudited Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015,” in which we present our financial forecast of our results of operations and the estimated distributable cash flow necessary for us to pay the full minimum quarterly distribution on all units for the twelve months ending December 31, 2015, and the significant assumptions upon which that forecast is based.

Unless otherwise specifically noted, the following discussion refers to 100% of Azure Midstream Operating, of which Azure Midstream Partners, LP will own a 40% interest upon the consummation of this offering. References to “non-controlling interest” describes the portion of income that is attributable to the 60% limited partner interest in Azure Midstream Operating retained by Azure Midstream Holdings. All comparisons below are made to historical periods which have been adjusted on a pro forma basis.

Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended September 30, 2014 and the Year Ended December 31, 2013

If we had completed the transactions contemplated in this prospectus on October 1, 2013, our pro forma distributable cash flow generated for the twelve months ended September 30, 2014 would have been approximately $18.7 million. This amount would have been sufficient to make cash distributions at the minimum quarterly distribution rate of $ per unit per quarter (or $ per unit on an annualized basis) on all of the common units and subordinated units. Our unaudited pro forma distributable cash flow assumes that the underwriters do not exercise their option to purchase additional common units. Assuming the underwriters exercise in full their option to purchase additional common units, our pro forma distributable cash flow for the twelve months ended September 30, 2014 would have been sufficient to make the full minimum quarterly distribution on all the common units and subordinated units.

If we had completed the transactions contemplated in this prospectus on January 1, 2013, our pro forma distributable cash flow generated for the year ended December 31, 2013 would have been approximately

$31.4 million. This amount would have been sufficient to make cash distributions at the minimum quarterly distribution rate of $ per unit per quarter (or $ per unit on an annualized basis) on all of the common units and subordinated units. Our unaudited pro forma distributable cash flow assumes that the underwriters do not exercise their option to purchase additional common units. Assuming the underwriters exercise in full their option to purchase additional common units, our pro forma distributable cash flow for the year ended December 31, 2013 would have been sufficient to the full minimum quarterly distribution on all the common units and subordinated units.

Unaudited pro forma distributable cash flow from operating surplus includes an incremental general and administrative expense we will incur as a result of being a separate publicly-traded limited partnership, including compensation and benefit expenses of corporate administrative employees, costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation. We expect these general and administrative expenses will initially total approximately $3.0 million per year.

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, cash available to pay distributions is primarily a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma distributable cash flow only as a general indication of the amount of distributable cash flow that we might have generated had we been formed in the periods set forth herein.

The following table illustrates, on a pro forma basis, for the twelve months ended September 30, 2014 and the year ended December 31, 2013, the amount of distributable cash flow, assuming that the transactions contemplated by this prospectus had been consummated at the beginning of such periods and that the underwriters did not exercise their option to purchase additional common units in this offering.

Azure Midstream Partners, LP

Unaudited Pro Forma Distributable Cash Flow


	Pro Forma
	Twelve Months Ended September 30, 2014			Year Ended December 31, 2013
	(in thousands)
Total operating revenues	$	183,025		$	219,704
Operating expenses:
Cost of purchased gas and NGLs sold		37,473			25,812
Operating expense		35,533			48,693
General and administrative		13,274			14,719
Asset impairments		237,706			238,061
Depreciation and amortization		29,054			28,737

Total operating expenses		353,040			356,022

Loss from operations		(170,015	)		(136,318	)
Interest expense		42,589			40,304
Other expense		1,524			2,890

Loss before income taxes		(214,128	)		(179,512	)
Income tax expense		578			509

Net loss		(214,706	)		(180,021	)
Net loss attributable to non-controlling interest(1)		(128,824	)		(108,013	)

Net loss attributable to Azure Midstream Partners, LP		(85,882	)		(72,008	)
Net loss attributable to non-controlling interest(1)		(128,824	)		(108,013	)

Net loss		(214,706	)		(180,021	)
Add:
Depreciation and amortization		29,054			28,737
Interest expense(2)		42,589			40,304
Income tax expense(3)		578			509
Asset impairments(4)		237,706			238,061
Deferred revenue(5)		5,305			684
Other adjustments(6)		4,402			2,316

Adjusted EBITDA(7)		104,928			130,590
Adjusted EBITDA attributable to non-controlling interest(1)		62,957			78,354

Adjusted EBITDA attributable to Azure Midstream Partners, LP		41,971			52,236
Deduct:
Cash paid for interest(8)		12,476			5,355
Cash paid for income taxes(8)		136			184
Estimated maintenance capital expenditures(9)		7,631			12,306
Estimated growth capital expenditures(10)		1,908			3,077
Incremental general and administrative expenses(11)		3,000			3,000
Add:
Contributions from Azure Midstream Holdings to fund estimated growth capital expenditures(9)		1,908			3,077

Distributable cash flow attributable to Azure Midstream Partners, LP	$	18,728		$	31,391

Cash distributions:
Distributions to public common unitholders(12)	$			$
Distributions to Azure:
Common units(12)
Subordinated units(12)

Total distributions(12)	$			$

Excess	$			$

(1)

Represents Azure Midstream Holdings’ 60% ownership of Azure Midstream Operating.

(2)

Pro forma interest expense for the twelve months ended September 30, 2014 and December 31, 2013 has been calculated assuming average outstanding long-term debt of $540.8 million and $544.8 million, respectively, and an average interest rate of 6.5%. The average outstanding long-term debt and average interest rate represent borrowings under the Azure Energy credit agreement.

(3)

Represents the Texas margin tax, which is classified as income tax for reporting purposes.

(4)

The unaudited pro forma statement of operations for the twelve months ended September 30, 2014 and the year ended December 31, 2013 includes an impairment charge of $237.7 million and $238.1 million, respectively, of which $237.0 million is an impairment that was recognized by ETG prior to the Acquisition and is the result of adjusting the carrying value of the ETG assets to their net realizable fair value immediately prior to the Acquisition. The $237.0 million impairment was included within the ETG statement of operations for the period from January 1, 2013 to November 15, 2013. The remaining impairment charge was recognized by our Predecessor and is the result of adjusting the carrying value of assets held for sale to their net realizable fair value.

(5)

(6)

(7)

Adjusted EBITDA is defined as EBITDA, plus (1) non-cash expenses, (2) adjustments related to deferred revenue and cash receipts under our MRC and MVC producer commitments and (3) adjustments associated with certain other items. For a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated in accordance with GAAP, please read “Summary—Non-GAAP Financial Measures.” We define distributable cash flow as Adjusted EBITDA less interest and income taxes paid and maintenance capital expenditures.

(8)

Represents estimated cash paid for interest and cash paid for income taxes attributable to our 40% interest in Azure Midstream Operating. For purposes of determining our pro forma distributable cash for the twelve months ended September 30, 2014 and the year ended December 31, 2013, we have assumed that Azure Midstream Operating total cash paid for interest and cash paid for income taxes was $31.2 million and $0.3 million, respectively, for the twelve month period ended September 30, 2014 and $13.4 million and $0.5 million, respectively, for the year ended December 31, 2013.

(9)

Represents estimated maintenance capital expenditures attributable to our 40% interest in Azure Midstream Operating. We historically have not provided an estimate of maintenance capital expenditures, and therefore for purposes of determining our pro forma distributable cash we have assumed that 80% of our historical total capital expenditures are maintenance capital expenditures and 20% of our total capital expenditures are growth capital expenditures. For purposes of determining our pro forma distributable cash for the twelve months ended September 30, 2014 and the year ended December 31, 2013, we have assumed that Azure Midstream Operating has paid estimated maintenance capital expenditures from operating cash flow. On an aggregate basis Azure Midstream Operating’s total estimated maintenance capital expenditures would have been $19.0 million and $30.8 million for the twelve months ended September 30, 2014 and December 31, 2013, respectively. Our partnership agreement requires that we subtract from operating surplus each quarter the capital contribution we estimate we will need to make to Azure Midstream Operating to fund our portion of the maintenance capital necessary to maintain our operating capacity. Following the closing of this offering, we expect that Azure Midstream Operating will continue to fund maintenance capital expenditures through operating cash flow, and we and Azure Midstream Holdings will each bear our respective share of such maintenance capital expenditures based on our respective interests in Azure Midstream Operating. For a further discussion of maintenance capital expenditures, please read “—Assumptions and Considerations—Costs and Expenses—Capital Expenditures.”

(10)

Represents estimated growth capital expenditures attributable to our 40% interest in Azure Midstream Operating. We historically have not provided an estimate of growth capital expenditures, and therefore for purposes of determining our pro forma distributable cash we have assumed that 80% of our historical total capital expenditures are maintenance capital expenditures and 20% of our total capital expenditures are growth capital expenditures. Following the closing of this offering, we expect that Azure Midstream Operating will fund growth capital expenditures from debt and equity liquidity sources. For purposes of our pro forma distributable cash for the twelve months ended September 30, 2014 and the year ended December 31, 2013, we have assumed that Azure Midstream Holdings funded 100% of the growth capital expenditures. On an aggregate basis, Azure Midstream Operating Company’s growth capital expenditures were $4.8 million for the twelve months ended September 30, 2014 and $7.7 million for the year ended December 31, 2013. For a further discussion of capital expenditures, please read “—Assumptions and Considerations.”

(11)

We expect to incur additional general and administrative costs of approximately $3.0 million as a result of being a publicly-traded partnership.

(12)

The table below sets forth the assumed number of outstanding common units and subordinated units upon the closing of this offering and the aggregate distribution amounts payable on such units during the year following the closing of this offering at our minimum quarterly distribution rate of $ per unit per quarter ($ per unit on an annualized basis).

No Exercise of the Underwriters’
Option to Purchase Additional
Common Units

Full Exercise of the
Underwriters’
Option to Purchase
Additional
Common Units

Distributions

Number
of Units

One
Quarter

Annualized

Number
of Units

One
Quarter

Annualized

Publicly held common units

Common units held by Azure Midstream Holdings

Subordinated units held by Azure Midstream Holdings

Total

Unaudited Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015

Set forth below is a table of unaudited estimated distributable cash flow for the twelve months ending December 31, 2015. The financial forecast presents, to the best of our knowledge and belief, the expected results of operations, Adjusted EBITDA and distributable cash flow for the forecast period.

Our financial forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending December 31, 2015. The assumptions discussed below under “—Assumptions and Considerations” are those we believe are significant to our financial forecast results, including the anticipated in-service dates of our growth projects. We believe our actual results of operations and cash flows will approximate those reflected in our financial forecast. However, we can give you no assurance that our forecast results will be achieved. There will likely be differences between our forecast and the actual results, and those differences could be material. If the forecast is not achieved, we may not be able to pay the cash distribution at the minimum quarterly distribution rate or at any rate on all our units. In order to fund distributions to our unitholders at the minimum quarterly distribution rate of $ per unit for the twelve months ending December 31, 2015, our distributable cash flow for the twelve months ending December 31, 2015, must be at least $ million.

