The following discussion and analysis should be read in conjunction with the
financial statements and the summary of significant accounting policies and
notes included herein and in our most recent Annual Report on Form 10-K. The
following discussion contains "forward-looking statements" that reflect our
future plans, estimates, forecasts, guidance, beliefs and expected performance.
The "forward-looking statements" are dependent upon events, risks and
uncertainties that may be outside our control. Our actual results could differ
materially from those discussed in these "forward-looking statements." Please
read "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a publicly-traded limited partnership formed in 2005 focused on the
acquisition, development, ownership and operation of infrastructure critical to
the transition of energy supply to lower carbon sources. We own natural gas
gathering systems, pipelines and processing facilities in South Texas and
continue to pursue energy transition infrastructure opportunities. Our common
units are currently listed on the NYSE American under the symbol "SNMP."
On February 26, 2021, in connection with our management team's focus on
expanding our business strategy to focus on the ongoing energy transition in the
industries in which we operate, we changed our name to Evolve Transition
Infrastructure LP and our general partner changed its name to Evolve Transition
Infrastructure GP LLC.
Developments during the Quarter Ended June 30, 2021
Amended and Restated Executive Services Agreement for Realignment
On April 15, 2021, the Partnership and our general partner entered into that
certain Amended and Restated Executive Services Agreement for Realignment (the
"Amended Agreement") with Gerald F. Willinger, a current member of the Board,
and the Chief Executive Officer of our general partner. The Amended Agreement
amends and restates that certain Executive Services Agreement, dated August 2,
2019, by and between Mr. Willinger, our general partner and the Partnership. The
Amended Agreement is entered into in connection with the Partnership's
go-forward strategy to acquire, develop and own infrastructure critical to the
transition of energy supply to lower carbon sources.
Pursuant to the terms of the Amended Agreement, for a period from April 15, 2021
through December 31, 2021, Mr. Willinger will continue to serve in his role as
Chief Executive Officer of the General Partner and will cooperate with the Board
in connection with the Board's realignment and transition of his roles and
responsibilities to other members of the management team for our general partner
and the Partnership. The Amended Agreement includes a customary general release
of claims and certain covenants and agreements from Mr. Willinger related to
confidential information, cooperation following termination or expiration of the
Amended Agreement, non-solicitation of customers and non-competition.
ATM Program
On April 20, 2021 the Partnership entered into an ATM Sales Agreement (the
"Sales Agreement") with Virtu Americas LLC ("Virtu"). Pursuant to the to the
terms of the Sales Agreement, the Partnership may sell from time to time through
Virtu, as the Partnership's sales agent or principal, common units having an
aggregate offering price of up to $7,000,000 (the "ATM Units"). Sales of the ATM
Units can be made by any method permitted that is deemed an "at the market
offering" as defined in Rule 415 under the Securities Act of 1933. The
Partnership used the net proceeds from sales pursuant to the Sales Agreement,
after deducting offering expenses and Virtu's commissions, for general
partnership purposes, which included repaying a portion of the Partnership's
outstanding indebtedness and funding capital expenditures and working capital.
During the three months ended June 30, 2021, the Partnership sold 8,774,888 ATM
Units with an aggregate offering price of $0.7977, resulting in net proceeds to
the Partnership of approximately $6.9 million and aggregate compensation payable
to Virtu of approximately $0.1 million.
Gas Lift Agreement
On April 21, 2021, but effective January 1, 2021, Catarina Midstream, LLC, a
wholly-owned subsidiary of the Partnership, entered into a Gas Lift Agreement
(the "Gas Lift Agreement") with SN Catarina, LLC, a subsidiary of Mesquite.
Pursuant to the Gas Lift Agreement, (i) Catarina Midstream LLC will provide
certain gas lift services ancillary to Mesquite's oil and gas operations on the
Piloncillo Ranch in South Texas, and (ii) Mesquite will pay a per-Mcf gas lift
fee based on the volume of Catrina Midstream, LLC's compressed gas delivered to
Mesquite in connection with the provision of such gas lift services. The initial
term of the Gas Lift Agreement is one year and it will continue on a
year-to-year basis thereafter unless terminated by either party at least 60 days
prior to
26
the expiration of the initial term or any successive one-year term. Under the
terms of the Gas Lift Agreement, each of the parties provided general
representations and warranties and indemnification to the other party.
NYSE American Update
On April 29, 2021, the Partnership received notice (the "2021 Notice") from NYSE
American LLC ("NYSE American") that the Partnership was not in compliance with
the continued listing standards set forth in Section 1003(a)(ii) of the NYSE
American Company Guide (the "Company Guide"). That section applies if a listed
company has stockholders' equity of less than U.S. $4.0 million and has reported
losses from continuing operations and/or net losses in three of its four most
recent fiscal years. The Partnership can regain compliance under Section
1003(a)(ii) of the Company Guide, as well as under Section 1003(a)(i), as
previously disclosed, under the compliance plan approved by the NYSE American on
June 25, 2020, which granted the Partnership a plan period through October 3,
2021. The Partnership is not required to submit an additional plan to NYSE
American with respect to Section 1003(a)(ii). Receipt of the 2021 Notice does
not affect the Partnership's business, operations, financial or liquidity
condition, or reporting requirements with the SEC.
Palmetto Divestiture
On April 30, 2021, but effective March 1, 2021 (the "Palmetto Effective Time"),
SEP Holdings IV, LLC ("SEP IV"), a wholly-owned subsidiary of the Partnership
entered into a purchase agreement (the "Palmetto PSA") with Westhoff Palmetto LP
("Palmetto Buyer"), pursuant to which SEP IV sold to Palmetto Buyer specified
wellbores and other associated assets located in Gonzales and Dewitt Counties,
Texas (the "Palmetto Assets") for a base purchase price of approximately $11.5
million, which remains subject to customary post-closing adjustments (the
"Palmetto Divestiture"). Pursuant to the Palmetto PSA, other than a limited
amount of retained obligations, Palmetto Buyer has agreed to assume all
obligations relating to the Palmetto Assets that arose on or after the Palmetto
Effective Time. The Palmetto PSA contains customary representations and
warranties by SEP IV and Palmetto Buyer, and SEP IV and Palmetto Buyer have
agreed to customary indemnities relating to breaches of representations,
warranties and covenants and the payment of assumed and excluded obligations.
