UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

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

For the transition period from to .

Commission File Number 001-33147

Evolve Transition Infrastructure LP

(Exact name of registrant as specified in its charter)


Delaware	11-3742489
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1360 Post Oak Blvd, Suite 2400 Houston, Texas	77056
(Address of Principal Executive Offices)	(Zip Code)

(713) 783-8000

(Registrant’s Telephone Number, Including Area Code)

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Units representing limited partner
interests	SNMP	NYSE American

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

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


Large accelerated filer ◻	Accelerated filer ◻	Non-accelerated filer ⌧	Smaller reporting company ☒	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. ◻

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

Common units outstanding as of August 12, 2021: approximately 78,723,515 common units.


		Page
PART I—Financial Information	7
Item 1.	Financial Statements	7
	Condensed Consolidated Statements of Operations (Unaudited)	7
	Condensed Consolidated Balance Sheets (Unaudited)	8
	Condensed Consolidated Statements of Cash Flows (Unaudited)	9
	Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited)	10
	Notes to Condensed Consolidated Financial Statements (Unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II—Other Information	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
Signatures	43

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

EVOLVE TRANSITION INFRASTRUCTURE LP and SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except unit data)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Revenues
Gathering and transportation sales	$	—	$	—	$	—	$	785
Gathering and transportation lease revenues		9,142		11,339		18,436		23,945
Total revenues		9,142		11,339		18,436		24,730
Expenses
Operating expenses
Transportation operating expenses		2,097		2,577		4,357		5,186
General and administrative expenses		2,574		4,512		9,507		8,287
Unit-based compensation expense		206		725		543		1,123
Depreciation and amortization		5,143		5,176		10,287		10,319
Accretion expense		96		88		189		174
Total operating expenses		10,116		13,078		24,883		25,089
Other (income) expense
Interest expense, net		27,938		23,164		58,385		46,173
Loss (earnings) from equity investments		271		(3,897)		(328)		(2,695)
Other income, net		(801)		(8)		(801)		(8)
Total other expenses		27,408		19,259		57,256		43,470
Total expenses		37,524		32,337		82,139		68,559
Loss before income taxes		(28,382)		(20,998)		(63,703)		(43,829)
Income tax expense (benefit)		(29)		39		3		97
Loss from continuing operations		(28,353)		(21,037)		(63,706)		(43,926)
Income (loss) from discontinued operations		557		(1,580)		1,105		(20,032)
Net loss	$	(27,796)	$	(22,617)	$	(62,601)	$	(63,958)
Loss from continuing operations per unit
Common units - Basic and Diluted	$	(0.42)	$	(1.09)	$	(1.20)	$	(2.30)
Loss from discontinued operations per unit
Common units - Basic and Diluted	$	0.01	$	(0.09)	$	0.02	$	(1.05)
Net loss per unit
Common units - Basic and Diluted	$	(0.41)	$	(1.18)	$	(1.18)	$	(3.35)
Weighted Average Units Outstanding
Common units - Basic and Diluted		66,913,613		19,220,593		52,994,963		19,113,498

See accompanying notes to condensed consolidated financial statements.

EVOLVE TRANSITION INFRASTRUCTURE LP and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except unit data)

(Unaudited)


	June 30,		December 31,
	2021		2020
ASSETS
Current assets
Cash and cash equivalents	$	5,465	$	1,718
Accounts receivable		3,370		5,259
Prepaid expenses		837		404
Fair value of warrants		764		—
Current assets from discontinued operations		380		1,602
Total current assets		10,816		8,983
Gathering and transportation assets, net		101,745		105,267
Intangible assets, net		125,058		131,786
Equity investments		78,249		89,635
Other non-current assets		107		25
Long-term assets from discontinued operations		—		18,082
Total assets	$	315,975	$	353,778

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable and accrued liabilities	$	2,980	$	4,079
Accounts payable and accrued liabilities - related entities		12,869		25,737
Royalties payable		359		359
Short-term debt, net of debt issuance costs		71,692		110,233
Class C Preferred Units		369,389		345,205
Current liabilities from discontinued operations		—		341
Total current liabilities		457,289		485,954
Other liabilities
Long term accrued liabilities - related entities		14,784		12,137
Asset retirement obligation		4,627		4,438
Other liabilities		8,061		1,766
Long-term liabilities from discontinued operations		—		3,027
Total other liabilities		27,472		21,368
Total liabilities		484,761		507,322
Commitments and contingencies (See Note 12)
Partners' deficit
Common units, 78,723,515 and 19,953,880 units issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		(168,786)		(153,544)
Total partners' deficit		(168,786)		(153,544)
Total liabilities and partners' capital	$	315,975	$	353,778

See accompanying notes to condensed consolidated financial statements.

EVOLVE TRANSITION INFRASTRUCTURE LP and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(62,601)	$	(63,958)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation, depletion and amortization		3,998		5,085
Amortization of debt issuance costs		491		366
Accretion of Class C discount		24,184		18,046
Class C distribution accrual		—		24,580
Asset impairments		—		23,247
Accretion expense		262		278
Distributions from equity investments		11,946		5,234
Equity earnings in affiliate		(328)		(2,695)
Bad debt expense		(1,926)		—
Gain on sale of assets		(334)		—
Mark-to-market on warrant		6,289		166
Net (gain) on commodity derivative contracts		—		(4,178)
Net cash settlements received on commodity derivative contracts		101		1,660
Gain on Nuvve Holding Warrants		(764)		—
Unit-based compensation		2,085		509
Amortization of intangible assets		6,728		6,730
Changes in Operating Assets and Liabilities:
Accounts receivable		2,914		(6,685)
Accounts receivable - related entities		—		6,719
Prepaid expenses		(242)		334
Other assets		54		(110)
Accounts payable and accrued liabilities		37,647		738
Accounts payable and accrued liabilities- related entities		(10,221)		1,308
Other long-term liabilities		354		—
Net cash provided by operating activities		20,637		17,374
Cash flows from investing activities:
Proceeds from sales of oil and natural gas properties		15,690		—
Development of oil and natural gas properties		—		5
Construction of gathering and transportation assets		(36)		(132)
Contributions to equity affiliates		(232)		—
Net cash provided by (used in) investing activities		15,422		(127)
Cash flows from financing activities:
Repayment of debt		(44,500)		(22,000)
Proceeds from issuance of debt		5,500		2,000
Issuance of common units		7,053		—
Payments for offering costs		(333)		—
Units tendered by employees for tax withholdings		—		(41)
Debt issuance costs		(32)		(109)
Net cash used in financing activities		(32,312)		(20,150)
Net decrease in cash and cash equivalents		3,747		(2,903)
Cash and cash equivalents, beginning of period		1,718		5,099
Cash and cash equivalents, end of period	$	5,465	$	2,196
Supplemental disclosures of cash flow information:
Cash paid during the period for income tax	$	139	$	—
Cash paid during the period for interest	$	1,646	$	3,055

See accompanying notes to condensed consolidated financial statements.