We do not as a routine matter make public projections as to future operations, earnings, or other results. However, we have prepared the table of unaudited estimated distributable cash flow and related assumptions set forth below to substantiate our belief that we will have sufficient available cash to pay the minimum quarterly distribution to all our unitholders for each quarter in the twelve months ending December 31, 2015. This forecast is a forward-looking statement and should be read together with the historical and pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The accompanying prospective financial information was not prepared with a view toward complying with the guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in our view, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of our knowledge and belief, the expected course of action and the expected future financial performance. Please read below under “—Assumptions and Considerations” for further information regarding the assumptions we have made for the financial forecast. However, this information is not presented as fact and should not be relied upon as being necessarily indicative of future results. Readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information, and neither have any of them expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those which would enable us to generate the unaudited estimated distributable cash flow.

Actual payments of distributions on our common units and subordinated units are expected to be approximately $ million for the twelve months ending December 31, 2015. This equals the expected aggregate amount of cash distributions of approximately $ million per quarter for this period. Quarterly distributions will be paid within 45 days after the close of each quarter.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast to reflect events or circumstances after the date of this prospectus. You are cautioned not to place undue reliance on this information.

Azure Midstream Partners, LP

Unaudited Estimated Distributable Cash Flow


	Estimated
	Twelve Months Ending December 31, 2015
	(in thousands)
Total operating revenues	$	151,972

Operating expenses:
Cost of purchased gas and NGLs sold		19,057
Operating expenses		33,847
General and administrative		12,975
Depreciation and amortization		31,254

Total operating costs and expenses		97,133

Income from operations		54,839
Interest expense		826

Income before income taxes		54,013
Income tax expense		465

Net income		53,548
Net income attributable to non-controlling interest(1)		32,129

Net income attributable to Azure Midstream Partners, LP		21,419
Net income attributable to non-controlling interest(1)		32,129

Net income		53,548
Add:
Depreciation and amortization		31,254
Interest expense(2)		890
Income tax expense(3)		465
Deferred revenue(4)		6,371

Adjusted EBITDA(5)		92,528
Adjusted EBITDA attributable to non-controlling interest(1)		55,517

Adjusted EBITDA attributable to Azure Midstream Partners, LP		37,011
Deduct:
Cash paid for interest		890
Cash paid for income taxes(3)		186
Estimated maintenance capital expenditures(6)		3,442
Estimated growth capital expenditures(7)		6,908
Incremental general and administrative expenses(8)		3,000
Add:
Borrowings to fund growth capital expenditures(7)		6,908

Distributable cash flow attributable to Azure Midstream Partners, LP	$	29,493

Annualized minimum quarterly distributions:
Distributions to public common unitholders	$
Distributions to Azure:
Common units
Subordinated units

Total minimum annual cash distributions	$

Excess	$

(1)

Represents Azure Midstream Holdings’ 60% ownership of Azure Midstream Operating.

(2)

Pro forma interest expense for the twelve months ending December 31, 2015 has been calculated assuming average outstanding long-term debt of $4.3 million and an average interest rate of 3.75% under our new revolving credit facility. We have also assumed an annual commitment fee of 0.50% on the unused portion of the revolving credit facility.

(3)

Represents the Texas margin tax, which is classified as income tax for reporting purposes. The amount deducted for distributable cash flow purposes represents cash paid for income taxes attributable to our 40% interest in Azure Midstream Operating.

(4)

deficiency payment to us may be credited against future volumes supplied by the customer in excess of the annual MRC. We record the cash receipts associated with the deficiency payments as deferred revenue because the customer is entitled to utilize the deficiency payment to offset future volumes supplied in excess of the annual MRC over the term of the contract. We include a proportional amount of the expected MRC and MVC cash receipts in each quarter in respect of the annual period for which we actually receive the payment to ensure our Adjusted EBITDA reflects the amount of cash we are entitled to receive on an annual basis under these MRC and MVC agreements. For a discussion of adjustments related to deferred revenue associated with our minimum revenue commitments, please read “Our Cash Distribution Policy and Restrictions on Distributions—Unaudited Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015.”

(5)

Adjusted EBITDA is defined as EBITDA, plus (1) non-cash expenses, (2) adjustments related to deferred revenue and cash receipts under our MRC and MVC producer commitments and (3) adjustments associated with certain other items. We define distributable cash flow as Adjusted EBITDA less interest and income taxes paid and maintenance capital expenditures.

(6)

Represents estimated maintenance capital expenditures attributable to our 40% interest in Azure Midstream Operating. For purposes of determining our pro forma distributable cash for the twelve months ending December 31, 2015, we have assumed that Azure Midstream Operating has paid maintenance capital expenditures from operating cash flow. On an aggregate basis, Azure Midstream Operating’s total maintenance capital expenditures are estimated to be $8.6 million for the twelve months ending December 31, 2015. Our proportionate share of the $8.6 million are estimated to be approximately $3.4 million. Our partnership agreement requires that we subtract from operating surplus each quarter the capital contribution we estimate we will need to make to Azure Midstream Operating to fund our portion of the maintenance capital necessary to maintain our operating capacity. Following the closing of this offering, we expect that Azure Midstream Operating will continue to fund maintenance capital expenditures through operating cash flow, and we and Azure Midstream Holdings will each bear our respective share of such maintenance capital expenditures based on our respective interests in Azure Midstream Operating. For a further discussion of maintenance capital expenditures, please read “—Assumptions and Considerations—Costs and Expenses—Capital Expenditures.”

(7)

Represents estimated growth capital expenditures attributable to our 40% interest in Azure Midstream Operating. Initially, we intend to fund these expenditures with borrowings under our revolving credit facility. Following the closing of this offering, we and Azure Midstream Holdings will each have the right to contribute capital to fund our respective share of Azure Midstream Operating’s growth capital expenditures based on our respective interest in Azure Midstream Operating. For the purposes of this forecast, we have assumed that Azure Midstream Holdings will fund its 60% share of growth capital expenditures during the forecast period. If Azure Midstream Holdings elects not to fund any such growth capital expenditures, we will have the opportunity to fund all or a portion of Azure Midstream Holdings’ proportionate share of such growth capital expenditures in exchange for additional interests in Azure Midstream Operating. For a further discussion of growth capital expenditures, please read “—Assumptions and Considerations—Costs and Expenses—Capital Expenditures.”

(8)

We expect to incur incremental general and administrative costs of approximately $3.0 million as a result of being a publicly-traded partnership.

Assumptions and Considerations

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending December 31, 2015. While the assumptions discussed below are not all-inclusive, they include those that we believe are material to our forecasted results of operations, and any assumptions not discussed below we deemed not to be material. We believe we have a reasonable, objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast, and our actual results and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate or at all.

General Assumptions and Considerations

•

Historically, the fixed-fee services provided to our top two customers, EXCO and BG, and their affiliates have accounted for a significant portion of our total throughput and revenues. We expect that production from EXCO and BG on our gathering systems will continue to represent a significant portion of total throughput volumes and revenues in the forecast period. For the twelve months ending December 31, 2015, we expect that EXCO and BG will each individually account for approximately 34% of our natural gas throughput, approximately 33% of our total revenue and approximately 41% of our total transportation, gathering, compression and treating revenues across all three of our systems. The average volumes received from EXCO and BG during the forecast period are estimated to be below the annually adjusted minimum volume commitment of 584 MMcf/d allocated to the Holly and Center systems, mitigating sensitivity to further reductions in EXCO and BG drilling projections during the forecast period.

•

Actual throughput volume is the primary factor that will influence the difference in the amount of distributable cash flow for the twelve months ending December 31, 2015 as compared to our forecast. Our estimates do not assume any incremental revenue, expenses or other costs associated with potential future acquisitions. If all other assumptions are held constant, a 10.0% reduction in throughput volumes below forecasted levels would result in a $2.0 million decline in distributable cash flow. A substantial portion of our distributable cash flow is underpinned by long-term minimum volume commitments from EXCO and BG and minimum revenue commitments from another customer. These commitments comprise 63% of our estimated total operating revenue and 78% of our total transportation, gathering, compression and treating revenues for the twelve months ending December 31, 2015.

•

Because we expect to generate substantially all of our revenues pursuant to long-term contracts that include fixed-fee rates and fixed-spread rates, annual rate escalators and minimum volume commitments, assumptions pertaining to future commodity price levels do not have a material direct impact on the forecast period.

•

For the year ending December 31, 2015, we have assumed $122.8 million of our total revenue will be generated from transportation, gathering, compression and treating fees. The remaining $29.2 million in total operating revenue in the forecast period is associated with natural gas and NGL sales that are partially offset by $19.1 million in associated natural gas and NGL purchases.

Volumes

We estimate that our average throughput volumes will be 0.8 Bcf/d of natural gas for the twelve months ending December 31, 2015, compared to 1.0 Bcf/d for the twelve months ended September 30, 2014 and 1.2 Bcf/d for the year ended December 31, 2013. The expected decrease in average throughput volumes of 0.2 Bcf/d, or 20%, compared to the twelve months ended September 30, 2014 and the expected decrease in average throughput volumes of 0.4 Bcf/d, or 33%, compared to the year ended December 31, 2013 is primarily attributable to decreased drilling activity by our customers EXCO and BG. We had 68 new well connects for the year ended December 31, 2013 compared to 41 new well connects for the twelve months ended September 30, 2014 and 28 new well connects expected during the twelve months ending December 31, 2015. The minimum volume commitments and minimum revenue commitments provide that we will receive a certain amount of cash from our customers even during these times of lower production.

Revenues

We estimate that our total revenues for the twelve months ending December 31, 2015 will be $152.0 million, as compared to $183.0 million for the twelve months ended September 30, 2014 and $219.7 million for the year ended December 31, 2013. The expected decrease in total revenues of $31.0 million, or 17%, compared to the twelve months ended September 30, 2014 and decrease in total revenues of $67.7 million, or 31%,

compared to the year ended December 31, 2013 is driven by lower producer volumes from customers EXCO and BG as a result of reduced levels of drilling activity. The decrease of $36.7 million, or 17%, in total revenue for the twelve months ended September 30, 2014 compared to the year ended December 31, 2013 is also a result of lower producer volumes due to reduced levels of drilling activity.