The Palmetto Divestiture closed simultaneously with the execution of the
Palmetto PSA.
Maverick Divestitures
On April 30, 2021, but effective March 1, 2021 (the "Maverick Effective Time"),
SEP IV entered into a purchase agreement (the "Maverick PSA") with Bayshore
Energy TX LLC ("Maverick Buyer"), pursuant to which SEP IV sold to Maverick
Buyer specified wellbores and other associated assets located in Zavala County,
Texas (the "Maverick 1 Assets") for a base purchase price of approximately $2.8
million, which remains subject to customary post-closing adjustments (the
"Maverick 1 Divestiture"). Pursuant to the Maverick PSA, other than a limited
amount of retained obligations, Maverick Buyer has agreed to assume all
obligations relating to the Maverick 1 Assets that arose on or after the
Maverick Effective Time. The Maverick PSA contains customary representations and
warranties by SEP IV and Maverick Buyer, and SEP IV and Maverick Buyer have
agreed to customary indemnities relating to breaches of representations,
warranties and covenants and the payment of assumed and excluded obligations.
The Maverick 1 Divestiture closed simultaneously with the execution of the
Maverick PSA.
On April 30, 2021, SEP IV entered into a letter agreement with Maverick Buyer
(the "Maverick Letter Agreement") pursuant to which SEP IV agreed to sell
additional other specified wellbores and other associated assets located in
Zavala and Dimmit Counties, Texas (the "Maverick 2 Assets") for a base purchase
price of approximately $1.4 million (the "Maverick 2 Divestiture"). The closing
of the Maverick 2 Divestiture was conditioned upon SEP IV obtaining certain
consents and complying with other preferential rights related to the Maverick 2
Assets. Following the entrance into the Maverick Letter Agreement, SEP IV
complied with the preferential rights and obtained multiple consents related to
the Maverick 2 Assets. SEP IV did not obtain one of the required consents and,
as a result, the Maverick 2 Assets subject to such consent were removed from the
Maverick 2 Assets included in the Maverick 2 Disposition (the "Updated Maverick
2 Assets") and the base purchase price was adjusted downward by approximately
$30,000.
On May 14, 2021, but effective as of the Maverick Effective Time, SEP IV and
Maverick Buyer entered into a purchase agreement (the "Maverick 2 PSA") pursuant
to which SEP IV sold to Maverick Buyer the Updated Maverick 2 Assets. Pursuant
to the Maverick 2 PSA, other than a limited amount of retained obligations,
Maverick Buyer agreed to assume all obligations and liabilities related to the
Updated Maverick 2 Assets that arose on or after the Maverick Effective Time.
The Maverick 2 PSA contains customary representations and warranties by SEP IV
and Maverick Buyer, and SEP IV and Maverick Buyer agreed to customary
indemnities relating to breaches of representations, warranties and covenants
and the payment of assumed and excluded obligations. The Maverick 2 Divestiture
closed simultaneously with the execution of the Maverick 2 PSA.
27
Levo Letter Agreement
On May 17, 2021, the Partnership entered into a letter agreement (the "Levo
Letter Agreement") with Nuvve Holding Corp. ("Nuvve Holding") and Stonepeak
Rocket Holdings LP ("Stonepeak Rocket"), relating to the proposed formation of a
joint venture, Levo Mobility LLC ("Levo" and such proposed joint venture, the
"Levo JV"). In connection with the Levo Letter Agreement, on May 17, 2021, Nuvve
Holding issued ten-year warrants to the Partnership as follows: (i) Series B
Warrants to purchase 20,000 shares of Nuvve Holding's common stock, at an
exercise price of $10.00 per share, which are fully vested upon issuance, (ii)
Series C warrants to purchase 10,000 shares of Nuvve Holding's common stock, at
an exercise price of $15.00 per share, which are vested as to 50% of the shares
upon issuance and vest as to the remaining 50% when Levo has entered into
contracts with third parties for $125 million in aggregate capital expenditures;
(iii) Series D warrants to purchase 10,000 shares of Nuvve Holding's common
stock, at an exercise price of $20.00 per share, which are vested as to 50% of
the shares upon issuance and vest as to the remaining 50% when Levo has entered
into contracts with third parties for $250 million in aggregate capital
expenditures; (iv) Series E warrants to purchase 10,000 shares of Nuvve
Holding's common stock, at an exercise price of $30.00 per share, which are
vested as to 50% of the shares upon issuance and vest as to the remaining 50%
when Levo has entered into contracts with third parties for $375 million in
aggregate capital expenditures; and (v) Series F warrants to purchase 100,000
shares of Nuvve Holding's common stock, at an exercise price of $40.00 per
share, which are vested as to 50% of the shares upon issuance and vest as to the
remaining 50% when Levo has entered into contracts with third parties for $500
million in aggregate capital expenditures (collectively the "Nuvve Holding
Warrants").
Settlement Agreement Termination
As previously disclosed, on June 6, 2020, we and our general partner, (A) each
entered into, (B) caused and approve the Partnership's wholly-owned subsidiaries
Catarina Midstream LLC ("Catarina Midstream") and Seco Pipeline, LLC ("Seco
Pipeline") entering into, and (C) approved Carnero JV entering into, in each
case, that certain Settlement Agreement (as amended by that certain Amendment
Agreement, dated as of June 14, 2020 our general partner, and TPL SouthTex
Processing Company LP. Also as previously disclosed, as of October 1, 2020, any
party to the Settlement Agreement could terminate the Settlement Agreement at
any time pursuant to its terms.
On June 24, 2021, the Partnership, the General Partner, Catarina Midstream and
Seco Pipeline received written notice from Mesquite, of Mesquite's intention to
terminate the Settlement Agreement (the "Settlement Agreement Termination
Notice"). The Settlement Agreement Termination Notice was delivered pursuant to
Section 5.1.2 and/or 5.1.3 of the Settlement Agreement and the termination was
effective as of the date of the notice.