EVOLVE TRANSITION INFRASTRUCTURE LP and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Partners’ Capital

(In thousands, except unit data)

(Unaudited)


	Common Units			Total
	Units	Amount		Capital
Partners' Deficit, December 31, 2020	19,953,880	$	(153,544)	$	(153,544)
Unit-based compensation programs	1,511,138		1,879		1,879
Common units issued as Class C Preferred distributions	34,720,360		25,685		25,685
Net loss	—		(34,805)		(34,805)
Partners' Deficit, March 31, 2021	56,185,378		(160,785)		(160,785)
Unit-based compensation programs	—		206		206
Issuance of common units, net of offering costs of $0.3 million	8,774,888		6,720		6,720
Common units issued as Class C Preferred distributions	13,763,249		12,869		12,869
Net loss	—		(27,796)		(27,796)
Partners' Deficit, June 30, 2021	78,723,515	$	(168,786)	$	(168,786)


	Common Units			Total
	Units	Amount		Capital
Partners' Deficit, December 31, 2019	20,087,462	$	(35,800)	$	(35,800)
Unit-based compensation programs	(23,387)		243		243
Units tendered by SOG employees for tax withholdings	(88,819)		(31)		(31)
Net loss	—		(41,341)		(41,341)
Partners' Deficit, March 31, 2020	19,975,256		(76,929)		(76,929)
Unit-based compensation programs	(126)		266		266
Units tendered by SOG employees for tax withholdings	(19,867)		(11)		(11)
Net loss	—		(22,617)		(22,617)
Partners' Deficit, June 30, 2020	19,955,263	$	(99,291)	$	(99,291)

See accompanying notes to condensed consolidated financial statements.

EVOLVE TRANSITION INFRASTRUCTURE LP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND BUSINESS

Organization

We are a publicly-traded limited partnership formed in 2005 focused on the acquisition, development, and ownership 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.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Accounting policies used by us conform to accounting principles generally accepted in the United States of America (“GAAP”). The accompanying financial statements include the accounts of us and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 16, 2021.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not effective, will not have a material impact on our consolidated financial statements upon adoption.

In January 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-01 “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),” which clarifies the interaction among the accounting standards for equity securities, equity method investments and certain derivatives. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. Additionally, in November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which changed the effective date for certain issuers to annual and interim periods in fiscal years beginning after December 15, 2022, and earlier adoption is permitted. We are currently in the process of evaluating the impact of adoption of this guidance on our condensed consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Partnership’s financial position, results of operations and cash flows.

Liquidity and Going Concern

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 contingent 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. The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of substantial doubt as to the Partnership’s ability to continue as a going concern. If the Partnership cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.

As disclosed in Note 17 “Subsequent Events,” we have entered into the Commitment Letter (as defined in Note 17 “Subsequent Events”) 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.

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. The estimates that are particularly significant to our financial statements include estimates of our reserves of natural gas, NGLs and oil; future cash flows from oil and natural gas properties; depreciation, depletion and amortization; asset retirement obligations; certain revenues and operating expenses; fair values of derivatives; and fair values of assets and liabilities. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best judgment using the data available. Management evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from the estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

3. DISCONTINUED OPERATIONS

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 and we recorded a gain of approximately $0.2 million on the sale.

Maverick Divestiture

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 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.

Also 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.

We recorded a net gain of approximately $0.1 million related to the Maverick 1 Divestiture and Maverick 2 Divestiture.

Information related to the upstream oil and natural gas assets sold have been reflected in the condensed consolidated financial statements as discontinued operations. The following table presents the results of operations and the gain on disposal which has been included in discontinued operations (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Revenues
Natural gas sales	$	180	$	84	$	255	$	318
Oil sales		930		187		3,236		7,374
Natural gas liquid sales		47		70		182		101
Total revenues		1,157		341		3,673		7,793
Expenses
Operating expenses
Lease operating expenses		294		1,110		1,776		2,968
Production taxes		54		44		160		150
Gain on sale of assets		(334)		—		(334)		—
Depreciation, depletion and amortization		122		724		439		1,496
Asset impairments		—		—		—		23,247
Accretion expense		18		52		73		104
Total operating expenses		154		1,930		2,114		27,965
Income (loss) before income taxes		1,003		(1,589)		1,559		(20,172)
Income tax expense (benefit)		446		(9)		454		(140)
Income (loss) from discontinued operations	$	557	$	(1,580)	$	1,105	$	(20,032)

4. REVENUE RECOGNITION

Revenue from Contracts with Customers

We account for revenue from contracts with customers in accordance with ASC 606, “Revenue from Contracts with Customers.” The unit of account in ASC 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.

Disaggregation of Revenue

We recognized revenue of $9.1 million and $18.4 million for the three and six months ended June 30, 2021, respectively. We disaggregate revenue based on type of revenue and product type. In selecting the disaggregation categories, we considered a number of factors, including disclosures presented outside the financial statements, such as in our earnings release and investor presentations, information reviewed internally for evaluating performance, and other factors used by the Partnership or the users of its financial statements to evaluate performance or allocate resources. We have concluded that disaggregating revenue by type of revenue and product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The Firm Transportation Service Agreement, dated September 1, 2017, by and between Seco Pipeline, LLC and SN Catarina, LLC (the “Seco Pipeline Transportation Agreement”) is the only contract that we account for under ASC 606. The Seco Pipeline Transportation Agreement was terminated by Mesquite effective February 12, 2020. The Gathering Agreement is classified as an operating lease and is accounted for under ASC 842, “Leases” and is reported as gathering and transportation lease revenues in our condensed consolidated statements of operations.