We estimate that our total transportation, gathering, compression and treating revenues will be $122.8 million for the twelve months ending December 31, 2015 as compared to $132.4 million for the twelve months ended September 30, 2014 and $184.8 million for the year ended December 31, 2013. The expected decrease in transportation, gathering, compression and treating revenue of $9.6 million, or 7%, compared to the twelve months ended September 30, 2014 and decrease in transportation, gathering, compression and treating revenue of $62.0 million, or 34%, compared to the year ended December 31, 2013 is driven by lower producer volumes from customers EXCO and BG as a result of reduced levels of drilling activity. The decrease of $52.4 million, or 28%, in transportation, gathering, compression and treating revenues for the twelve months ended September 30, 2014 compared to the year ended December 31, 2013 is also a result of lower producer volumes due to reduced levels of drilling activity. During the twelve months ending December 31, 2015, we expect EXCO and BG to have lower production and reduced capital spending levels in the Haynesville, Bossier and Cotton Valley formation areas compared to the twelve months ended September 30, 2014 and the year ended December 31, 2013. However, based on the current price of natural gas, as well as the anticipated price of natural gas in the near future, we expect near-term future production and volumes to remain at current levels. Additionally, our minimum volume and minimum revenue commitments provide that we will receive a certain amount of cash from our customers even during these times of lower production.

We estimate that total natural gas sales and NGL sales revenues will be $29.2 million for the twelve months ending December 31, 2015 as compared to $48.8 million for the twelve months ended September 30, 2014 and $34.9 million for the year ended December 31, 2013. The expected decrease in natural gas sales and NGL sales revenues is due primarily to an estimated reduction in natural gas and NGL purchase and sales activities and the exclusion of short-term natural gas purchase contracts. During the twelve months ended September 30, 2014, we procured a contract to gather up to an additional 40 MMcf/d of throughput volumes on our Legacy system that contributed to the increase in cost of purchased natural gas and the resulting natural gas sales for the twelve months ended September 30, 2014 compared to the year ended December 31, 2013 and the twelve months ending December 31, 2015. Due to the short-term nature of the contract, we did not factor these volumes into our 2015 forecast, resulting in a reduction in natural gas sales for the period ending December 31, 2015.

The net margin earned from our natural gas and NGL purchase and sales activities encompasses the purchase of natural gas from our producers and sale to third party marketing, transportation and processing companies. The natural gas and NGLs purchase and sales activities margin is based upon fixed and variable components, with the variable component impacted by fluctuations in commodity prices, interruptible gas supply opportunities and physical operations. Due to the variable component of natural gas and NGLs purchase and sales activities, we take the lower end of the expected range when forecasting natural gas and NGLs sales activities, which reduces the forecast of natural gas sales and NGLs sales.

Sensitivity Analysis. The actual volume of natural gas that we gather on our systems will influence whether the amount of distributable cash flow for the twelve months ending December 31, 2015 is above or below our forecast. If the actual volume of natural gas we gather on our systems is below our forecast, we may not have sufficient cash available to pay the aggregate annualized minimum quarterly distribution to all of our unitholders for the forecast period. If the actual volume of natural gas we gather on our systems for the twelve months ending December 31, 2015 is 10% lower than our forecast, we would expect a corresponding reduction in our revenues of $7.0 million to $144.9 million. The reduction in revenue is expected to be partially offset by an increase in deferred revenue associated with our minimum volume and minimum revenue commitments, resulting in an expected reduction to distributable cash flow attributable to Azure Midstream Partners, LP of $2.0 million. Accordingly, we would expect to have sufficient cash from operations to pay 100% of both the aggregate annualized minimum quarterly distribution to holders of our common units and the aggregate annualized minimum quarterly distribution to the holders of our subordinated units.

Cost of purchased gas and NGLs sold

We estimate that our cost of purchased gas and NGLs sold for the twelve months ending December 31, 2015 will be $19.1 million, as compared to $37.5 million for the twelve months ended September 30, 2014 and $25.8 million for the year ended December 31, 2013. The expected decrease in cost of purchased gas and NGLs sold of $18.4 million, or 49%, compared to the twelve months ended September 30, 2014 and the expected decrease in cost of purchased gas and NGLs sold of $6.8 million, or 26%, compared to the year ended December 31, 2013 is due primarily to an estimated reduction in natural gas and NGL purchase and sales activities and the exclusion of short-term gas purchase contracts as discussed above.

Operating Expense

We estimate that operating expense for the twelve months ending December 31, 2015 will be $33.8 million, as compared to $35.5 million for the twelve months ended September 30, 2014 and $48.7 million for the year ended December 31, 2013. The expected decrease in operating expense of $1.7 million, or 5%, for the twelve months ended September 30, 2014 and the expected decrease in operating expense of $14.9 million, or 30%, for the year ended December 31, 2013 is primarily due to decreases as a result of management’s continuing focus on executing an effective asset optimization program including moving and consolidating compression facility locations, releasing under-utilized rental compression and treating equipment, and reduced treating costs. Other cost reductions were related to a reduction of underutilized contractors and other personnel, and creating generally more efficient operations since the Acquisition.

General and Administrative

We estimate that our general and administrative expense will be approximately $13.0 million (excluding $3.0 million of expenses as a result of being a publicly traded partnership) for the twelve months ending December 31, 2015, compared to general and administrative expenses of $13.3 million for the twelve months ended September 30, 2014 and $14.7 million for the year ended December 31, 2013. The expected decrease in general and administrative expense of $0.3 million, or 2%, for the twelve months ended September 30, 2014 and the expected decrease in general and administrative expense of $1.7 million, or 12%, compared to the year ended December 31, 2013 are driven by the reduction of transaction and transition costs associated with the Acquisition, partially offset by the increases in personnel expenses, business development and stand-alone information technology costs. In addition, in the forecast period we expect to incur an additional $3.0 million of estimated expenses as a result of being a publicly traded partnership, which are not reflected in the historical periods. For more information regarding the general and administrative expense allocation, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Evaluate our Business—Operating Expenses—General and Administrative Expenses.”

Asset Impairments

We do not expect to have any asset impairment expense for the twelve months ending December 31, 2015, as compared to $237.7 million for the twelve months ended September 30, 2014 and $238.1 million for the year ended December 31, 2013. The twelve months ended September 30, 2014 and the year ended December 31, 2013 both include an impairment charge of $237.0 million that was recognized by ETG prior to the Acquisition and is the result of adjusting the carrying value of the ETG assets to their net realizable fair value prior to the Acquisition. Additionally, the year ended December 31, 2013 included additional asset impairments of $1.1 million resulting from adjusting the net book value of assets held for sale in order to reflect their net realizable fair market value.

Depreciation and Amortization

We estimate that depreciation and amortization expense for the twelve months ending December 31, 2015 will be $31.3 million, compared to $29.1 million for the twelve months ended September 30, 2014 and $28.7 million for the year ended December 31, 2013. Estimated depreciation and amortization expense reflects

management’s estimates, which are based on consistent average depreciable asset lives and depreciation methodologies. The expected increase in depreciation and amortization expense of $2.2 million, or 8%, for the twelve months ended September 30, 2014 and $2.6 million, or 9%, for the year ended December 31, 2013, is primarily due to the amortization of our intangible assets resulting from our Acquisition and the increase in depreciation associated with increased maintenance capital expenditures.

Capital Expenditures

We estimate that total capital expenditures for the twelve months ending December 31, 2015 will be $25.9 million, compared to total capital expenditures of $23.8 million for the twelve months ended September 30, 2014 and $34.5 million for the year ended December 31, 2013. We will categorize our capital expenditures as either maintenance or growth capital expenditures. Our forecast estimate is based upon the following assumptions:

Maintenance Capital Expenditures

Historically, we have not made a distinction between maintenance and growth capital expenditures.

Our estimate that Azure Midstream Operating’s total maintenance capital expenditures will be approximately $8.6 million for the twelve months ending December 31, 2015 reflects our management’s judgment of the amount of capital that will be needed to maintain the current throughput across our systems and the current operating capacity of our assets for the long-term. Projected maintenance capital expenditures primarily consist of expenditures for well connections, gathering laterals, repairs, maintenance and asset integrity expenditures.

Historical total maintenance capital expenditures for the pro forma twelve months ended September 30, 2014 and for the pro forma twelve months ended December 31, 2013 primarily include the construction of well connections and gathering laterals to maintain operating income and operating capacity. Additionally, we constructed a $5.0 million salt water disposal facility located on our Legacy System during 2013. Beginning in 2014, we have incurred approximately $3.0 million in repairs, maintenance, and asset integrity maintenance capital expenses that were previously operating expenses. For the twelve months ending December 31, 2015, we estimate repairs, maintenance and asset integrity maintenance capital expenditures will comprise $3.4 million of the $8.6 million in total maintenance capital expenditures.

Growth Capital Expenditures

We estimate Azure Midstream Operating’s total growth capital expenditures will be $17.3 million for the twelve months ending December 31, 2015, of which $16.5 million relates to a compression project which will provide centralized compression on the Holly System, reducing line pressures to approximately 450 psig from 1,250 psig. The project is expected to be in service during the third quarter of 2015. The project is expected to provide incremental fee based revenue and a minimal increase in volumes from existing and incremental production due to a decrease in system line pressure.

For the pro forma twelve months ended September 30, 2014 and for the pro forma year ended December 31, 2013, total growth capital expenditures represented approximately 20% of capital spending. Approximately $6.0 million was spent on the construction of the new Fairway processing plant in our Center System. Fairway is a processing plant with processing capacity of 10 MMcf/d, which is designed to extract NGL content from natural gas ranging between 3.5 and 7.5 GPM, from the James Lime formation for liquids processing. Other growth capital expenditures included pipeline extensions and the installation of incremental gathering laterals to expand our gathering footprint and connect new production to our system.

Interest Expense and Related Charges

We estimate that total interest expense and related charges will be $0.9 million for the twelve months ending December 31, 2015, compared to $42.5 million for the twelve months ended September 30, 2014 and $40.3 million for the year ended December 31, 2013. In connection with the closing of the offering, we will enter into a new $150 million revolving credit facility. Initially, the new revolving credit facility will have zero outstanding borrowings, and will be used by us for working capital, capital contributions, certain acquisitions, distributions, unit repurchases and other general partnership purposes. Within the twelve months ending December 31, 2015, we have assumed that we funded our portion, $6.9 million, of Azure Midstream Operating’s total estimated growth capital expenditures of $17.3 million, with borrowings under the new revolving credit facility. We assumed these were the only borrowings under the new revolving credit facility during the twelve months ended December 31, 2015. We assumed average outstanding borrowings of $4.3 million, and we have assumed an interest rate of 3.75%, which is the applicable interest rate under the new revolving credit facility. We have also assumed an annual commitment fee of 0.50% on the unused portion of the revolving credit facility. The interest expense and related charges for the twelve months ended September 30, 2014 and the year ended December 31, 2013 are associated with outstanding borrowings under the Azure Energy credit agreement and have been calculated assuming average outstanding long-term debt of $540.8 million and $544.8 million, respectively, and an average interest rate of 6.5%.