How We Evaluate Our Operations
We evaluate our business on the basis of the following key measures:
? our throughput volumes on gathering systems upon acquiring those assets;
? our operating expenses; and
our Adjusted EBITDA, a non-GAAP financial measure (for a reconciliation of
? Adjusted EBITDA to the most comparable GAAP financial measure please read
"-Non-GAAP Financial Measures-Adjusted EBITDA").
Throughput Volumes
Our management analyzes our performance based on the aggregate amount of
throughput volumes on the gathering system. We must connect additional wells or
well pads within Mesquite's Catarina Asset, which is in Dimmit, La Salle and
Webb counties in Texas, in order to maintain or increase throughput volumes on
Western Catarina Midstream. Our success in connecting additional wells is
impacted by successful drilling activity by Mesquite on the acreage dedicated to
Western Catarina Midstream, our ability to secure volumes from Mesquite or third
parties from new wells drilled on non-dedicated acreage, our ability to attract
hydrocarbon volumes currently gathered by our competitors and our ability to
cost-effectively construct or acquire new infrastructure. Construction of the
Seco Pipeline was completed in August 2017, however, Mesquite does not currently
transport any volumes on the Seco Pipeline following termination of the Seco
Pipeline Transportation Agreement effective February 12, 2020. Future throughput
volumes on the pipeline are dependent on execution of a new transportation
agreement with Mesquite or execution of an agreement with a third party.
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Operating Expenses
Our management seeks to maximize Adjusted EBITDA, a non-GAAP financial measure,
in part by minimizing operating expenses. These expenses are or will be
comprised primarily of field operating costs (which generally consists of lease
operating expenses, labor, vehicles, supervision, transportation, minor
maintenance, tools and supplies expenses, among other items), compression
expense, ad valorem taxes and other operating costs, some of which will be
independent of our oil and natural gas production or the throughput volumes on
the midstream gathering system but fluctuate depending on the scale of our
operations during a specific period.
Non-GAAP Financial Measures-Adjusted EBITDA
To supplement our financial results and guidance presented in accordance with
GAAP, we use Adjusted EBITDA, a non-GAAP financial measure, in this Form 10-Q.
We believe that non-GAAP financial measures are helpful in understanding our
past financial performance and potential future results, particularly in light
of the effect of various transactions effected by us. We define Adjusted EBITDA
as net income (loss) adjusted by: (i) interest (income) expense, net, which
includes interest expense, interest expense net (gain) loss on interest rate
derivative contracts, and interest (income); (ii) income tax expense (benefit);
(iii) depreciation, depletion and amortization; (iv) asset impairments;
(v) accretion expense; (vi) (gain) loss on sale of assets; (vii) unit-based
compensation expense; (viii) unit-based asset management fees; (ix)
distributions in excess of equity earnings; (x) (gain) loss on mark-to-market
activities; (xi) commodity derivatives settled early; (xii) (gain) loss on
embedded derivatives; and (xiii) acquisition and divestiture costs.
Adjusted EBITDA is used as a quantitative standard by our management and by
external users of our financial statements such as investors, research analysts,
our lenders and others to assess: (i) the financial performance of our assets
without regard to financing methods, capital structure or historical cost basis;
(ii) the ability of our assets to generate cash sufficient to pay interest costs
and support our indebtedness; and (iii) our operating performance and return on
capital as compared to those of other companies in our industry, without regard
to financing or capital structure.
We believe that the presentation of Adjusted EBITDA provides useful information
to investors in assessing our financial condition and results of operations. The
GAAP measure most directly comparable to Adjusted EBITDA is net income (loss).
Our non-GAAP financial measure of Adjusted EBITDA should not be considered as an
alternative to GAAP net income (loss). Adjusted EBITDA has important limitations
as an analytical tool because it excludes some but not all items that affect net
income (loss). Adjusted EBITDA should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP. Because Adjusted
EBITDA may be defined differently by other companies in our industry, our
definition of Adjusted EBITDA may not be comparable to similarly titled measures
of other companies, thereby diminishing its utility.
The following table sets forth a reconciliation of Adjusted EBITDA to net loss,
its most directly comparable GAAP performance measure, for each of the periods
presented (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net loss $ (27,796) $ (22,617) $ (62,601) $ (63,958)
Adjusted by:
Interest expense, net 27,938 23,164 58,385 46,173
Income tax expense (benefit) 417 30 457 (43)
Depreciation, depletion and amortization 5,265 5,176 10,287 11,815
Asset impairments - - - 23,247
Accretion expense 114 88 189 278
Gain on sale of assets (334) - (334) -
Unit-based compensation expense 206 725 543 1,123
Unit-based asset management fees (1,800) 806 2,647 1,961
Distributions in excess of equity earnings 8,064 (1,507) 9,075 3,314
(Gain) loss on mark-to-market activities
(764) 2,197 (764) (2,276)
Adjusted EBITDA $ 11,310 $ 8,062 $ 17,884 $ 21,634
29
Significant Operational Factors
Throughput. The following table sets forth selected throughput data pertaining
to the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Western Catarina Midstream:
Oil (MBbl/d) 5.9 7.8 6.0 7.9
Natural gas (MMcf/d) 77.6 97.8 78.2 98.8
Water (MBbl/d) 1.5 3.9 2.0 3.4
Seco Pipeline:
Natural gas (MMcf/d) - - - 0.2
Subsequent Events
Credit Agreement Amendment
On July 28, 2021, the Partnership, as borrower, entered into that certain
Eleventh Amendment to the Credit Agreement with the guarantors party thereto,
Royal Bank of Canada, as administrative agent and the lenders party thereto (the
"Eleventh Amendment" and the Credit Agreement, as amended by the Eleventh
Amendment, the "Amended Credit Agreement"). Pursuant to the Eleventh Amendment,
the parties agreed to, among other things: (a) amend the definition of "Excluded
Cash" to include (i) cash and cash equivalents set aside by the Partnership for
the purposes of making a Levo JV Investment, (ii) cash and cash equivalents of
up to $1 million for the proceeds of the issuance or at-the-market sale of the
Partnership's equity interests, and (iii) cash and cash equivalents received by
the Partnership from Stonepeak Investors for the purposes of making a Levo JV
Investment, in each case, subject to prior or concurrent written notice to Royal
Bank of Canada, as administrative agent, of the amounts and the Partnership's
intention to use such amounts for purposes of making a Levo JV Investment in
accordance with the Amended Credit Agreement; and (b) expand the exemptions
under the Investments, Loans and Advances negative covenant to permit (i) the
payment or reimbursement by the Partnership of up to $350,000 in legal and due
diligence costs of Levo, (ii) any Levo JV Investment made by the Partnership
using cash or cash equivalent proceeds of a concurrent contribution of capital
to the Partnership from Stonepeak Investors, or (iii) additional Levo JV
Investments, capped at $1 million, made by the Partnership from the proceeds of
the issuance or at-the-market sale by the Partnership of any equity interests in
the Partnership.