We account for income from our unconsolidated equity method investments as earnings from equity investments in our condensed consolidated statements of operations. Earnings from these equity method investments are further discussed in Note 11 “Investments.”

Performance Obligations

Under that certain firm transportation service agreement with Mesquite, dated as of September 1, 2017 (the “Seco Pipeline Transportation Agreement”), we agreed to provide transportation services of certain quantities of natural gas from the receipt point to the delivery point. Each MMBtu of natural gas transported is distinct and the transportation services performed on each distinct molecule of product is substantially the same in nature. We applied the series guidance and treated these services as a single performance obligation satisfied over time using volumes delivered as the measure of progress. The Seco Pipeline Transportation Agreement required payment within 30 days following the calendar month of delivery.

The Seco Pipeline Transportation Agreement contained variable consideration in the form of volume variability. As the distinct goods or services (rather than the series) are considered for the purpose of allocating variable consideration, we have taken the optional exception under ASC 606 which is available only for wholly unsatisfied performance obligations for which the criteria in ASC 606 have been met. Under this exception, neither estimation of variable consideration nor disclosure of the transaction price allocated to the remaining performance obligations is required. Revenue is alternatively recognized in the period that control is transferred to the customer and the respective variable component of the total transaction price is resolved.

For forms of variable consideration that are not associated with a specific volume (such as late payment fees) and thus do not meet allocation exception, estimation is required. These fees, however, are immaterial to our condensed consolidated financial statements and have a low probability of occurrence. As significant reversals of revenue due to this variability are not probable, no estimation is required.

Contract Balances

Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606. At June 30, 2021 and December 31, 2020, our accounts receivables from contracts with customers were zero and approximately $1.9 million, respectively.

5. FAIR VALUE MEASUREMENTS

Measurements of fair value of derivative instruments are classified according to the fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:

Level 1: Measured based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Measured based on quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. Substantially all of these inputs are observable in the marketplace throughout the term of the instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Management's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2021 (in thousands):


	Fair Value Measurements at June 30, 2021
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Value
Fair value of warrants
Nuvve Holding Warrants	$	—	$	764	$	—	$	764
Other liabilities
Warrant to issue common units		—		(7,709)		—		(7,709)
Total	$	—	$	(6,945)	$	—	$	(6,945)

The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2020 (in thousands):


	Fair Value Measurements at December 31, 2020
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Value
Other liabilities
Warrant to issue common units		—		(1,418)		—		(1,418)
Total	$	—	$	(1,418)	$	—	$	(1,418)

As of June 30, 2021and December 31, 2020, the estimated fair value of cash and cash equivalents, accounts receivable, other current assets and current liabilities approximated their carrying value due to their short-term nature.

Fair Value on a Non-Recurring Basis

The Partnership follows the provisions of Topic 820-10, “Fair Value Measurement,” for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs under the fair value hierarchy. We periodically review oil and natural gas properties and related equipment for impairment when facts and circumstances indicate that their carrying values may not be recoverable.

A reconciliation of the beginning and ending balances of the Partnership’s asset retirement obligations is presented in Note 9 “Asset Retirement Obligation.”

The following table summarizes the non-recurring fair value measurements of our production assets as of December 31, 2020 (in thousands):


	Fair Value Measurements at December 31, 2020
	Active Markets for		Observable
	Identical Assets		Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Impairment^(a)	$	—	$	—	$	12,884
Total net assets	$	—	$	—	$	12,884

(a)

During the year ended December 31, 2020, we recorded a non-cash impairment charge of $23.4 million to impair our producing oil and natural gas properties and $0.9 million to impair the Seco Pipeline. The carrying values of the impaired properties were reduced to a fair value of $12.9 million, estimated using inputs characteristic of a Level 3 fair value measurement.

The fair values of oil and natural gas properties and related equipment were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties and related equipment include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; (iv) estimated future cash flows; (v) estimated throughput; and (vi) a market-based weighted average cost of capital rate of 15%. These inputs require significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change.

Seco Pipeline – We own and operate a 30-mile natural gas pipeline with 400 MMcf/d capacity that is designed to transport dry gas to multiple markets in South Texas (the “Seco Pipeline”). As of December 31, 2020, we recorded a non-cash impairment charge of $0.9 million to impair the Seco Pipeline. The carrying value of the Seco Pipeline was reduced to a fair value of zero, estimated based on inputs characteristic of a Level 3 fair value measurement.

The fair value of the Seco Pipeline was measured using probabilistic valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of the Seco Pipeline include estimates of: (i) future operating and development costs; (ii) estimated future cash flows; and (iii) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change.

Fair Value of Financial Instruments

The estimated fair value amounts of financial instruments have been determined using available market information and valuation methodologies described below. We prioritize the use of the highest level inputs available in determining fair value such that fair value measurements are determined using the highest and best use as determined by market participants and the assumptions that they would use in determining fair value.

Credit Agreement – We believe that the carrying value of our Credit Agreement (as defined in Note 7 “Debt”) approximates its fair value because the interest rates on the debt approximate market interest rates for debt with similar terms. The debt is classified as a Level 2 input in the fair value hierarchy and represents the amount at which the instrument could be valued in an exchange during a current transaction between willing parties. The Credit Agreement is discussed further in Note 7 “Debt.”

Warrant to acquire Nuvve Holding shares – The Nuvve Holding Warrants (as defined in Note 6. “Derivative and Financial instruments”) are valued using the value of Nuvve’s common stock and the Nuvve Warrants exercise price. We have therefore classified the fair value measurement of the Nuvve Holding Warrants as Level 2 and is presented within fair value of warrants on the condensed consolidated balance sheets.

Warrant to issue common units – As part of the Exchange, the Partnership issued to Stonepeak the Warrant which entitles the holder to receive junior securities representing ten percent of junior securities deemed outstanding when exercised. The Warrant is valued using ten percent of the junior securities deemed outstanding and the common unit price as of the balance sheet date. We have therefore classified the fair value measurement of the Warrant as Level 2 and is presented within other liabilities on the condensed consolidated balance sheets.