Liquidity and Capital Resources

Capital and liquidity has historically been provided by our operating cash flow and we expect this will continue in the future. Additionally, other sources of liquidity will include borrowing capacity under the $150 million revolving credit facility we will enter into in connection with the offering and proceeds from the issuance of additional limited partner units. We expect the combination of these capital resources will be adequate to meet our short-term working capital requirements, long-term capital expenditures and expected quarterly cash distributions.

Regulatory, Industry and Economic Factors

Our forecast for the twelve months ending December 31, 2015 is based on the following significant assumptions related to regulatory, industry and economic factors:

•

There will not be any new federal, state or local regulation of the midstream energy sector, or any new interpretation of existing regulations, that will be materially adverse to our business.

•

There will not be any major adverse change in the midstream energy sector, commodity prices or in market, insurance or general economic conditions.

•

There will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our facilities or those of third parties on which we depend.

•

We will not make any acquisitions or other significant growth capital expenditures (other than as described above).

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending , 2015 we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the completion of the offering through , 2015 based on the actual length of that period.

Definition of Available Cash

Available cash, for any quarter, generally consists of all cash and cash equivalents on hand at the end of that quarter:

•

less, the amount of cash reserves established by our general partner to:

•

provide for the proper conduct of our business;

•

comply with applicable law, any of our debt instruments or other agreements or any other obligation; or

•

provide funds for distributions to our partners for any one or more of the next four quarters;

•

plus, if our general partner so determines, all or any portion of cash on hand immediately prior to the date of distribution of available cash for the quarter, including cash on hand resulting from working capital borrowings made after the end of the quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash received by us after the end of the quarter but on or before the date of distribution of available cash for that quarter, including cash on hand resulting from working capital borrowings made after the end of the quarter, to pay distributions to partners. Under our partnership agreement, working capital borrowings are borrowings that are made under a credit agreement, commercial paper facility or similar financing arrangement with the intent to repay such borrowings within twelve months from sources, and that are used solely for working capital purposes or to pay distributions to partners.

Intent to Distribute the Minimum Quarterly Distribution

Within 45 days after the end of each quarter, beginning with the quarter ending , 2015, we intend to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $ per unit, or $ on an annualized basis, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. The amount of distributions paid under our cash distribution policy and the decision to make any distribution will be determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

General Partner Interest and Incentive Distribution Rights

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.

Azure Midstream Holdings currently indirectly holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $ per unit per quarter. The maximum distribution of 50.0% does not include any distributions that Azure Midstream Holdings may receive on any limited partner units that it owns.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as being paid from either “operating surplus” or “capital surplus.” Our partnership agreement requires that we distribute available cash from operating surplus differently than available cash from capital surplus.

Operating Surplus

We define operating surplus as:

•

$ million (as described below); plus

•

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below) provided that cash receipts from the termination of a commodity hedge or interest rate hedge not related to the financing of a growth capital expenditure prior to its specified termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge related to the financing of a growth capital expenditure; plus

•

working capital borrowings made after the end of a period but on or before the date of determination of operating surplus for the period; plus

•

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued on the closing date of this offering, to finance all or a portion of growth capital expenditures in respect of the period from such financing until the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus

•

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the growth capital expenditures referred to above, in each case, in respect of the period from such financing until the earlier to occur of the date the capital asset is placed in service and the date that it is abandoned or disposed of; less

•

all of our operating expenditures (as defined below) after the closing of this offering; less

•

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

•

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less

•

any loss realized on disposition of an investment capital expenditure.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a basket of $ million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.

We define operating expenditures in our partnership agreement, which generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under interest rate hedge agreements or commodity hedge agreements (provided that (i) with respect to amounts paid in connection with the initial purchase of an interest rate hedge contract or a commodity hedge contract, such amounts will be amortized over the life of the applicable interest rate hedge contract or commodity hedge contract and (ii) payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract), officer compensation, repayment of working capital borrowings, debt service payments and maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:

•

repayment of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

•

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness, other than working capital borrowings;

•

growth capital expenditures;

•

actual maintenance capital expenditures (as discussed in further detail below);

•

investment capital expenditures;

•

payment of transaction expenses (including taxes) relating to interim capital transactions;

•

distributions to our partners (including distributions in respect of our incentive distribution rights);

•

repurchases of equity interests except to fund obligations under employee benefit plans; or

•

any other expenditures or payments using the proceeds of this offering that are described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

•

borrowings other than working capital borrowings;

•

sales of our equity and debt securities; and

•

sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets.

Characterization of Cash Distributions

Our partnership agreement requires that we treat all available cash distributed by us as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that

distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus includes a basket of $ million, and therefore does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, this provision will enable us, if we choose, to distribute as operating surplus up to that amount of cash we receive in the future from interim capital transactions that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures are cash expenditures that are made to maintain our asset base, operating capacity or operating income, or to maintain the existing useful life of any of our capital assets, in each case over the long term. Examples of maintenance capital expenditures are expenditures for the repair, refurbishment and replacement of our assets, to maintain equipment reliability, integrity and safety, and to address environmental laws and regulations. In addition, we may designate a portion of our maintenance capital expenditures to connect new wells to maintain throughput to the extent such capital expenditures are necessary to maintain, over the long term, our operating capacity or operating income. We capitalize the costs of major maintenance activities, or turnarounds, and depreciate the costs over the expected useful life of such maintenance cost. Expenditure levels will increase as pipelines age and require higher levels of inspection, maintenance and capital replacement.

Because our maintenance capital expenditures can be irregular, the amount of our actual maintenance capital expenditures may differ substantially from period to period, which could cause similar fluctuations in the amounts of operating surplus and adjusted operating surplus if we subtracted actual maintenance capital expenditures from operating surplus.

Our partnership agreement requires that an estimate of the average quarterly maintenance capital expenditures necessary to maintain our operating capacity over the long-term be subtracted from operating surplus each quarter as opposed to the actual amounts spent. The amount of estimated maintenance capital expenditures deducted from operating surplus for those periods will be subject to review and change by our general partner at least once a year. The estimate will be made at least annually and whenever an event occurs that is likely to result in a material adjustment to the amount of our maintenance capital expenditures, such as a major acquisition or the introduction of new governmental regulations that will impact our business. Our partnership agreement does not set a limit on the amount of maintenance capital expenditures that our general partner may estimate. For purposes of calculating operating surplus, any adjustment to this estimate will be prospective only. For a discussion of the amounts we have allocated toward estimated maintenance capital expenditures, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

The use of estimated maintenance capital expenditures in calculating operating surplus will have the following effects:

•

the amount of actual maintenance capital expenditures in any quarter will not directly reduce operating surplus but will instead be factored into the estimate of the average quarterly maintenance capital expenditures. This may result in the subordinated units converting into common units when the use of actual maintenance capital expenditures would result in lower operating surplus during the subordination period and potentially result in the tests for conversion of the subordinated units not being satisfied;

•

it may increase our ability to distribute as operating surplus cash we receive from non-operating sources; and

•

it may be more difficult for us to raise our distribution above the minimum quarterly distribution and pay incentive distributions on the incentive distribution rights held by our general partner.

plants, and new well connections, in each case to the extent such capital expenditures are expected to expand our operating capacity or operating income. In the future, if we make acquisitions that increase system throughput or capacity, the associated capital expenditures will also be considered growth capital expenditures.

Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor growth capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity or operating income, but which are not expected to expand, for more than the short term, our operating capacity or operating income.

As described below, neither investment capital expenditures nor growth capital expenditures are included in operating expenditures, and thus will not reduce operating surplus. Because growth capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, replacement or improvement of a capital asset in respect of a period that begins when we enter into a binding obligation to commence construction of a capital improvement and ending on the earlier to occur of the date any such capital asset commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized, and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes or growth capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or growth capital expenditures by our general partner.

Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $ per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient available cash from operating surplus to pay the minimum quarterly distribution on the common units.

Determination of Subordination Period

Azure Midstream Holdings will initially indirectly own all of our subordinated units. Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending , 2018 if each of the following has occurred:

•

distributions of available cash from operating surplus on each of the outstanding common and subordinated units equaled or exceeded the annualized minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

•

the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the annualized minimum quarterly distribution on all of the outstanding common and subordinated units during those periods on a fully-diluted weighted-average basis; and

•

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the subordinated units will convert into common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending , 2016 if each of the following has occurred:

•

distributions of available cash from operating surplus on each of the outstanding common and subordinated units exceeded $ (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;

•

the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of $ (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units during that period on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and

•

there are no arrearages in payment of the minimum quarterly distributions on the common units.

Conversion Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause, the subordinated units held by any person will immediately and automatically convert into a new class of common units on a one-for-one basis, provided (i) neither such person nor any of its affiliates voted any of its units in favor of the removal and (ii) such person is not an affiliate of the successor general partner.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods if not utilized to pay expenses. Adjusted operating surplus consists of:

•

operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet point under “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

•

any net increase in working capital borrowings with respect to that period; less

•

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

•

any net decrease in working capital borrowings with respect to that period; plus

•

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium; plus

•

any net decrease made in subsequent periods in cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.

Distributions of Available Cash From Operating Surplus During the Subordination Period

Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

•

first, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

•

second, to the subordinated unitholders, pro rata, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

•

thereafter, in the manner described in “—Incentive Distribution Rights” below.

Distributions of Available Cash From Operating Surplus After the Subordination Period

Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

•

first, to all common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter; and

•

thereafter, in the manner described in “—Incentive Distribution Rights” below.

General Partner Interest

Incentive Distribution Rights

Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently indirectly holds the incentive distribution rights, but may transfer these rights at any time.

If for any quarter:

•

we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

•

we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then our partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the unitholders and the holders of our incentive distribution rights in the following manner:

•

first, to all unitholders, pro rata, until each unitholder receives a total of $ per unit for that quarter (the “first target distribution”);

•

second, 85.0% to all common unitholders and subordinated unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $ per unit for that quarter (the “second target distribution”);

•

third, 75.0% to all common unitholders and subordinated unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $ per unit for that quarter (the “third target distribution”); and

•

thereafter, 50.0% to all common unitholders and subordinated unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.

Percentage Allocations of Available Cash From Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and Azure Midstream Holdings based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of Azure Midstream Holdings and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for our unitholders and Azure Midstream Holdings for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below assume Azure Midstream Holdings has not transferred its incentive distribution rights and there are no arrearages on common units.