Stonepeak Letter Agreement Election
On July 30, 2021, pursuant to the terms of the Stonepeak Letter Agreement, the
Partnership received written notice of Stonepeak Catarina's election to receive
distributions on the Class C Preferred Units for the quarter ended June 30,
2021, in common units. In accordance with the Stonepeak Letter Agreement, the
Partnership will issue 8,012,850 common units to Stonepeak Catarina on August
20, 2021 (the "Q221 Stonepeak Units").
Carnero JV Litigation
On July 30, 2021, the Carnero JV initiated suit against Mesquite and SN EF
UnSub, LP, Eagle Ford TX LP, Venado EF L.P., Mitsui E&P Texas LP (collectively,
the "WIP Defendants") in the 269th Judicial District Court of Harris County,
Texas (the "Carnero JV Litigation"). In the Carnero JV Litigation, the Carnero
JV seeks declarations from the Court regarding Mesquite's and the WIP
Defendants' respective obligations to deliver gas from the over 315,000 acres
located in the Western Eagle Ford on Mesquite's acreage in Dimmit, Webb, La
Salle, Zavala and Maverick counties, Texas (such acreage, collectively, the
"Comanche Asset") to the Carnero JV under the long-term firm gas gathering and
processing agreement between Mesquite and the Carnero JV, which was agreed to by
the WIP Defendants.
Warrant Amendment
As previously disclosed, the Partnership's Long-Term Incentive Plan, effective
March 6, 2015 (the "LTIP"), provides that upon the issuance of additional common
units from time to time, the maximum number of common units that may be
delivered or reserved for delivery with respect to the LTIP shall be
automatically increased (such increase, the "LTIP Increase") by a number of
common units equal to the lesser of (i) fifteen percent (15%) of such additional
common units, or (ii) such lesser number of common units as determined by the
Board. On August 2, 2021, the Board determined that the LTIP Increase with
respect to the Q221 Stonepeak Units will be fifteen percent (15%).
30
On August 2, 2021, the Partnership and Stonepeak Catarina entered into Amendment
No. 3 to the Warrant (the "Warrant Amendment") to exclude from the Warrant the
1,201,928 Common Units included in the LTIP Increase resulting from the issuance
of the Q221 Stonepeak Units.
Levo JV Completion
On August 4, 2021, the Partnership, Stonepeak Rocket and Nuvve Holding completed
the formation of Levo.
Levo JV LLC Agreement
In connection with the Levo JV, the Partnership, Stonepeak Rocket, Nuvve
Corporation ("Nuvve"), a wholly-owned subsidiary of Nuvve Holding, and Levo JV
entered into an Amended and Restated Limited Liability Company Agreement for
Levo (the "Levo LLC Agreement"). Pursuant to the Levo LLC Agreement, the
Partnership and Stonepeak Rocket plan to make capital contributions to Levo in
an aggregate amount of up to $750 million to finance Levo's business, with a
maximum of $75 million of such capital contributions being funded by the
Partnership.
The Levo LLC Agreement governs the affairs of Levo and the conduct of its
business. The membership interests authorized by the Levo LLC Agreement consist
of Class A Common Units, Class B Preferred Units, Class C Common Units and Class
D Incentive Units. On August 4, 2021 in connection with the signing of the Levo
LLC Agreement, Levo issued 2,800 Class B Preferred Units to Stonepeak Rocket, 1
Class B Preferred Unit to the Partnership, 441,000 Class C Common Units to
Stonepeak Rocket, 49,000 Class C Common Units to the Partnership and 510,000
Class A Common Units to Nuvve Holding. Stonepeak Rocket agreed to pay to Levo an
aggregate purchase price of $2,800,044.10 for its Class B Preferred Units and
Class C Common Units. The Partnership agreed to pay to Levo an aggregate
purchase price of $1,004.90 for its Class B Preferred Unit and Class C Common
Units. Stonepeak Rocket and the Partnership are able to receive additional Class
B Preferred Units in consideration for each $1,000 in additional capital
contributions made by them.
Levo JV Parent Letter Agreement
In connection with the Levo JV, the Partnership also entered into that certain
Parent Letter Agreement with Nuvve Holding, Stonepeak Rocket and Levo (the
"Parent Letter Agreement").
The Parent Letter Agreement includes, among other provisions, certain
restrictive covenants with respect to Levo's business, including a business
opportunities covenant applicable to Nuvve Holding that is identical to the one
in the Levo LLC Agreement described above, and a covenant granting Stonepeak
Rocket a right of first offer to participate in certain future financings of
Levo. In addition, Nuvve Holding agreed to reimburse each of Stonepeak Rocket
and the Partnership for a portion of their out-of-pocket expenses incurred in
connection with the due diligence, documentation and negotiation of the
agreements.
RBC Commitment Letter
On August 10, 2021, we entered into a letter agreement (the "Commitment Letter")
with Royal Bank of Canada ("RBC"). Pursuant to the terms of the Commitment
Letter, RBC has agreed to (a) purchase at par and assume the outstanding Term
Loan and Revolving Loan (each as defined in the Amended Credit Agreement) of the
other lenders party to the Amended Credit Agreement, (b) enter into an amendment
to the Amended Credit Agreement (the "Twelfth Amendment") to (i) extend the
maturity date under the Amended Credit Agreement to September 30, 2023,
(ii) provide for a term loan facility in an aggregate principal amount of up to
$65 million and a revolving credit facility in an aggregate principal amount of
$5 million (the "Amended Credit Facilities"), and (iii) effect certain other
amendments agreed to between us and RBC, and (c) provide the entire principal
amount of the Amended Credit Facilities.