Earnout Derivative – As part of the Carnero Gathering Transaction (as defined in Note 11 “Investments”), we are required to pay Mesquite an earnout based on natural gas received above a threshold volume and tariff at designated delivery points from Mesquite and other producers. The earnout derivative was valued through the use of a Monte Carlo simulation model which utilized observable inputs such as the earnout price and volume commitment, as well as unobservable inputs related to the weighted probabilities of various throughput scenarios. We have therefore classified the fair value measurements of the earnout derivative as Level 3 inputs. As of June 30, 2021 and December 31, 2020, the fair value of the earnout was determined to be zero.

6. DERIVATIVE AND FINANCIAL INSTRUMENTS

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 200,000 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 100,000 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 100,000 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 100,000 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”).The Nuvve Holding Warrants are accounted for in accordance with Topic 815, “Derivatives and Hedging,” and are recorded on the condensed consolidated balance sheets at fair value. Changes in the Nuvve Warrants fair value are recognized in earnings and included in other income on the condensed consolidated statements of operations.

The following table sets forth a reconciliation of the changes in fair value of the Partnership’s Nuvve Warrants for the periods indicated (in thousands):


	Six Months Ended
	June 30, 2021
Beginning fair value of warrants	$	—
Net gain on warrants		764
Ending fair value of warrants	$	764

To reduce the impact of fluctuations in oil and natural gas prices on our revenues, we periodically enter into derivative contracts with respect to a portion of our projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never our intention to enter into derivative contracts for speculative trading purposes.

Under Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. We will net derivative assets and liabilities for counterparties where we have a legal right of offset. Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met. We have not elected to designate any of our current derivative contracts as hedges; however, changes in the fair value of all of our derivative instruments are recognized in earnings and included in natural gas sales and oil sales in the condensed consolidated statements of operations. We do not have derivative contracts related to production in 2021 and beyond.

The following table sets forth a reconciliation of the changes in fair value of the Partnership’s commodity derivatives for the year ended December 31, 2020 (in thousands):


	Year Ended
	December 31, 2020
Beginning fair value of commodity derivatives	$	(759)
Net gains (losses) on crude oil derivatives		3,814
Net gains on natural gas derivatives		87
Net settlements received on derivative contracts:
Oil		(2,829)
Natural gas		(313)
Ending fair value of commodity derivatives	$	—

The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):



	Location of Gain (Loss)	Three Months Ended		Six Months Ended
Derivative Type	in Income	June 30, 2020		June 30, 2020
Commodity – Mark-to-Market	Income (loss) from discontinued operations	$	(799)	$	4,027
Commodity – Mark-to-Market	Income (loss) from discontinued operations		29		151
		$	(770)	$	4,178

Earnout Derivative

Refer to Note 5 “Fair Value Measurements.”

7. DEBT

Credit Agreement

We have entered into a credit facility with Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto, as amended by the Tenth Amendment to Third Amended and Restated Credit Agreement, dated as of November 6, 2020 (the “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 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 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.

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 initial borrowing base under the Credit Agreement was $235.5 million. 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 amortizing payments of outstanding principal on the Term Loan of $10.0 million per fiscal quarter. The maximum revolving credit amount is $15.0 million 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.

At our election, interest for borrowings under the Credit Agreement are determined by reference to (i) the 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 to unitholders.

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.

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.

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 in Note 17 “Subsequent Events,” 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”).

Debt Issuance Costs

As of June 30, 2021 and December 31, 2020, our unamortized debt issuance costs were approximately $0.3 million and $0.8 million, respectively. These costs are amortized to interest expense in our condensed consolidated statements of operations over the life of our Credit Agreement. Amortization of debt issuance costs recorded during the three months ended June 30, 2021 and 2020 was approximately $0.3 million and $0.2 million, respectively. Amortization of debt issuance costs recorded during the six months ended June 30, 2021 and 2020 was approximately $0.5 million and $0.4 million, respectively.

8. GATHERING AND TRANSPORTATION ASSETS

Gathering and transportation assets consisted of the following (in thousands):


	June 30,		December 31,
	2021		2020
Gathering and transportation assets
Midstream assets	$	188,013	$	187,977
Less: Accumulated depreciation and impairment		(86,268)		(82,710)
Total gathering and transportation assets, net	$	101,745	$	105,267

Depreciation and Amortization. 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 three to 15 years for furniture and equipment, up to 36 years for gathering facilities, and up to 40 years for transportation assets.

Depreciation and amortization consisted of the following (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Depreciation and amortization of gathering and transportation related assets	$	1,778	$	1,810	$	3,559	$	3,589
Amortization of intangible assets		3,365		3,366		6,728		6,730
Total depreciation and amortization	$	5,143	$	5,176	$	10,287	$	10,319

Impairment of Gathering and Transportation Assets. The recoverability of gathering and transportation assets is evaluated when facts or circumstances indicate that their carrying value may not be recoverable. Asset recoverability is measured by comparing the carrying value of the asset or asset group with its expected future pre-tax undiscounted cash flows. These cash flow estimates require us to make projections and assumptions for many years into the future for pricing, demand, competition, operating cost and other factors. If the carrying amount exceeds the expected future undiscounted cash flows, we recognize an impairment equal to the excess of net book value over fair value. The determination of the fair value using present value techniques requires us to make projections and assumptions regarding the probability of a range of outcomes and the rates of interest used in the present value calculations. Any changes we make to these projections and assumptions could result in significant revisions to our evaluation of recoverability of our gathering and transportation assets and the recognition of additional impairments. Upon disposition or retirement of gathering and transportation assets, any gain or loss is recorded to operations.

9. ASSET RETIREMENT OBLIGATION

We recognize the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it is incurred if a reasonable estimate of fair value can be made. Each period, we accrete the ARO to its then present value. The associated asset retirement cost (“ARC”) is capitalized as part of the carrying amount of our oil and natural gas properties, equipment and facilities or gathering and transportation assets. Subsequently, the ARC is depreciated using the units-of-production method for production assets and the straight-line method for midstream assets. The AROs recorded by us relate to the plugging and abandonment of oil and natural gas wells and decommissioning of oil and natural gas gathering and other facilities.