		Marginal Percentage Interest in Distributions
	Total Quarterly Distribution per Unit Target Amount	Unitholders			Incentive Distribution Rights
Minimum Quarterly Distribution	$		100.0	%		—
First Target Distribution	above $ up to $		100.0	%		—
Second Target Distribution	above $ up to $		85.0	%		15.0	%
Third Target Distribution	above $ up to $		75.0	%		25.0	%
Thereafter	above $		50.0	%		50.0	%

Azure Midstream Holdings’ Right to Reset Incentive Distribution Levels

Azure Midstream Holdings, as the indirect holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments would be set. If Azure Midstream Holdings transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that Azure Midstream Holdings holds all of the incentive distribution rights at the time that a reset election is made. The right to reset the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our unitholders or the conflicts committee of Azure Midstream Holdings, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for the prior four consecutive fiscal quarters. The reset target distribution levels will be higher than the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following the reset event increase as described below. We anticipate that Azure Midstream Holdings would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made.

In connection with the resetting of the target distribution levels and the corresponding relinquishment by Azure Midstream Holdings of incentive distribution payments based on the target cash distributions prior to the reset, Azure Midstream Holdings will be entitled to receive a number of newly issued common units based on the formula described below that takes into account the “cash parity” value of the cash distributions related to the incentive distribution rights for the quarter prior to the reset event as compared to the cash distribution per common unit in such quarter.

The number of common units to be issued in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels would be equal to the quotient determined by dividing (x) the amount of cash distributions received in respect of the incentive distribution rights for the fiscal quarter ended immediately prior to the date of such reset election by (y) the amount of cash distributed per common unit with respect to such quarter. Azure Midstream Holdings would be entitled to receive distributions in respect of these common units in subsequent periods.

Following a reset election, a baseline minimum quarterly distribution amount will be calculated as an amount equal to the cash distribution amount per unit for the fiscal quarter immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would make distributions from operating surplus for each quarter thereafter as follows:

•

first, to all common unitholders, pro rata, until each unitholder receives an amount per unit equal to 115.0% of the reset minimum quarterly distribution for that quarter;

•

second, 85.0% to all unitholders, pro rata, and 15.0% to Azure Midstream Holdings, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

•

third, 75.0% to all unitholders, pro rata, and 25.0% to Azure Midstream Holdings, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

•

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to Azure Midstream Holdings

Because a reset election can only occur after the subordination period expires, the reset minimum quarterly distribution will have no significance except as a baseline for the target distribution levels.

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and Azure Midstream Holdings at various cash distribution levels (i) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (ii) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the fiscal quarter immediately preceding the reset election was $ .


	Quarterly Distribution per Unit Prior to Reset		Marginal Percentage Interest in Distributions
	Quarterly Distribution per Unit Prior to Reset		Unitholders			Incentive Distribution Rights			Quarterly Distribution Per Unit Following Hypothetical Reset
Minimum Quarterly Distribution	$			100.0	%		—		$	(1	)
First Target Distribution	above $	up to $		100.0	%		—			above $ (1) up to $ (2	)
Second Target Distribution	above $	up to $		85.0	%		15.0	%		above $ (2) up to $ (3	)
Third Target Distribution	above $	up to $		75.0	%		25.0	%		above $ (3) up to $ (4	)
Thereafter	above $			50.0	%		50.0	%		above $ (4	)

(1)

This amount is equal to the hypothetical reset minimum quarterly distribution.

(2)

This amount is 115.0% of the hypothetical reset minimum quarterly distribution.

(3)

This amount is 125.0% of the hypothetical reset minimum quarterly distribution.

(4)

This amount is 150.0% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and Azure Midstream Holdings, including in respect of incentive distribution rights, based on an amount distributed for the quarter immediately prior to the reset. The table assumes that immediately prior to the reset there would be common units outstanding and the average distribution to each common unit would be $ per quarter for the quarter prior to the reset.

Quarterly Distribution
Per Unit Prior to Reset

Cash
Distributions
to Common
Unitholders
Prior to Reset

Cash
Distributions
to the Holder
of Our
Incentive
Distribution
Rights Prior
to Reset

Total
Distributions

Minimum Quarterly Distribution

First Target Distribution

above $

up to $

—

Second Target Distribution

above $

up to $

—

Third Target Distribution

above $

up to $

—

Thereafter

above $

—

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the holder of our incentive distribution rights in respect of its incentive distribution rights, for the quarter immediately after the reset occurs. The table reflects that as a result of the reset there would be common units outstanding and the distribution to each common unit would be $ . The number of common units to be indirectly issued to Azure Midstream Holdings upon the reset was calculated by dividing (x) the amount received by Azure Midstream Holdings in respect of its incentive distribution rights for the quarter prior to the reset as shown in the table above, or $ , by (y) the cash distributed on each common unit for the quarter prior to the reset as shown in the table above, or $ .

Quarterly Distribution Per
Unit After Reset

Cash
Distributions
to Common
Unitholders

Cash Distributions to Holder of
Our Incentive Distribution
Rights After Reset

After Reset

Common
Units(1)

Incentive
Distribution
Rights

Total

Total
Distributions

Minimum Quarterly Distribution

First Target Distribution

above $

up to $

—

Second Target Distribution

above $

up to $

—

Third Target Distribution

above $

up to $

—

Thereafter

above $

—

(1)

Represents distributions in respect of the common units indirectly issued to Azure Midstream Holdings upon the reset.

The holder of our incentive distribution rights will be entitled to cause the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

Distributions From Capital Surplus

How Distributions From Capital Surplus Will Be Made

Our partnership agreement requires that we make distributions of available cash from capital surplus, if any, in the following manner:

•

first, to all common unitholders and subordinated unitholders, pro rata, until the minimum quarterly distribution is reduced to zero, as described below;

•

second, to the common unitholders, pro rata, until we distribute for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

•

thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.

Effect of a Distribution From Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the distribution of capital surplus to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for Azure Midstream Holdings to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we reduce the minimum quarterly distribution and target distribution levels to zero, all future distributions will be made such that 50.0% is paid to all unitholders, pro rata, and 50.0% is paid to the holder or holders of incentive distribution rights, pro rata.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our common units into fewer common units or subdivide our common units into a greater number of common units, our partnership agreement specifies that the following items will be proportionately adjusted:

•

the minimum quarterly distribution;

•

the target distribution levels;

•

the initial unit price, as described below under “—Distributions of Cash Upon Liquidation”;

•

the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units; and

•

the number of subordinated units.

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. Our partnership agreement provides that we do not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if as a result of a change in law or interpretation thereof, we or any of our subsidiaries are treated as an association taxable as a corporation or are otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding tax purposes, Azure Midstream Holdings may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (after deducting Azure Midstream Holdings’ estimate of our additional aggregate liability for the quarter for such income and withholdings taxes payable by reason of such change in law or interpretation) and the denominator of which is the sum of (x) available cash for that quarter, plus (y) Azure Midstream Holdings’ estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and the holders of the incentive distribution rights, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of units to a repayment of the initial value contributed by unitholders for their units in this offering, which we refer to as the “initial unit price” for each unit. The allocations of gain and loss upon liquidation are also intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the common unitholders to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of Azure Midstream Holdings

Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in the partnership agreement. If our liquidation occurs before the end of the subordination period, we will generally allocate any gain to the partners in the following manner:

•

first, to our general partner to the extent of certain prior losses specially allocated to our general partner;

•

second, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (i) the initial unit price; (ii) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (iii) any unpaid arrearages in payment of the minimum quarterly distribution;

•

third, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of: (i) the initial unit price; and (ii) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

•

fourth, to all unitholders, pro rata, until we allocate under this bullet an amount per unit equal to: (i) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (ii) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;

•

fifth, 85.0% to all unitholders, pro rata, and 15.0% to the holder of our incentive distribution rights, until we allocate under this paragraph an amount per unit equal to: (i) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (ii) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to Azure Midstream Holdings for each quarter of our existence;

•

sixth, 75.0% to all unitholders, pro rata, and 25.0% to the holder of our incentive distribution rights, until we allocate under this paragraph an amount per unit equal to: (i) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (ii) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to the holder of our incentive distribution rights for each quarter of our existence; and

•

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to the holder of our incentive distribution rights.

The percentage interests set forth above for Azure Midstream Holdings assume Azure Midstream Holdings has not transferred the incentive distribution rights.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (iii) of the second bullet point above and all of the third bullet point above will no longer be applicable.

We may make special allocations of gain among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our general partner and the unitholders in the following manner:

•

first, to holders of subordinated units in proportion to the positive balances in their capital accounts until the capital accounts of the subordinated unitholders have been reduced to zero;

•

second, to the holders of common units in proportion to the positive balances in their capital accounts, until the capital accounts of the common unitholders have been reduced to zero; and

•

thereafter, 100.0% to our general partner.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

We may make special allocations of loss among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Adjustments to Capital Accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for federal income tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the holder of our incentive distribution rights in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting

from the issuance of additional units or upon our liquidation in a manner that results, to the extent possible, in the partners’ capital account balances equaling the amount that they would have been if no earlier positive adjustments to the capital accounts had been made. By contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The selected historical consolidated financial data presented as of September 30, 2014 and for the nine-month period ended September 30, 2014 are derived from the unaudited historical condensed consolidated financial statements of Azure Midstream Holdings included elsewhere in this prospectus. The selected historical consolidated financial data presented for the nine-month period ended September 30, 2013 are derived from the unaudited historical condensed consolidated financial statements of the Azure Midstream Predecessor included elsewhere in this prospectus. The selected historical consolidated financial data presented as of December 31, 2013 and for the period from November 15, 2013 to December 31, 2013 are derived from the audited historical consolidated financial statements of Azure Midstream Holdings included elsewhere in this prospectus. The selected historical consolidated financial data presented as of December 31, 2012 and for the period from January 1, 2013 to November 14, 2013 and the year ended December 31, 2012 are derived from the audited historical consolidated financial statements of the Predecessor included elsewhere in this prospectus.

The selected unaudited pro forma consolidated financial data for the nine-month period ended September 30, 2014 and for the year ended December 31, 2013 have been derived from the unaudited pro forma consolidated financial statements of the partnership included elsewhere in this prospectus. The selected unaudited pro forma consolidated statement of operations data for the year ended December 31, 2013 include the pro forma effects of the TGGT and ETG acquisitions and the pro forma effects of the offering transaction described under the caption “Summary—Formation Transactions and Partnership Structure” as if the TGGT and ETG acquisitions and the offering transaction had occurred on January 1, 2013. The selected unaudited pro forma consolidated statement of operations data for the nine-month period ended September 30, 2014 include the pro forma effects of the offering transaction as if it had occurred on January 1, 2013. As part of the offering transaction, Azure Midstream Holdings will cause Azure Energy to be contributed to Azure Midstream Operating in exchange for all of the limited partner interests of Azure Midstream Operating. Azure Midstream Holdings will then contribute an approximate 40% limited partner interest in Azure Midstream Operating to the partnership.