Pursuant to the Commitment Letter, we agreed to, among other things, (a)
indemnify RBC, its affiliates and its and their directors, officers, employees,
advisors or agents in connection with, or as a result of, the Commitment Letter
or any other agreement or instrument contemplated therein, (b) reimburse RBC for
all reasonable and documented out-of-pocket fees and expenses (including
expenses of counsel to RBC and due diligence expenses) incurred by RBC in
connection with the transactions contemplated by the Commitment Letter, whether
or not the Twelfth Amendment becomes effective, and (c) deliver additional
credit support reasonably acceptable to RBC, as the administrative agent. With
respect to (c), one or more affiliates of our general partner may provide credit
support and RBC has agreed as to the sufficiency of such additional credit
support.
Completion of such definitive documentation and the closing of the transactions
contemplated by the Twelfth Amendment and the Amended Credit Facilities will be
subject to various closing conditions, some of which may be outside of our
control. The Commitment Letter terminates on the earlier to occur of September
30, 2021 and the closing date of the Twelfth Amendment. We expect definitive
documentation with respect to the Twelfth Amendment to be completed prior to
September 30, 2021.
31
Results of Operations
Three months ended June 30, 2021 compared to three months ended June 30, 2020
The following table sets forth the selected financial and operating data
pertaining to our continuing operations for the periods indicated (in
thousands):
Three Months Ended
June 30,
2021 2020 Variance
Revenues:
Gathering and transportation lease
revenues $ 9,142 $ 11,339 $ (2,197) (19)%
Total revenues 9,142 11,339 (2,197) (19)%
Expenses
Operating expenses
Transportation operating expenses 2,097 2,577 (480) (19)%
General and administrative expenses 2,574 4,512 (1,938) (43)%
Unit-based compensation expense 206 725 (519) (72)%
Depreciation and amortization 5,143 5,176 (33) (1)%
Accretion expense 96 88 8 9%
Total operating expenses 10,116 13,078 (2,962) (23)%
Other (income) expense
Interest expense, net 27,938 23,164 4,774 21%
Loss (earnings) from equity
investments 271 (3,897) 4,168 (107)%
Other income, net (801) (8) (793) 9913%
Total other expenses 27,408 19,259 8,149 42%
Total expenses 37,524 32,337 5,187 16%
Loss before income taxes (28,382) (20,998) (7,384) 35%
Income tax (benefit) expense (29) 39 (68) (174)%
Loss from continuing operations (28,353) (21,037) (7,316) 35%
Income (loss) from discontinued
operations 557 (1,580) 2,137 (135)%
Net loss $ (27,796) $ (22,617) $ (5,179) 23%
Gathering and transportation lease revenues. Gathering and transportation lease
revenues decreased approximately $2.2 million, or 19%, to approximately $9.1
million for the three months ended June 30, 2021, compared to approximately
$11.3 million for the same period in 2020. This decrease was primarily the
result of a decrease in overall volumes being transported through Western
Catarina Midstream under the Gathering Agreement.
Transportation operating expenses. Our transportation operating expenses
generally consist of equipment rentals, chemicals, treating, metering fees,
permit and regulatory fees, labor, minor maintenance, tools, supplies and
pipeline integrity management expenses and ad valorem taxes. Our transportation
operating expenses decreased by approximately $0.5 million, or 19%, to
approximately $2.1 million for the three months ended June 30, 2021 compared to
approximately $2.6 million for the same period in 2020. This decrease was due to
the nature of operating expenses being dependent on throughput.
Depreciation and amortization expense. Gathering and transportation assets are
stated at historical acquisition cost, net of any impairments, and are
depreciated using the straight-line method over the useful lives of the assets,
which range from five to 15 years for equipment and up to 36 years for gathering
facilities. Our depreciation and amortization expense was consistent for the
three months ended June 30, 2021, with only a 1% decrease compared to the same
period in 2020.
Earnings from equity investments. Earnings from equity investments decreased
approximately $4.2 million, or 107%, to a loss of approximately $0.3 million for
the three months ended June 30, 2021, compared to earnings of approximately $3.9
million for the same period in 2020. This decrease was primarily the result of
lower margins between the comparative periods.
General and administrative expenses. General and administrative expenses include
indirect costs billed by SP Holdings in connection with the Shared Services
Agreement, field office expenses, professional fees and other costs not directly
associated with field operations. General and administrative expenses decreased
by approximately $1.9 million, or 43%, to approximately $2.6 million for the
three months ended June 30, 2021 compared to approximately $4.5 million for the
same period in 2020. The decrease was primarily the result of a decrease in the
market-to-market impact to indirect costs billed in connection with the Shared
Services Agreement of approximately $2.7 million as a result of the decrease in
the market price of our common units during the period. This decrease was
partially offset by bad debt expenses of approximately $1.9 million. Additional
decreases in expense over the comparative periods are a result a reduction in
legal and professional services. Cash general and administrative expenses for
the three months ended June 30, 2021 was approximately $2.4 million compared to
approximately $3.7 million for the same period in 2020. The decrease in
32
cash general and administrative expenses was primarily the result of lower
professional fees when compared to the professional fees attributable to
negotiation of the Settlement Agreement and related agreements with Mesquite
during the three months ended June 30, 2020.
Unit-based compensation expense. Unit-based compensation expense decreased
approximately $0.5 million, or 72%, to approximately $0.2 million for the three
months ended June 30, 2021, compared to approximately $0.7 million for the same
period in 2020.
Interest expense, net. Interest expense consists of distributions on the Class C
Preferred Units, non-cash accretion of the discount on the Class C Preferred
Units, the non-cash change in fair value of the Warrant and cash interest
expense from borrowings under the Credit Agreement. Interest expense increased
approximately $4.8 million, or 21%, to approximately $27.9 million for the three
months ended June 30, 2021 compared to approximately $23.2 million for the same
period in 2020. This increase was the result of higher distributions on the
Class C Preferred Units and an increase in common unit price and junior
securities deemed outstanding causing the Warrant value to increase. Cash
interest expense for the three months ended June 30, 2021 was approximately $0.8
million compared to approximately $1.3 million for the same period in 2020. The
decrease in cash interest expense was primarily the result of the decrease in
the outstanding Credit Agreement debt balance between the periods.