Inherent in the fair value calculation of AROs are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions result in adjustments to the recorded fair value of the existing ARO, a corresponding adjustment is made to the ARC capitalized as part of the oil and natural gas properties, equipment and facilities or gathering and transportation assets.

The following table is a reconciliation of changes in ARO for the six months ended June 30, 2021 and the year ended December 31, 2020 (in thousands):



	Six Months Ended		Year Ended
	June 30, 2021		December 31, 2020
Asset retirement obligation, beginning balance	$	4,438	$	4,083
Accretion expense		189		355
Asset retirement obligation, ending balance	$	4,627	$	4,438

Additional AROs increase the liability associated with new oil and natural gas wells and other facilities as these obligations are incurred. Abandonments of oil and natural gas wells and other facilities reduce the liability for AROs. During the six months ended June 30, 2021 and the year ended December 31, 2020, there were no significant expenditures for abandonments and there were no assets

legally restricted for purposes of settling existing AROs. During the six months ended June 30, 2021, obligations were relieved as part of the Palmetto Divestiture, Maverick 1 Divestiture and Maverick 2 Divestiture.

10. INTANGIBLE ASSETS

Intangible assets are comprised of customer and marketing contracts. The intangible assets balance as of June 30, 2021 is related to the Gathering Agreement with Mesquite that was entered into as part of the acquisition of the Western Catarina gathering system. The Western Catarina gathering system (“Western Catarina Midstream”) is located on the western portion of Mesquite’s acreage position in Dimmit, La Salle and Webb counties, Texas (the western portion of such acreage, “Western Catarina”). Pursuant to the 15-year agreement, Mesquite tenders all of its crude oil, natural gas and other hydrocarbon-based product volumes produced in the Western Catarina of the Eagle Ford Shale in Texas for processing and transportation through Western Catarina Midstream, with a right to tender additional volumes outside of the dedicated acreage. These intangible assets are being amortized using the straight-line method over the 15-year life of the agreement.

Amortization expense for each of the six months ended June 30, 2021 and 2020 was approximately $6.7 million. These costs are amortized to depreciation, depletion, and amortization expense in our condensed consolidated statements of operations. The following table is a reconciliation of changes in intangible assets (in thousands):


	June 30,		December 31,
	2021		2020
Beginning balance	$	131,786	$	145,246
Amortization		(6,728)		(13,460)
Ending balance	$	125,058	$	131,786

11. INVESTMENTS

In July 2016, we completed a transaction pursuant to which we acquired from Mesquite a 50% interest in Carnero Gathering, LLC (“Carnero Gathering”), a joint venture that was 50% owned and operated by Targa Resources Corp. (NYSE: TRGP) (“Targa”), for an initial payment of approximately $37.0 million and the assumption of remaining capital commitments to Carnero Gathering, estimated at approximately $7.4 million as of the acquisition date (the “Carnero Gathering Transaction”). The fair value of the intangible asset for the contractual customer relationship related to Carnero Gathering was valued at approximately $13.0 million. This amount is being amortized over a contract term of 15 years and decreases earnings from equity investments in our condensed consolidated statements of operations. As part of the Carnero Gathering Transaction, we are required to pay Mesquite an earnout based on natural gas received above a threshold volume and tariff at designated delivery points from Mesquite and other producers. See Note 5 “Fair Value Measurements” for further discussion of the earnout derivative.

In November 2016, we completed a transaction pursuant to which we acquired from Mesquite a 50% interest in Carnero Processing, LLC (“Carnero Processing”), a joint venture that was 50% owned and operated by Targa, for aggregate cash consideration of approximately $55.5 million and the assumption of remaining capital contribution commitments to Carnero Processing, estimated at approximately $24.5 million as of the date of acquisition (the “Carnero Processing Transaction”).

In May 2018, we executed a series of agreements with Targa and other parties pursuant to which, among other things: (1) the parties merged their respective 50% interests in Carnero Gathering and Carnero Processing (the “Carnero JV Transaction”) to form an expanded 50 / 50 joint venture in South Texas, within Carnero G&P, LLC (the “Carnero JV”), (2) Targa contributed 100% of the equity interest in the Silver Oak II Gas Processing Plant (“Silver Oak II”), located in Bee County, Texas, to the Carnero JV, which expands the processing capacity of the Carnero JV from 260 MMcf/d to 460 MMcf/d, (3) Targa contributed certain capacity in the 45 miles of high pressure natural gas gathering pipelines owned by Carnero Gathering that connect Western Catarina Midstream to nearby pipelines and the Raptor Gas Processing Facility (the “Carnero Gathering Line”) to the Carnero JV resulting in the Carnero JV owning all of the capacity in the Carnero Gathering Line, which has a design limit (without compression) of 400 MMcf/d, (4) the Carnero JV received a new dedication from Mesquite and its working interest partners of 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 is collectively referred to as Mesquite’s “Comanche Asset”) pursuant to a new long-term firm gas gathering and processing agreement. The agreement with Mesquite, which was approved by all of the unaffiliated Comanche Asset working interest partners, establishes commercial terms for the gathering of gas on the Carnero Gathering Line and processing at the Raptor Gas Processing Facility and Silver Oak II. Prior to execution of the agreement, Comanche volumes were gathered and processed on an interruptible basis, with the processing capabilities of the Carnero JV limited by the capacity of the Raptor Gas Processing Facility. As a result of the Carnero JV Transaction, we now record our share of earnings and losses from the Carnero JV using the Hypothetical Liquidation at Book Value (“HLBV”) method of accounting. HLBV is a balance-sheet approach that calculates the amount we would have received if the Carnero JV were liquidated at book value at the end of each measurement period. The change in our allocated amount during the period is recognized in our condensed consolidated statements of operations. In the event of liquidation of the Carnero JV, available proceeds are first distributed to any priority return and unpaid capital associated with Silver Oak II, and then to members in accordance with their capital accounts.