For a detailed discussion of the following table, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table presents our selected historical and pro forma consolidated financial and operating data as of the dates and for the periods indicated and should also be read in conjunction with the historical audited and unaudited consolidated financial statements and related notes of Azure Midstream Holdings and the Predecessor included elsewhere in this prospectus. Among other things, those historical financial statements include more detailed information regarding the basis of presentation for the information below. For a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated in accordance with GAAP, please read “—Non-GAAP Financial Measures” below. We define distributable cash flow as Adjusted EBITDA less interest and income taxes paid and maintenance capital expenditures.


	Azure Midstream Holdings LLC			Predecessor				Azure Midstream Holdings LLC		Predecessor		Pro Forma Azure Midstream Partners, LP
	Period from November 15, 2013 to December 31, 2013			Period From January 1, 2013 to November 14, 2013		Year Ended December 31, 2012		Nine-Month Period Ended September 30, 2014		Nine-Month Period Ended September 30, 2013		Nine-Month Period Ended September 30, 2014		Year Ended December 31, 2013
	(in thousands, except for volumes)
Statement of Operations Data:
Total operating revenues	$	24,819		$	180,332	$	246,451	$	134,833	$	158,560	$	134,833	$	219,704
Operating expenses:
Cost of purchased gas and NGLs sold		4,505			21,054		22,794		30,095		18,239		30,095		25,812
Operating expense		5,455			33,850		48,586		23,685		28,993		23,685		48,693
General and administrative		458			11,166		17,514		10,760		9,820		10,760		14,719
Transaction costs		6,135			—		—		—		—		—		—
Asset impairments(1)		—			583		50,771		228		583		228		238,061
Depreciation and amortization		3,480			31,143		32,132		21,989		26,713		21,989		28,737

Total expenses		20,033			97,796		171,797		86,757		84,348		86,757		356,022

Income (loss) from operations		4,786			82,536		74,654		48,076		74,212		48,076		(136,318	)
Interest expense		5,046			10,321		16,145		31,145		9,331		31,145		40,304
Other expense		576			2,316		3,441		326		1,695		326		2,890
Income tax expense		106			361		425		423		317		423		509

Net income (loss) from continuing operations	$	(942	)	$	69,538	$	54,643	$	16,182	$	62,869	$	16,182	$	(180,021	)

Net (loss) income attributed to non-controlling interest													9,709		(108,013	)

Net (loss) income attributable to Azure Midstream Partners, LP(2)												$	6,473	$	(72,008	)

Net (loss) income per limited partner unit (basic and diluted):
Common Units												$		$
Subordinated Units												$		$
Balance Sheet Data (as of the period end):
Cash and cash equivalents	$	15,576				$	8,050	$	26,034			$	26,034
Property, plant and equipment—net		823,102					1,142,208		823,068				823,068
Total assets		1,080,340					1,201,634		1,074,563
Total debt		550,000					493,671		534,013
Members’ equity		499,058					678,608		515,240
Other Financial Data:
Adjusted EBITDA(3)	$	14,206		$	114,153	$	157,596	$	78,250	$	101,389	$	78,250	$	130,590
Adjusted EBITDA attributable to Azure Midstream Partners, LP(4)													31,300		52,236
Capital expenditures		5,326			29,208		191,001		16,363		27,604
Operating Data:
Average throughput volumes of natural gas (MMcf/d)		843			1,217		1,471		991		1,302

(1)

(2)

Calculated as 40% of net income (loss) from continuing operations.

(3)

(4)

Calculated as 40% of Adjusted EBITDA.

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for each of the periods indicated:


	Azure Midstream Holdings LLC			Predecessor				Azure Midstream Holdings LLC		Predecessor		Pro Forma Azure Midstream Partners, LP
	Period from November 15, 2013 to December 31, 2013			Period from January 1, 2013 to November 14, 2013		Year Ended December 31, 2012		Nine-Month Period Ended September 30, 2014		Nine-Month Period Ended September 30, 2013		Nine-Month Period Ended September 30, 2014		Year Ended December 31, 2013
	(in thousands)
Reconciliation of EBITDA and Adjusted EBITDA to Net Income (Loss)
Net Income (Loss)	$	(942	)	$	69,538	$	54,643	$	16,182	$	62,869	$	16,182	$	(180,021	)

Add:
Depreciation and amortization		3,480			31,143		32,132		21,989		26,713		21,989		28,737
Interest expense		5,046			10,321		16,145		31,145		9,331		31,145		40,304
Income tax expense		106			361		425		423		317		423		509

EBITDA	$	7,690		$	111,363	$	103,345	$	69,739	$	99,230	$	69,739	$	(110,471	)

Add:
Impairment of assets(1)		—			583		50,771		228		583		228		238,061
Deferred revenue(2)		684			—		—		4,621		—		4,621		684
Other adjustments(3)		5,832			2,207		3,480		3,662		1,576		3,662		2,316

Adjusted EBITDA	$	14,206		$	114,153	$	157,596	$	78,250	$	101,389	$	78,250	$	130,590

Adjusted EBITDA attributable to Azure Midstream Partners, LP(4)												$	31,300	$	52,236

(1)

(2)

(3)

(4)

Calculated as 40% of Adjusted EBITDA.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of financial condition and results of operations in conjunction with the historical and unaudited pro forma consolidated financial statements and related notes included elsewhere in this prospectus. Among other things, those financial statements and related notes include more detailed information regarding the basis of presentation for the following information. All references in this section to “we,” “our,” “us” or similar terms refer to Azure Midstream Partners, LP, including Azure Midstream Operating, when used in the present or future tense and refer to Azure Midstream Holdings and its subsidiaries, including Azure Energy, and the Predecessor and its subsidiaries when used in historical context.

Overview

We are a fee-based, growth-oriented Delaware limited partnership focused on owning, operating, developing and acquiring midstream energy infrastructure that is strategically located in core producing areas of unconventional resource basins in North America. We currently provide natural gas gathering, compression, treating and processing services in North Louisiana and East Texas in the prolific Haynesville and Bossier shale formations, the liquids-rich Cotton Valley formation and the shallower producing sands in the Travis Peak formation. According to the EIA, these formations comprise the third largest natural gas basin in the United States in terms of natural gas production.

Our business and operations are conducted through Azure Midstream Operating, a recently formed partnership between Azure Midstream Holdings and us. As of September 30, 2014, our gathering systems had approximately 1,365 miles of pipeline and during the nine-month period ended September 30, 2014, our systems gathered an average of approximately 991 MMcf/d of natural gas. At the consummation of this offering, our assets will consist of a 40% limited partner interest in Azure Midstream Operating, as well as the general partner interest in Azure Midstream Operating. Unless otherwise stated, financial results and operating data are shown on a 100% basis and are not adjusted for the 60% noncontrolling interest in Azure Midstream Operating.

How We Generate Our Revenue

During the nine-months ended September 30, 2014, we generated over 90% of our revenues under long-term, fixed-fee and fixed-spread natural gas gathering and sales agreements that are intended to mitigate our direct commodity price exposure and enhance the stability of our cash flows. Our customers include some of the largest natural gas producers in North America, such as BG, EXCO, BP plc, Chesapeake Energy Corporation, Devon Energy Corporation, Encana Corporation, EOG Resources, Inc. and EP Energy Corporation. Substantially all of our gas gathering revenue is underpinned by minimum volume commitments, minimum revenue commitments or acreage dedications, including life of lease arrangements. The contracted revenue under minimum volume and revenue commitments on our systems represented approximately 56.9% of our revenue for the nine months ended September 30, 2014. Our minimum volume and revenue commitments have original terms that range from five to ten years and, as of September 30, 2014, had a weighted average remaining term of 5.2 years. As of that date, our acreage dedications and life of lease arrangements with BG, BP plc and EXCO covered approximately 187,000 acres in the aggregate.

Additionally, we own and operate a gas processing facility and multiple treating facilities located in East Texas and North Louisiana. Our processing and treating assets service long-lived natural gas regions, including the Haynesville and Bossier shale formations. These gas basins also include multiple natural gas formations such as the James Lime and Cotton Valley formations. Our systems process or treat natural gas from the associated wells. Where applicable, we process the raw natural gas into residue gas by extracting NGLs and removing impurities and transport natural gas to interstate and transmission pipelines for delivery to customers. Our processing and treating systems have receipt points consisting primarily of individual well connections and, secondarily, central delivery points, which are linked to multiple wells. Our gathering systems interconnect with interstate and intrastate natural gas pipelines operated by eight independent pipeline operators. For our gas

processing and treating services, we receive additional fees, with gross receipts determined by the volume of gas that is processed or treated. Similar to our gathering agreements, we do not take direct commodity price risk thereby protecting our cash flow from commodity price volatility.

Other revenue producing activities include the sale of natural gas purchased from third parties, for which we take title, and the sale of natural gas condensate. Natural gas revenues are reported as a component of revenues within natural gas and NGL sales. Our natural gas sales are completed under contracts with limited commodity price exposure, and we report the natural gas and condensate revenues and the associated purchases and expenses on a gross basis within our statement of operations. The cost of natural gas purchased from third parties is reported as a component of operating costs and expenses.

Gas Gathering Agreements

We derive revenue primarily from long-term, fixed-fee gas gathering agreements (“GGAs”) with some of the largest and most active producers in our areas of operation. The following describes the material provisions included in certain of our significant gas gathering agreements described above, including our natural gas gathering agreement with BG and EXCO and our minimum revenue commitment gas gathering agreement.

BG and EXCO Minimum Volume Commitment

We have entered into gas gathering agreements with both BG and EXCO (collectively, the “BG/EXCO GGA”) pursuant to which BG and EXCO have jointly agreed to a minimum volume commitment (“MVC”) with respect to their collective production gathered by our Holly and Center systems, the material terms of which are discussed below. The minimum volume of natural gas required to be delivered to these systems is calculated on an annual basis based upon the daily average of such volumes delivered during the applicable contract year. While the MVC feature of the contract is set to terminate on December 1, 2018, the BG/EXCO GGA is a life of lease contract. Accordingly, BG and EXCO will not be obligated to deliver a minimum volume of natural gas from their production gathered by our Holly and Center systems after such date, although the production from BG and EXCO’s dedicated acreage in these fields will still be required to be delivered to our gathering systems.