Income tax expense. Income tax benefit was approximately $29.0 thousand for the
three months ended June 30, 2021, compared to an expense of approximately $39.0
thousand for the same period in 2020. The decrease in income tax expense
resulted from a decrease in taxable margin over the comparable periods.
Other income, net. Other income, net includes the mark-to-market impact of the
Nuvve Warrants as well as other expenses and income not associated with
operations of the Partnership. Other income, net for the three months ended June
30, 2021, was approximately $0.8 million compared to an insignificant of income
during the three months ended June 30, 2020. The primary income for the three
months ended June 30, 2021, relates to the mark-to-market impact of the Nuvve
Warrants which we received in May, 2021.
Results of Operations
Six months ended June 30, 2021 compared to six months ended June 30, 2020
The following table sets forth the selected financial and operating data
pertaining to our continuing operations for the periods indicated (in
thousands):
Six Months Ended
June 30,
2021 2020 Variance
Revenues:
Gathering and transportation sales $ - $ 785 $ (785) (100)%
Gathering and transportation lease
revenues
18,436 23,945 (5,509) (23)%
Total revenues 18,436 24,730 (6,294) (25)%
Expenses
Operating expenses
Transportation operating expenses 4,357 5,186 (829) (16)%
General and administrative expenses 9,507 8,287 1,220 15%
Unit-based compensation expense 543 1,123 (580) (52)%
Depreciation and amortization 10,287 10,319 (32) (0)%
Accretion expense 189 174 15 9%
Total operating expenses 24,883 25,089 (206) (1)%
Other (income) expense
Interest expense, net 58,385 46,173 12,212 26%
Earnings from equity investments (328) (2,695) 2,367 (88)%
Other income, net (801) (8) (793) 9913%
Total other expenses 57,256 43,470 13,786 32%
Total expenses 82,139 68,559 13,580 20%
Loss before income taxes (63,703) (43,829) (19,874) 45%
Income tax expense 3 97 (94) (97)%
Loss from continuing operations (63,706) (43,926) (19,780) 45%
Income (loss) from discontinued
operations 1,105 (20,032) 21,137 (106)%
Net loss $ (62,601) $ (63,958) $ 1,357 (2)%
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Gathering and transportation lease revenues. Gathering and transportation lease
revenues decreased approximately $5.5 million, or 23%, to approximately $18.4
million for the six months ended June 30, 2021, compared to approximately $23.9
million for the same period in 2020. This decrease was primarily the result of a
decrease in overall volumes being transported through Western Catarina Midstream
under the Gathering Agreement.
Transportation operating expenses. Our transportation operating expenses
generally consist of equipment rentals, chemicals, treating, metering fees,
permit and regulatory fees, labor, minor maintenance, tools, supplies and
pipeline integrity management expenses and ad valorem taxes. Our transportation
operating expenses decreased by approximately $0.8 million, or 16%, to
approximately $4.4 million for the six months ended June 30, 2021 compared to
approximately $5.2 million for the same period in 2020. This decrease was due to
the nature of operating expenses being dependent on throughput.
Depreciation and amortization expense. Gathering and transportation assets are
stated at historical acquisition cost, net of any impairments, and are
depreciated using the straight-line method over the useful lives of the assets,
which range from five to 15 years for equipment and up to 36 years for gathering
facilities. Our depreciation and amortization expense was consistent for the six
months ended June 30, 2021 compared to the same period in 2020.
Earnings from equity investments. Earnings from equity investments decreased
approximately $2.4 million, or 88%, to earnings of approximately $0.3 million
for the six months ended June 30, 2021, compared to earnings of approximately
$2.7 million for the same period in 2020. This decrease was primarily the result
of lower margins between the comparative periods.
General and administrative expenses. General and administrative expenses include
indirect costs billed by SP Holdings in connection with the Shared Services
Agreement, field office expenses, professional fees and other costs not directly
associated with field operations. General and administrative expenses increased
by approximately $1.2 million, or 15%, to approximately $9.5 million for the six
months ended June 30, 2021 compared to approximately $8.3 million for the same
period in 2020. The increase was primarily the result of bad debt expenses of
approximately $1.9 million partially offset by a reduction in legal and
professional services. Cash general and administrative expense for the six
months ended June 30, 2021 was approximately $4.9 million compared to
approximately $6.3 million for the same period in 2020. The decrease in cash
general and administrative expenses was primarily the result of lower
professional fees when compared to the professional fees attributable to
negotiation of the Settlement Agreement and related agreements with Mesquite
during the six months ended June 30, 2020.
Unit-based compensation expense. Unit-based compensation expense decreased
approximately $0.6 million, or 52%, to approximately $0.5 million for the six
months ended June 30, 2021, compared to approximately $1.1 million for the same
period in 2020.
Interest expense, net. Interest expense consists of distributions on the Class C
Preferred Units, non-cash accretion of the discount on the Class C Preferred
Units, the non-cash change in fair value of the Warrant and cash interest
expense from borrowings under the Credit Agreement. Interest expense increased
approximately $12.2 million, or 26%, to approximately $58.4 million for the six
months ended June 30, 2021 compared to approximately $46.2 million for the same
period in 2020. This increase was the result of higher distributions on the
Class C Preferred Units and an increase in common unit price and junior
securities deemed outstanding causing the Warrant value to increase. Cash
interest expense for the six months ended June 30, 2021 was approximately $1.6
million compared to approximately $3.1 million for the same period in 2020. The
decrease in cash interest expense was primarily the result of the decrease in
the outstanding Credit Agreement debt balance between the periods.
Income tax expense. Income tax expense was approximately $2.7 thousand for the
six months ended June 30, 2021, compared to an expense of approximately $97.1
thousand for the same period in 2020. The decrease in income tax expense
resulted from a decrease in taxable margin over the comparable periods.
Other income, net. Other income, net includes the mark-to-market impact of the
Nuvve Warrants as well as other expenses and income not associated with
operations of the Partnership. Other income, net for the six months ended June
30, 2021, was approximately $0.8 million compared to an insignificant of income
during the six months ended June 30, 2020. The primary income for the six months
ended June 30, 2021, relates to the mark-to-market impact of the Nuvve Warrants
which we received in May, 2021.