As of June 30, 2021 the Partnership had paid approximately $124.4 million for its investment in the Carnero JV related to the initial payments and contributed capital. The Partnership has accounted for this investment using the equity method. Targa is the operator of the Carnero JV and has significant influence with respect to the normal day-to-day capital and operating decisions. We have included the investment balance in the equity investments caption on the condensed consolidated balance sheets. For the three months ended June 30, 2021, the Partnership recorded an insignificant amount of earnings in equity investments from the Carnero JV, which was offset by approximately $0.3 million related to the amortization of the contractual customer intangible asset. For the six months ended June 30, 2021, the Partnership recorded earnings of approximately $0.9 million in equity investments from the Carnero JV, which was partially offset by approximately $0.6 million related to the amortization of the contractual customer intangible asset. We have included these equity method earnings in the earnings from equity investments line within the condensed consolidated statements of operations. Cash distributions of approximately $11.9 million were received during the six months ended June 30, 2021.

Summarized financial information of unconsolidated entities is as follows (in thousands):


	Six Months Ended June 30,
	2021		2020
Sales	$	43,668	$	37,146
Total expenses		38,906		27,692
Net income	$	4,762	$	9,454

12. COMMITMENTS AND CONTINGENCIES

As part of the Carnero Gathering Transaction, we are required to pay Mesquite an earnout based on natural gas received above a threshold volume and tariff at designated delivery points from Mesquite and other producers. This earnout has an approximate value of zero as of June 30, 2021. For the six months ended June 30, 2021, we made no payments to Mesquite related to the earnout.

13. RELATED PARTY TRANSACTIONS

Please read the disclosure under the headings “Relationship with Stonepeak,” “Relationship with Mesquite,” “Relationship with SP Holdings” and “Shared Services Agreement” in Note 13 “Related Party Transactions” of our Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for a more complete description of certain related party transactions that were entered into prior to 2021.

14. UNIT-BASED COMPENSATION

The Sanchez Production Partners LP Long-Term Incentive Plan (the “LTIP”) allows for grants of restricted common units. Restricted common unit activity under the LTIP during the period is presented in the following table:


		Weighted
		Average
	Number of	Grant Date
	Restricted	Fair Value
	Units	Per Unit
Outstanding at December 31, 2020	683,171	$	2.68
Granted	1,651,785		1.12
Returned/Cancelled	(140,647)		2.37
Outstanding at June 30, 2021	2,194,309	$	1.53

In March 2021, the Partnership issued 1,651,785 restricted common units pursuant to the LTIP to certain officers of the Partnership’s general partner. Two-thirds of the restricted common units vest on the one year anniversary of the date of grant and the remaining one-third vest on the second year anniversary of the date of grant. The number of restricted common units granted was based on the fair value on the day before the grant date.

As of June 30, 2021, 4,958,568 common units remained available for future issuance to participants under the LTIP.

The Class C Preferred Units are accounted for as a current liability on our condensed consolidated balance sheet consisting of the following (in thousands):


	June 30,		December 31,
	2021		2020
Class C Preferred Units, beginning balance	$	345,205	$	281,688
Accretion of discount		24,184		38,938
Distribution accrual		—		24,579
Class C Preferred Units, ending balance	$	369,389	$	345,205

The table below reflects the payment of distributions on Class C Preferred Units related to the periods indicated.


	Class C Preferred		Date of	Date of	Date of
Three Months Ended	PIK Distribution		Declaration	Record	Distribution
December 31, 2019		1,039,314	February 13, 2020	February 28, 2020	February 20, 2020
March 31, 2020		1,071,793	April 29, 2020	May 20, 2020	May 29, 2020
June 30, 2020		1,105,286	July 31, 2020	August 20, 2020	August 31, 2020

On November 16, 2020, the Partnership and Stonepeak entered into the Stonepeak Letter Agreement wherein the parties agreed that the distribution on the Class C Preferred Units for the three months ended September 30, 2020 would be paid in common units instead of Class C Preferred PIK Units, cash or a combination thereof. The Stonepeak Letter Agreement also provides that Stonepeak will be able to elect to receive distributions on the Class C Preferred Units in common units for any quarter following the third quarter of 2020 by providing written notice to the Partnership no later than the last day of the calendar month following the end of such quarter.

The table below reflects distributions on Class C Preferred Units which were elected to be paid in common units related to the periods indicated.


	Class C Preferred		Date of
Three Months Ended	Distribution of Common Units		Distribution
September 30, 2020		22,274,869	February 1, 2021
December 31, 2020		12,445,491	February 25, 2021
March 31, 2021		13,763,249	May 20, 2021
June 30, 2021		8,012,850	August 20, 2021

Warrant to issue common units

On August 2, 2019, in connection with the Exchange, the Partnership issued to Stonepeak the Original Warrant, which entitles the holder to receive junior securities representing ten percent of junior securities deemed outstanding when exercised. The Warrant expires on the later of August 2, 2026 or 30 days following the full redemption of the Class C Preferred Units. There is no strike price associated with the exercise of the Warrant. The Warrant is accounted for as a liability in accordance with ASC 480 and is presented within other liabilities on the condensed consolidated balance sheet. Changes in the fair value of the Warrant are charged to interest expense in our condensed consolidated statements of operations.

Earnings per Unit

Net income (loss) per common unit for the period is based on any distributions that are made to the unitholders (common units) plus an allocation of undistributed net income (loss) based on provisions of the Amended Partnership Agreement, divided by the weighted average number of common units outstanding. The two-class method dictates that net income (loss) for a period be reduced by the amount of distributions and that any residual amount representing undistributed net income (loss) be allocated to common unitholders and other participating unitholders to the extent that each unit may share in net income (loss) as if all of the net income for the period had been distributed in accordance with the Amended Partnership Agreement. Unit-based awards granted but unvested are eligible to receive distributions. The underlying unvested restricted unit awards are considered participating securities for purposes of determining net income (loss) per unit. Undistributed income is allocated to participating securities based on the proportional relationship of the weighted average number of common units and unit-based awards outstanding. Undistributed losses (including those resulting from distributions in excess of net income) are allocated to common units based on provisions of the Amended Partnership Agreement. Undistributed losses are not allocated to unvested restricted unit awards as they do not participate in net losses. Distributions declared and paid in the period are treated as distributed earnings in the computation of earnings per common unit even though cash distributions are not necessarily derived from current or prior period earnings.

The Partnership’s general partner does not have an economic interest in the Partnership and, therefore, does not participate in the Partnership’s net income.