The collective MVC is 600,000 MMbtu/d (584 MMcf/d) and the BG/EXCO GGA includes the following provisions:

•

to the extent throughput volumes exceed the MVC in the applicable contract year, the MVC in the following contract year will be reduced by an amount equal to 25% of these excess volumes. As of September 30, 2014, BG and EXCO have shipped an average of 628 MMcf/d since the inception of the agreement, which, if sustained through the end of the contract year, would reduce the MVC for the 2015 calendar year to 588,000 MMbtu/d (573 MMcf/d); and

•

to the extent that there is a shortfall of the annual MVC, then we will charge a flat fee per MMbtu times the shortfall amount, to be paid 50% by BG and 50% by EXCO. If BG and EXCO’s actual throughput volumes are less than their MVC for the applicable contract year, they must make a deficiency payment to us within three months after the end of that contract year.

We do not defer revenue associated with the BG/EXCO GGA because BG and EXCO are not entitled to utilize the deficiency payment to offset gathering fees in the following contract year. The MVC is subject to suspension in the event of a force majeure or a breach by us of the BG/EXCO GGA.

Minimum Revenue Commitment

We have also entered into a gas gathering agreement with a customer on our Center system that includes an annual minimum revenue commitment and a cumulative minimum revenue commitment (collectively, the “MRC”) through 2020. Pursuant to the terms of the contract, the MRC is calculated on an annual and cumulative

basis based on volumes of gas transported at agreed upon rates, subject to certain adjustments. The contract has a ten-year term expiring December 31, 2020, and continues year-to-year thereafter. Volumes supplied by the customer are currently less than the annual MRC requirement, and we are therefore entitled to a deficiency payment. As a result, the customer’s deficiency payments may be credited against future volumes supplied by the customer in excess of the annual MRC. We record the deficiency payments received as deferred revenue because the customer is entitled to utilize the deficiency payment to offset future volumes supplied in excess of the annual MRC over the term of the contract. We recognize the deferred revenue under this arrangement in revenue once all contingencies or potential performance obligations associated with the related deficiency volumes have either (i) been satisfied through the gathering of future excess volumes or (ii) expired (or lapsed) through the passage of time.

Our Operations

Our results are driven primarily by the volumes of natural gas that we gather, compress, treat and process across our systems. We contract with producers to gather natural gas from pad sites and central receipt points connected to our systems. These receipt points are connected to our gathering pipelines, through which we compress natural gas and deliver it to third-party processing plants or downstream pipelines for ultimate delivery to end users. We currently contract primarily all of our gathering services under long-term, fee-based gas gathering agreements, which limit our direct commodity price exposure. Under these agreements, we are paid a fixed-fee based on the volume and thermal content of the natural gas we gather. We also generate revenues under fixed-spread natural gas sales arrangements, whereby we purchase natural gas volumes that have been processed by our third-party processing facilities or treated by our own facilities at an index price less a fixed price, and we then sell these volumes at the same index price, plus or minus a fixed price differential, or a fixed-spread. As of September 30, 2014, we had long-term gas gathering and sales agreements with 72 gas producing customers in the Haynesville, Bossier, and Cotton Valley formations. These agreements provide us with a revenue stream that is not subject to direct commodity price risk.

We have indirect exposure to changes in commodity prices. Rising prices may cause our customers to increase drilling activity, and conversely falling prices may delay drilling or temporarily shut in production. Either scenario would impact the volumes of natural gas we gather. If our customers delay drilling or temporarily shut-in production due to falling commodity prices, our minimum volume and revenue commitments assure us that we will receive a certain amount of cash from our customers.

Our assets are in both liquids-rich and “dry” gas regions, and we believe that our gathering systems are well positioned to capture additional volumes from increased producer activity in these regions in the future due to our geographic footprint, available excess capacity and strong customer relationships. Please read “Business—Our Assets.” Dry gas regions contain natural gas reserves that are primarily comprised of methane, as compared to liquids-rich regions that contain NGLs in addition to methane.

How We Evaluate Our Operations

Our management uses a variety of financial and operational metrics to analyze our performance. We view these metrics as important factors in evaluating our profitability and review these measurements on at least a monthly basis for consistency and trend analysis. These metrics include (i) throughput volume, (ii) EBITDA and Adjusted EBITDA, (iii) distributable cash flow, (iv) operating expenses and (v) capital spending.

Throughput Volume

The volume of natural gas that we gather depends on the level of production from natural gas wells connected to our gathering systems. Aggregate production volumes are impacted by the overall amount of drilling and completion activity because production must be maintained or increased by new drilling or other activity as the production rate of a natural gas well declines over time. Producers’ willingness to engage in new drilling is determined by a number of factors, the most important of which are the prevailing and projected prices of natural gas and NGLs, the cost to drill and operate a well, the availability and cost of capital, and environmental and government regulations. We generally expect the level of drilling to positively correlate with long-term trends in commodity prices. Similarly, production levels nationally and regionally generally tend to positively correlate with drilling activity.

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

•

successful drilling activity within our dedicated acreage;

•

the level of work-overs and recompletions of wells on existing pad sites to which our gathering systems are connected;

•

the number of new pad sites in our dedicated acreage awaiting lateral connections;

•

our ability to compete for volumes from successful new wells in the areas in which we operate outside of our existing dedicated acreage;

•

our ability to utilize the remaining uncommitted capacity on, or add additional capacity to, our gathering systems;

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our ability to gather natural gas that has been released from commitments with our competitors; and

•

our ability to acquire or develop new systems with associated volumes and contracts.

We actively monitor producer activity in the areas served by our gathering systems to pursue new supply opportunities.

EBITDA and Adjusted EBITDA

We define EBITDA as net income (loss), plus (1) interest expense, (2) income tax expense and (3) depreciation and amortization expense. We define Adjusted EBITDA as EBITDA, plus (1) non-cash expenses, (2) adjustments related to deferred revenue and cash receipts under our MRCs and MVCs and (3) adjustments associated with certain other and non-cash items.

Distributable Cash Flow

Although we have not quantified distributable cash flow on a historical basis, after the closing of this offering we intend to use distributable cash flow, which we define as Adjusted EBITDA less cash paid for interest expense and maintenance capital expenditures, to analyze our performance. Distributable cash flow will not reflect changes in working capital balances, other than deferred revenues. Distributable cash flow is used as a supplemental financial measure by our management and by external users of our financial statements such as investors, commercial banks and research analysts, to assess the ability of our assets to generate cash sufficient to support our indebtedness and make future cash distributions to our unitholders, and the attractiveness of capital projects and acquisitions and the overall rates of return on our investment opportunities.

EBITDA, Adjusted EBITDA and distributable cash flow are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations. Because EBITDA, Adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our

definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Please read “Selected Historical and Pro Forma Financial and Operating Data—Non-GAAP Financial Measures.”

Operating Expenses

We seek to maximize the profitability of our operations in part by minimizing, to the extent appropriate, expenses directly tied to operating and maintaining our assets. Direct labor costs, repair and non-capitalized maintenance costs, integrity management costs, treating chemical costs, utilities and contract services are the most significant portion of our operating expenses. Other than utilities expense, these expenses are largely independent of volumes delivered through our gathering systems, but may fluctuate depending on the activities performed during a specific period.

Capital Spending

Our management seeks to effectively manage our maintenance capital expenditures, including turnaround costs. These capital expenditures relate to the maintenance and integrity of our pipelines and facilities. We capitalize the costs of major maintenance activities, or turnarounds, and depreciate the costs over the period until the next planned turnaround of the affected unit. Historically, we have not made a distinction between maintenance and growth capital expenditures. In the future, we will categorize maintenance capital expenditures as those that are made to maintain our asset base, operating capacity or operating income, or to maintain the existing useful life of any of our capital assets, in each case over the long term. Examples of maintenance capital expenditures are expenditures for the repair, refurbishment and replacement of our assets, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. In addition, we may designate a portion of our maintenance capital expenditures to connect new wells to maintain throughput to the extent such capital expenditures are necessary to maintain, over the long term, our operating capacity or operating income. We capitalize the costs of major maintenance activities, or turnarounds, and depreciate the costs over the expected useful life of such maintenance cost. Expenditure levels will increase as pipelines age and require higher levels of inspection, maintenance and capital replacement.

Growth capital expenditures are cash expenditures to construct new midstream infrastructure, including those expenditures incurred in order to extend the useful lives of our assets, reduce costs, increase revenues, or increase system throughput or capacity from current levels. Examples of growth capital expenditures include the construction, development or acquisition of additional gathering pipelines, compressor stations, processing plants, and new well connections, in each case to the extent such capital expenditures are expected to expand our operating capacity or operating income. In the future, if we make acquisitions that increase system throughput or capacity, the associated capital expenditures will also be considered growth capital expenditures.

Items Affecting Comparability of Our Financial Results

The historical financial results of Azure Midstream Holdings and the Predecessor discussed below may not be comparable to our future financial results for the reasons described below:

Growing Asset Base

The historical financial results of the Predecessor are those of TGGT prior to the Acquisition, and therefore include only a subset of our assets. Effective November 15, 2013, we completed the acquisition of ETG, and, as a result, the financial and operating data of Azure Midstream Holdings for the year ended December 31, 2013 includes only 45 days of results for ETG in addition to a full year of operating results for TGGT. Because Azure Midstream Holdings acquired the TGGT assets on November 15, 2013, the financial and operational data for 2013 discussed below are generally bifurcated between the period our Predecessor owned these assets and the period from our acquisition of those assets, as well as ETG, through the end of the year. We incurred acquisition-related costs of $6.1 million associated with the Acquisition, which have been included within transaction costs during the period from November 15, 2013 to December 31, 2013.

Ownership Structure

Prior to the Acquisition, our Predecessor operated approximately 1,060 miles of gathering pipelines that transported natural gas from supply basins to major intrastate and interstate pipelines in the region. These gathering systems and treating facilities were operated primarily to provide midstream services to BG and EXCO to support their drilling and development programs, and our Predecessor’s management team did not pursue third-party volumes aggressively. As a result, our average daily throughput of 625, 125 and 234 MMcf/d on our Holly, Center and Legacy systems, respectively, is currently below our daily throughput capacity by 1,475, 768 and 266 MMcf/d for our Holly, Center and Legacy systems, respectively. We believe this excess capacity creates an opportunity for us to significantly increase volumes on our existing systems with minimal incremental capital expenditures, thereby giving us substantial operating leverage. We intend to increase throughput volumes on our existing pipeline systems by continuing to work with our existing customers to enhance our service offerings to maximize the value of their production and our economics. Additionally, we intend to increase throughput volumes and diversify our customer base over time by aggressively competing for contracted volumes with new customers as their existing contracts with other pipeline operators expire. We believe that our recently constructed pipeline systems allow us to offer producers in our basins customized services with greater flexibility than many of our competitors. In addition to our differentiated service offerings, we believe that the lower maintenance capital associated with our new pipeline systems, together with our available throughput capacity, allows us to offer more attractive economic terms to producers than competitors with older assets while achieving compelling margins from our services. Consequently, the historical financial results of Azure Midstream Holdings reflect, and our future financial results are expected to reflect, the implementation of a significantly different operating strategy.