Liquidity and Capital Resources
As of June 30, 2021, we had approximately $5.5 million in cash and cash
equivalents and $8.0 million available for borrowing under the Credit Agreement,
as discussed further below.
During the three months ended June 30, 2021, we paid approximately $0.8 million
in cash for interest on borrowings under our Credit Agreement, of which
approximately $9.5 thousand was related to the fee on undrawn commitments.
During the six months ended
34
June 30, 2021, we paid approximately $1.6 million in cash for interest on
borrowings under our Credit Agreement, of which approximately $23.9 thousand was
related to the fee on undrawn commitments.
Our capital expenditures during the six months ended June 30, 2021 were funded
with cash on hand. In the future, capital and liquidity are anticipated to be
provided by operating cash flows, borrowings under our Credit Agreement and
proceeds from the issuance of additional debt, additional common units or other
limited partner interests. We expect that the combination of these capital
resources will be adequate to meet our short-term working capital requirements,
long-term capital expenditures program and quarterly cash distributions, if any.
However, there can be no assurance that operations and other capital resources
will provide cash in sufficient amounts to maintain our current debt level,
planned levels of capital expenditures, operating expenses or any cash
distributions that we may make to unitholders.
We expect that our future cash requirements relating to working capital,
maintenance capital expenditures and quarterly cash distributions, if any to our
partners will be funded from cash flows internally generated from our
operations. Our expansion capital expenditures will be funded by borrowings
under our Credit Agreement or from potential capital market transactions.
However, there can be no assurance that operations and other capital resources
will provide cash in sufficient amounts to maintain our current debt level,
planned levels of capital expenditures, operating expenses or any cash
distributions that we may make to unitholders.
Credit Agreement
The Credit Agreement provides a quarterly amortizing term loan of $155.0 million
(the "Term Loan") and a maximum revolving credit amount of $17.5 million, which
was reduced to the lesser of (i) $15.0 million through May 14, 2021 and (ii)
from and after May 15, 2021, the positive difference of the Borrowing Base minus
the aggregate outstanding principal amount of the Term Loan (the "Revolving
Loan"). The Term Loan and Revolving Loan both have a maturity date of September
30, 2021. Borrowings under the Credit Agreement are secured by various mortgages
of both midstream and upstream properties that we own as well as various
security and pledge agreements among us, certain of our subsidiaries and the
administrative agent.
The Credit Agreement is a current liability that matures on September 30, 2021.
We expect to refinance or extend the maturity of the Credit Agreement prior to
its maturity date. However, we may not be able to refinance or extend the
maturity of the Credit Agreement or, if we are able to refinance or extend the
maturity, we may not be able to do so with borrowing and debt issue costs,
terms, covenants, restrictions, commitment amount or a borrowing base favorable
to us.
Borrowings under the Credit Agreement are available for limited direct
investment in oil and natural gas properties, midstream properties,
acquisitions, and working capital and general business purposes. The Credit
Agreement has a sub-limit of up to $2.5 million which may be used for the
issuance of letters of credit. Pursuant to the Credit Agreement, the initial
aggregate commitment amount under the Term Loan is $155.0 million, subject to
quarterly $10.0 million principal and other mandatory prepayments. The borrowing
base is equal to the sum of the rolling four quarter EBITDA of our midstream
operations and the amount of distributions received from the Carnero JV
multiplied by 4.5 or a lower number dependent upon natural gas volumes flowing
through Western Catarina Midstream. Outstanding borrowings in excess of our
borrowing base must be repaid within 45 days. As of June 30, 2021, the borrowing
base under the Credit Agreement was $90.9 million and we had $72.0 million of
debt outstanding, consisting of $65.0 million under the Term Loan and $7.0
million under the Revolving Loan. We are required to make mandatory payments of
outstanding principal on the Term Loan of $10.0 million per fiscal quarter. The
maximum revolving credit amount is $15.0 million which left us with $8.0 million
in unused borrowing capacity at June 30, 2021. There were no letters of credit
outstanding under our Credit Agreement as of June 30, 2021.
At our election, interest for borrowings under the Credit Agreement are
determined by reference to (i) the London interbank offered rate ("LIBOR") plus
an applicable margin between 2.50% and 3.00% per annum based on net debt to
EBITDA or (ii) a domestic bank rate ("ABR") plus an applicable margin between
1.50% and 2.00% per annum based on net debt to EBITDA plus (iii) a commitment
fee of 0.500% per annum based on the unutilized maximum revolving credit.
Interest on the borrowings for ABR loans and the commitment fee are generally
payable quarterly. Interest on the borrowings for LIBOR loans are generally
payable at the applicable maturity date.
The Credit Agreement contains various covenants that limit, among other things,
our ability to incur certain indebtedness, grant certain liens, merge or
consolidate, sell all or substantially all of our assets, make certain loans,
acquisitions, capital expenditures and investments, and pay distributions.
In addition, we are required to maintain the following financial covenants:
? current assets to current liabilities excluding any current maturities of debt,
of at least 1.0 to 1.0 at all times; and
senior secured net debt to consolidated adjusted EBITDA for the last twelve
? months, as of the last day of any fiscal quarter, of not greater than 3.5 to
1.0.
35
The Credit Agreement also includes customary events of default, including events
of default relating to non-payment of principal, interest or fees, inaccuracy of
representations and warranties when made or when deemed made, violation of
covenants, cross-defaults, bankruptcy and insolvency events, certain unsatisfied
judgments, loan documents not being valid and a change in control. A change in
control is generally defined as the occurrence of one of the following events:
(i) our existing general partner ceases to be our sole general partner or (ii)
certain specified persons shall cease to own more than 50% of the equity
interests of our general partner or shall cease to control our general partner.
If an event of default occurs, the lenders will be able to accelerate the
maturity of the Credit Agreement and exercise other rights and remedies.
Our partnership agreement prohibits us from paying any distributions on our
common units until we have redeemed all of the Class C Preferred Units.
Following such redemption, the Credit Agreement further limits our ability to
pay distributions to unitholders.