16. VARIABLE INTEREST ENTITIES

The Partnership’s investment in the Carnero JV represents a variable interest entity (“VIE”) that could expose the Partnership to losses. The amount of losses the Partnership could be exposed to from the Carnero JV is limited to the capital investment of approximately $78.2 million.

As of June 30, 2021, the Partnership had invested approximately $124.4 million in the Carnero JV and no debt has been incurred by the Carnero JV. We have included this VIE in other assets, equity investments on our condensed consolidated balance sheet.

Below is a tabular comparison of the carrying amounts of the assets and liabilities of the VIE and the Partnership’s maximum exposure to loss as of June 30, 2021 and December 31, 2020 (in thousands):


	June 30,		December 31,
	2021		2020
Acquisitions, earnout and capital investments	$	128,483	$	128,251
Earnings in equity investments		30,783		30,455
Distributions received		(81,017)		(69,071)
Maximum exposure to loss	$	78,249	$	89,635

17. SUBSEQUENT EVENTS

Credit Agreement Amendment

On July 28, 2021, the Partnership, as borrower, entered into the Eleventh Amendment. 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) any 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’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 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 over 315,000 acres located in the Western Eagle Ford on Mesquite’s acreage in Dimmit, Web, 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%).

On August 2, 2021, the Partnership and Stonepeak 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 will receive additional Class B Preferred Units 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 financing transactions 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.

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

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.”

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

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

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.

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.

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

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

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

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

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

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)%

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

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.

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.

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 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.”

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.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Principal Executive Officer and the Principal Financial Officer of the general partner of SNMP have evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of June 30, 2021 (the “Evaluation Date”). Based on such evaluation, the Principal Executive Officer and the Principal Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information

Item 1. Legal Proceedings

From time to time we may be the subject of lawsuits and claims arising in the ordinary course of business. Management cannot predict the ultimate outcome of such lawsuits or claims. Management does not currently expect the outcome of any of the known claims or proceedings to individually or in the aggregate have a material adverse effect on our results of operations or financial condition.

To date, no claims relating to the Mesquite Chapter 11 Case have been filed against us. However, on March 13, 2020, the official committee of unsecured creditors in the Mesquite Chapter 11 Case (the “Committee”) filed the Motion of the Official Committee of Unsecured Creditors for Leave, Standing, and Authority to Prosecute Claims on Behalf of the Debtors’ Estate and for Related Relief (the “Standing Motion”). In its Standing Motion, the Committee sought, in relevant part, authority from the Court to prosecute certain identified claims against the Partnership, the general partner and Catarina Midstream, LLC (collectively, the “Claims”) that, if valid, belong to Mesquite.

On June 30, 2020, the SN Debtors emerged from the Mesquite Chapter 11 Case, with Mesquite becoming a privately held corporation. Upon emergence, the Claims re-vested, and are owned by, the Reorganized Debtors (as defined in the Plan). Accordingly, the Committee was dissolved and no longer retains the authority to bring all or a portion of the Claims against the Evolve Parties. While the Settlement Agreement contemplated, in relevant part, the settlement of the Claims between the Reorganized Debtors and the Evolve Parties.

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 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. As a result of the termination of the Settlement Agreement, the Claims will not be released and the Claims or other claims relating to the Mesquite Chapter 11 Case may be filed against us.

Item 1A. Risk Factors

Carefully consider the risk factors under “Part I, Item 1A. Risk Factors” in our 2020 10-K. There have been no significant changes except as follows:

You will not receive cash distributions on your common units until we are able to redeem 100% of the outstanding Class C Preferred Units, as a result, you are unlikely to receive cash distributions on your common units for the foreseeable future.

Our partnership agreement prohibits us from declaring or making any distributions, redemptions or repurchases in respect of any junior securities or any parity securities until the first quarter in which no Class C Preferred Units remain outstanding. This means that you will not receive any cash distributions on your common units until such time as we are able to redeem all of the outstanding Class C Preferred Units. We currently have the right to redeem 100% of the outstanding Class C Preferred Units for cash at the greater of the current market price or the liquidation preference for the Class C Preferred Units. As of August 12, 2021, the liquidation preference for the Class C Preferred Units was approximately $417.8 million. Our total revenues for the three

months ended June 30, 2021 were approximately $9.1 million. As a result, you are unlikely to receive cash distributions on your common units for the foreseeable future.

Stonepeak and its affiliates may sell common units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

As of August 12, 2021, Stonepeak and its affiliates owned (i) 53,386,692 common units, representing approximately 74% of our outstanding common units, and (ii) a warrant exercisable for junior securities that entitles Stonepeak Catarina to receive junior securities of the Partnership (including common units) representing 10% of all junior securities deemed outstanding when exercised. Additionally, we have agreed to provide Stonepeak Catarina with certain registration rights under applicable securities laws. The sale of these common units in the public or private markets could have an adverse impact on the price of the common units or on the trading market for our common units.

If we are unable to continue as a going concern, you may lose some or all of your investment in us.

Our Credit Agreement matures September 30, 2021 and our ability to continue as a going concern is contingent upon our ability to either (i) refinance or extend the maturity of our Credit Agreement, or (ii) obtain adequate new debt or equity financing to repay our Credit Agreement in full at maturity. We intend to enter into the Twelfth Amendment prior to the current maturity date under the Amended Credit Agreement. However, we cannot guarantee that we will be able to enter into definitive documentation for the Twelfth Amendment prior to September 30, 2021. The consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of substantial doubt as to our ability to continue as a going concern. If we cannot continue as a going concern, you may lose some or all of your investment in us.

You may continue to experience substantial dilution.