Additionally, after the consummation of this offering, we will own a 40% interest in Azure Midstream Operating rather than the 100% ownership interest reflected as part of Azure Midstream Holdings, and our Predecessor’s historical financial results. We will control Azure Midstream Operating through our ownership of its general partner. Our unaudited pro forma financial statements consolidate, and our financial statements after the closing of this offering will consolidate, all of Azure Midstream Operating’s financial results with ours in accordance with GAAP. Consequently, our future consolidated financial statements will include Azure Midstream Operating as a consolidated subsidiary, and Azure Midstream Holdings’ 60% limited partner interest will be reflected as a non-controlling interest.

General and Administrative Expenses

In connection with the Acquisition, we incurred acquisition related costs of $6.1 million and these costs were expensed as incurred during the period from November 15, 2013 to December 31, 2013. Following the Acquisition, the respective employees of EXCO and BG continued as employees of their respective subsidiaries through December 31, 2013 under transition service agreements with Azure Midstream Holdings. EXCO and BG invoiced Azure Midstream Holdings for the payroll and benefits cost of the employees, as well as for information technology and treasury support services in accordance with the respective transition service agreements. Azure Midstream Holdings also entered into a transition services agreement with Tenaska Capital Management to assist with the transition of accounting services, natural gas flow management and other administrative functions through December 31, 2013. Azure Midstream Holdings recognized operating expenses and general and administrative expenses of $1.6 million and $1.9 million, respectively, during the period from November 15, 2013 to December 31, 2013 for such services under these agreements. We recorded our assets at fair value as of November 15, 2013 in connection with the Acquisition in accordance with GAAP. The fair value of our assets was less than our Predecessor’s book value of those assets, which had the effect of decreasing the depreciation expense associated with our assets subsequent to the Acquisition.

After the completion of this offering, we expect to incur approximately $3.0 million in incremental, annual general and administrative expenses as a result of becoming a publicly-traded partnership. These costs include fees associated with annual and quarterly reports to unitholders, tax returns, K-1 preparation and distribution, investor relations, registrar and transfer agent fees, incremental insurance costs, executive compensation, accounting, auditing, legal services and independent director compensation.

Financing

There are differences in the way we will finance our operations as compared to the way our Predecessor and Azure Midstream Holdings financed their respective operations. Historically, our Predecessor’s operations were financed as part of BG and EXCO’s midstream joint venture operations. In addition, our Predecessor largely relied on internally generated cash flows and capital contributions from BG and EXCO to satisfy its capital expenditure requirements.

Azure Midstream Holdings and Azure Energy entered into a term loan and revolving credit facility in connection with the Acquisition. As a result, interest expense and related charges associated with the period Azure Midstream Holdings owned our assets is not comparable to the period in which the Predecessor owned our assets.

In connection with the closing of this offering, we will enter into a new revolving credit facility. As a result, interest expense and related charges for the period following the closing of this offering is not comparable to the period in which the Predecessor owned our assets.

Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings under our new credit facility and the issuance of debt and equity securities, to fund our acquisitions and growth capital expenditures. Upon the completion of this offering, we intend to have no debt and an available borrowing capacity of $150 million under our new $150 million revolving credit facility.

General Trends and Outlook

We expect our business to continue to be affected by the following key factors. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.

Natural Gas and NGL Supply and Demand

Our gathering and processing operations are generally dependent upon natural gas production from our customer’s upstream activity in their areas of operation. The decline in natural gas prices as a result of significant new supplies of domestic natural gas production has caused a related decrease in dry natural gas drilling by many producers in the United States. Depressed natural gas prices could affect production rates over time and levels of investment by our customers in exploration for and development of new oil and natural gas reserves. In addition, there is a natural decline in production from existing wells that are connected to our gathering systems. We believe our long-term minimum volume commitment contracts substantially reduce our volumetric risk over that period of time. Although we expect our customers will continue to devote substantial resources to the development of the Haynesville and Bossier shale plays and the Cotton Valley formation, we have no control over this activity and our customers have the ability to reduce or curtail such development at their discretion.

Natural Gas Price Impact on Production Levels

Natural gas prices have a direct impact on dry natural gas drilling. Consequently, volatility in natural gas prices can affect producers’ capital programs, drilling activity and production levels. Recent trends in drilling and production levels in the Haynesville shale exemplify this direct relationship with natural gas prices. Natural gas production in the Haynesville shale steadily trended upward through 2011 peaking in 2012 at over 10 Bcf/d. However, as natural gas prices fell during 2012, producers reduced their drilling programs and natural gas production in the Haynesville shale steadily declined to approximately 7 Bcf/d by 2013. Over the same period, the average number of active rigs running in the Haynesville shale declined from 57 in 2012 to 40 in 2013. Natural gas prices again trended upward in 2013 into early 2014, and gas production levels stabilized at approximately 7 Bcf/d. We believe production has stabilized at this level, and production is likely to increase with a commensurate increase in natural gas prices.

Although natural gas prices have recently trended lower in the latter half of 2014 from nearly $5.00 per Mcf, the natural gas forward strip remains in contango, indicating natural gas prices are likely to rise over the short-term. We believe our core producers can earn acceptable rates of return above their costs of capital at natural gas prices slightly above $3.00 per Mcf. As a result, we believe overall production within our operating areas have stabilized and are likely to trend upward over the intermediate term. Spear & Associates, Inc. estimates the Haynesville shale will have 45 average active rigs in 2014 and 47 average active rigs in 2015, positively impacting natural gas production levels during those periods.

Additionally, we continue to see higher production out of the horizontal Cotton Valley near our Legacy system where a higher concentration of NGL-rich gas and crude oil is accelerating production. We are actively pursuing opportunities to capture volume from this higher growth production area.

Natural Gas Prices (Henry Hub), December 2010—September 2014 (U.S. $ per Mcf)

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Source: EIA

Natural Gas Forward Strip Prices (Henry Hub), Calendar 2014—Calendar 2018 (U.S. $ per Mcf)

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Source: Factset

Rising Operating Costs and Inflation

The current level of exploration, development and production activities across the United States has resulted in increased competition for personnel and equipment. This competition has caused, and we believe will continue to cause, increases in the prices we pay for labor, supplies and property, plant and equipment. An increase in the general level of prices in the economy could have a similar effect on the operating costs we incur. We attempt to recover increased costs from our customers, but there may be a delay in doing so or we may be unable to recover these costs. To the extent we are unable to procure necessary supplies or recover higher costs, our operating results will be negatively impacted.

Regulatory Compliance

The regulation of natural gas gathering and transportation activities by the Federal Energy Regulatory Commission (“FERC”) and other federal and state regulatory agencies, including the Department of Transportation (“DOT”), has a significant impact on our business. For example, the DOT’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”), has established pipeline integrity management programs that require more frequent inspections of pipeline facilities and other preventative measures, which may increase our compliance costs and increase the time it takes to obtain required permits. Additionally, increased regulation of natural gas producers, including regulation associated with hydraulic fracturing, could reduce regional supplies of natural gas and therefore throughput on our gathering systems. For more information see “Business—Regulation of Operations.”

Growth Opportunities

We acquired a significant portion of our midstream assets through our acquisition of TGGT, a joint venture formed in 2009 by two of our largest customers, BG and EXCO. At that time, TGGT operated approximately 1,060 miles of gathering pipelines that transported natural gas from supply basins to major intrastate and interstate pipelines in the region. Prior to the Acquisition, TGGT operated approximately 1,060 miles of gathering pipelines that transported natural gas from supply basins to major intrastate and interstate pipelines in the region. These gathering systems and treating facilities were operated primarily to provide midstream services to BG and EXCO to support their drilling and development programs. Consequently, TGGT’s management team did not pursue third-party volumes aggressively. As a result, our average daily throughput for the nine-month period ended September 30, 2014 of 625, 125 and 234 MMcf/d on our Holly, Center and Legacy systems, respectively, is currently below our daily throughput capacity by 1,475, 768 and 266 MMcf/d for our Holly, Center and Legacy systems, respectively. We believe this excess capacity creates an opportunity for us to significantly increase volumes on our existing systems with minimal incremental capital expenditures, thereby giving us substantial operating leverage.

We expect to acquire additional interests in Azure Midstream Operating over time. Through its participation in any increases to our cash distributions through the incentive distribution rights, as well as its substantial limited partner interest in us, Azure Midstream Holdings is positioned to directly benefit from growth in the volumes on our systems from our customers and acquisition of other midstream assets from Azure Midstream Holdings and third parties. However, Azure Midstream Holdings is under no obligation to offer us the opportunity to purchase any portion of its retained interest in Azure Midstream Operating.

Results of Our Operations

The following table and discussion presents Azure Midstream Holdings historical consolidated financial data and the historical financial data of our Predecessor for the periods indicated. We will refer to the period from November 15, 2013 to December 31, 2013 as the “2013 Holdings Period” and the period from January 1, 2013 to November 14, 2013 as the “2013 Predecessor Period.” The financial data for the periods in which our Predecessor owned our assets does not necessarily represent the results of operations that would have been achieved had we owned and operated these assets during the periods.

For a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated in accordance with GAAP, please read “Summary—Non-GAAP Financial Measures.” We define distributable cash flow as Adjusted EBITDA less interest and income taxes paid and maintenance capital expenditures.


	Azure Midstream Holdings LLC		Predecessor				Azure Midstream Holdings LLC		Predecessor
	Period from November 15, 2013 to December 31, 2013		Period from January 1, 2013 to November 14, 2013		Year Ended December 31, 2012		Nine-Month Period Ended September 30, 2014		Nine-Month Period Ended September 30, 2013
	(in thousands, except for volumes)
Statement of Operations Data:
Revenues:
Operating revenues—affiliates	$	16,389	$	135,665	$	198,243	$	78,741	$	125,014
Operating revenues—non-affiliates		8,430		44,667		48,208		56,092		33,546

Total operating revenues		24,819		180,332		246,451		134,833		158,560

Operating expenses:
Cost of purchased gas and NGLs sold		4,505		21,054		22,794		30,095		18,239
Operating expense		5,455		33,850		48,586		23,685		28,993
General and administrative		458		11,166		17,514		10,760		9,820
Transaction costs		6,135		—		—		—		—
Asset impairments		—		583		50,771		228		583
Depreciation and amortization		3,480		31,143		32,132		21,989		26,713

Total expenses		20,033		97,796		171,797		86,757		84,348

Income from operations

Azure Midstream Partners, LP S-1