The Partnership's inability to generate sufficient liquidity to meet future debt
obligations raises substantial doubt regarding our ability to continue as a
going concern. The Credit Agreement matures September 30, 2021 and our ability
to continue as a going concern is dependent upon our ability to either (i)
refinance or extend the maturity of the Credit Agreement, or (ii) obtain
adequate new debt or equity financing to repay the Credit Agreement in full at
maturity. As disclosed above under "-Subsequent Events," we have entered into
the Commitment Letter (as defined above) with RBC pursuant to which we expect to
enter into the Twelfth Amendment prior to the current September 30, 2021
maturity date. The Twelfth Amendment will extend the maturity date to September
30, 2023.
The Tenth Amendment contains a new covenant (the "Transaction Covenant"), which
provides that we must engage an Advisory Firm to advise us with respect to a
Qualifying Transaction. In accordance with the requirements of a Transaction
Covenant, we engaged an Advisory Firm as of March 31, 2021.As a result of such
engagement, the target closing date for a Qualifying Transaction must be no
later than August 31, 2021 and the net cash proceeds must be reasonably expected
to be greater than the full amount due under the Credit Agreement on the
maturity date. If we are unable to comply with the Transaction Covenant it will
be deemed an immediate event of default under the Credit Agreement, which could
cause all of our existing indebtedness to become immediately due and payable.
Please read "Item 1A. Risk Factors-Our Credit Agreement has substantial
prepayment requirements, other restrictions and financial covenants and requires
periodic borrowing base redeterminations."
At June 30, 2021, we were in compliance with the financial covenants contained
in the Credit Agreement. We monitor compliance on an ongoing basis. If we are
unable to remain in compliance with the financial covenants contained in our
Credit Agreement or maintain the required ratios discussed above, the lenders
could call an event of default and accelerate the outstanding debt under the
terms of the Credit Agreement, such that our outstanding debt could become then
due and payable. We may request waivers of compliance from the violated
financial covenants from the lenders, but there is no assurance that such
waivers would be granted.
As described in more detail under "-Subsequent Events" above, on July 28, 2021,
the Partnership, as borrower, entered into Eleventh Amendment.
Sources of Debt and Equity Financing
As of June 30, 2021, we had $7.0 million of debt outstanding under the Revolving
Loan, leaving us with $8.0 million in unused borrowing capacity. There were no
letters of credit outstanding under our Credit Agreement as of June 30, 2021.
Our Credit Agreement matures on September 30, 2021.
Operating Cash Flows
We had net cash flows provided by operating activities for the six months ended
June 30, 2021, of approximately $20.6 million, compared to net cash flows
provided by operating activities of approximately $17.4 million for the same
period in 2020.
Our operating cash flows are subject to many variables, the most significant of
which is the volume of oil and natural gas transported through our midstream
assets. Our future operating cash flows will depend on oil and natural gas
transported through our midstream assets.
Investing Activities
We had net cash flows provided by investing activities for the six months ended
June 30, 2021, of approximately $15.4 million, substantially all of which were
proceeds from the sale of oil and natural gas properties. Net cash flows used in
investing activities for the six months ended June 30, 2020, of approximately
$0.1, substantially all of which were related to midstream activities.
36
Financing Activities
Net cash flows used in financing activities was approximately $32.3 million for
the six months ended June 30, 2021. During the six months ended June 30, 2021,
we repaid borrowings of $39.0 million under our Credit Agreement.
Net cash flows used in financing activities was approximately $20.2 million for
the six months ended June 30, 2020. During the six months ended June 30, 2020,
we repaid borrowings of $22.0 million under our Credit Agreement and withdrew
$2.0 million under the Revolving Loan.
Going Concern
Our historical consolidated financial statements have been prepared under the
assumption that we will continue as a going concern. The report on our audited
consolidated financial statements for the year ended December 31, 2020, issued
by our independent registered public accounting firm and included in our Annual
Report on Form 10-K for the year ended December 31, 2020 ("2020 10-K"), includes
an explanatory paragraph referring to our inability to generate sufficient
liquidity to meet future debt obligations which raises substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is dependent upon our ability to either (i) refinance or extend the
maturity of the Credit Agreement, or (ii) obtain adequate new debt or equity
financing to repay the Credit Agreement in full at maturity. Our consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. The outcome of these matters cannot be predicted
with any certainty at this time and raise doubt that we will be able to continue
as a going concern. Our consolidated financial statements do not include any
adjustments to the amount and classification of assets and liabilities that may
be necessary should we be unable to continue as a going concern.
We have entered into the Commitment Letter with RBC pursuant to which we expect
to enter into the Twelfth Amendment prior to the current September 30, 2021
maturity date. The Twelfth Amendment will extend the maturity date to September
30, 2023.
Off-Balance Sheet Arrangements
As of June 30, 2021, we had no off-balance sheet arrangements with third
parties, and we maintain no debt obligations that contained provisions requiring
accelerated payment of the related obligations in the event of specified levels
of declines in credit ratings.
Credit Markets and Counterparty Risk
We actively monitor the credit exposure and risks associated with our
counterparties. Additionally, we continue to monitor global credit markets to
limit our potential exposure to credit risk where possible. Our primary credit
exposures result from the generation of substantially all of our midstream
revenues from a single customer, Mesquite.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of the financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
most significant estimates pertain to proved oil and natural gas reserves and
related cash flow estimates used in the calculation of depletion and impairment
of oil and natural gas properties, the fair value of commodity derivative
contracts and asset retirement obligations, accrued oil and natural gas revenues
and expenses and the allocation of general and administrative expenses. Actual
results could differ materially from those estimates.
As of June 30, 2021, there were no changes with regard to the critical
accounting policies disclosed in our 2020 10-K. The policies disclosed included
the accounting for oil and natural gas properties, oil and natural gas reserve
quantities, revenue recognition and hedging activities. Please read "Part I,
Item 1. Note 2 Basis of Presentation and Summary of Significant Accounting
Policies" to our condensed consolidated financial statements for a discussion of
additional accounting policies and estimates made by management.
New Accounting Pronouncements
See "Part I, Item 1. Note 2 Basis of Presentation and Summary of Significant
Accounting Policies" to our condensed consolidated financial statements included
in this report for information on new accounting pronouncements.
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