On November 16, 2020, we entered into the “Stonepeak Letter Agreement” wherein we agreed with Stonepeak Catarina that the distribution on their Class C Preferred Units for the three months ended September 30, 2020 would be paid in common units instead of Class C Preferred PIK Units, cash or a combination thereof. The Stonepeak Letter Agreement also provides Stonepeak Catarina with the ability to elect to receive distributions on the Class C Preferred Units in common units for any quarter following the third quarter of 2020 by providing written notice to us no later than the last day of the calendar month following the end of such quarter. The transactions under the Stonepeak Letter Agreement were approved by the conflicts committee of the board of directors of our general partner. As a result of the Stonepeak Letter Agreement, aggregate distributions of 22,274,869 common units, 12,445,491 common units, and 13,763,249 common units were made to Stonepeak Catarina on February 1, 2021, February 25, 2021, and May 20, 2021, respectively, representing distributions for the third quarter of 2020, the fourth quarter of 2020, and the first quarter of 2021, respectively. In accordance with the Stonepeak Letter Agreement, on July 30, 2021, 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. The aggregate distribution of 8,012,850 common units will be paid to Stonepeak Catarina on August 20, 2021. Stonepeak Catarina may elect to receive future distributions on their Class C Preferred Units in common units instead of Class C Preferred PIK Units and, as a result, you may experience substantial future dilution.

Failure to achieve commercial resolution with Mesquite could adversely affect our business, cash flows and results of operations.

The Settlement Agreement contemplated, among other things, our entry into Amendment No. 2 to the Gathering Agreement (the “Gathering Agreement Amendment”) providing for, among other things, the dedication by Mesquite of the eastern portion (“Eastern Catarina”) of Mesquite’s acreage position in Dimmit, La Salle and Webb counties in Texas (such net acreage, collectively, “Mesquite’s Catarina Asset”) and the establishment of field-wide rates.

As a result of our receipt of the Settlement Agreement Termination Notice, the Gathering Agreement Amendment will not become effective. The western portion of Mesquite’s Catarina Asset (“Western Catarina”) is currently dedicated under the Gathering Agreement. As previously disclosed, on June 24, 2021, we increased the tariff rate for interruptible throughput volumes from Eastern Catarina, however, while not yet due and payable, Mesquite has informed us that it will not pay such increased tariff rate and will continue to pay the tariff rate in effect prior to the June 24, 2021 increase. We are currently in discussions with Mesquite on a commercial resolution for Eastern Catarina. If we are unable to reach a commercial resolution with Mesquite including with respect to the dedication of Eastern Catarina and set tariff rate on volumes from Eastern Catarina, we may seek to enforce the increased tariff rate through arbitration or other courses of action available to us. There can be no guarantee that we are able to reach any commercial resolution and our failure to do so could adversely affect our business, financial condition, cash flows and results of operations.



Exhibit Number	Description

10.1	Amended and Restated Executive Services Agreement for Realignment, dated April 16, 2021, by and among Gerald F. Willinger, Evolve Transition Infrastructure GP LLC and Evolve Transition Infrastructure LP (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Evolve Transition Infrastructure LP on April 16, 2021, File No. 001-33147).

10.2	ATM Sales Agreement, dated as of April 20, 2021 between Evolve Transition Infrastructure LP and Virtu Americas LLC (incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K filed by Evolve Transition Infrastructure LP on April 20, 2021, File No. 001-33147).

10.3	Gas Lift Agreement, entered into on April 21, 2021 but effective January 1, 2021, by and between SN Catarina, LLC and Catarina Midstream, LLC (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Evolve Transition Infrastructure LP on April 26, 2021, File No. 001-33147).

10.4**	Purchase Agreement, dated April 30, 2021, by and between SEP Holdings IV, LLC and Bayshore Energy TX LLC.

10.5**	Letter Agreement, dated April 30, 2021, by and between SEP Holdings IV, LLC and Bayshore Energy TX LLC.

10.6**	Purchase Agreement, dated April 30, 2021, by and between SEP Holdings IV, LLC and Westhoff Palmetto LP.

10.7**	Amendment No. 2 to Warrant Exercisable for Junior Securities, dated May 4, 2021.

10.8**	Letter Agreement, dated May 11, 2021, by and between Evolve Transition Infrastructure LP, Royal Bank of Canada, as Administrative Agent under the Third Amended and Restated Credit Agreement of the Partnership, as amended, and the lenders party thereto.

10.9**	Purchase Agreement, dated May 14, 2021, by and between SEP Holdings IV, LLC and Bayshore Energy TX LLC.

10.10**	Series B Warrant for the Purchase of 200,000 Shares of Common Stock of Nuvve Holding Corp. issued May 17, 2021.

10.11**	Series C Warrant for the Purchase of 100,000 Shares of Common Stock of Nuvve Holding Corp. issued May 17, 2021.

10.12**	Series D Warrant for the Purchase of 100,000 Shares of Common Stock of Nuvve Holding Corp. issued May 17, 2021

10.13**	Series E Warrant for the Purchase of 100,000 Shares of Common Stock of Nuvve Holding Corp. issued May 17, 2021.

10.14**	Series F Warrant for the Purchase of 100,000 Shares of Common Stock of Nuvve Holding Corp. issued May 17, 2021.

10.15**	Letter Agreement, dated May 17, 2021, among Stonepeak Rocket Holdings LP, Evolve Transition Infrastructure LP and Nuvve Holding Corp.

10.16**	Securities Purchase Agreement, dated May 17, 2021, by and among Nuvve Holding Corp., Stonepeak Rocket Holdings LP and Evolve Transition Infrastructure LP.

10.17**	Registration Rights Agreement, dated May 17, 2021, by and among Nuvve Holding Corp., Stonepeak Rocket Holdings LP and Evolve Transition Infrastructure LP.

31.1**	Certification of Principal Executive Officer of Evolve Transition Infrastructure GP LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2**	Certification of Principal Financial Officer of Evolve Transition Infrastructure GP LLC pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1***	Certification of Principal Executive Officer of Evolve Transition Infrastructure GP LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2***	Certification of Principal Financial Officer of Evolve Transition Infrastructure GP LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**	Inline XBRL Instance Document

101.SCH**	Inline XBRL Schema Document

101.CAL**	Inline XBRL Calculation Linkbase Document

101.LAB**	Inline XBRL Label Linkbase Document

101.PRE**	Inline XBRL Presentation Linkbase Document

101.DEF**	Inline XBRL Definition Linkbase Document

EX 104	Cover Page Interactive Data File (embedded within the Inline XBRL document)


	Evolve Transition Infrastructure LP By: Evolve Transition Infrastructure GP LLC, its general partner

Date: August 12, 2021	By	/s/ Charles C. Ward
		Charles C. Ward
		Chief Financial Officer and Secretary (Duly Authorized Officer and Principal Financial Officer)