Notes to Consolidated Financial Statements

December 31, 2022 and 2021

THQ Appalachia I, LLC (the Company) is an energy company engaged in the acquisition, development and exploitation of conventional and unconventional oil and natural gas assets in the Appalachia Basin in the Northeastern United States and focused on the Marcellus and Point Pleasant shale formations. Its executive offices are located in Fort Worth, Texas.

The operations of the Company are governed by the provisions of a Limited Liability Company Agreement (the Agreement) dated July 23, 2014, as amended and as executed by and among its members. The Company’s majority member is Q-TH Appalachia (VI) Investment Partners, LLC (Quantum), with Radler 2000, LP (R2K) and certain members of management comprising the remaining capital members. The Agreement includes specific provisions with respect to the maintenance of the capital accounts of each of the Company’s members (see footnote 13).

On September 6, 2022, the Company entered into a purchase agreement with EQT Corporation to sell the Company’s upstream assets along with the gathering and processing assets of affiliate company THQ-XCL Holdings I, LLC for total consideration of $2.6 billion of cash and 55 million shares of common stock of EQT Corporation (EQT). The Company will be selling 100% of its membership interests in THQ Appalachia I Midco, LLC (“THQA Midco”) along with the 100% membership interests of the subsidiaries of THQA Midco (“EQT Acquisition”). On December 23, 2022, the parties entered into an amended and restated purchase agreement to extend the right to terminate the agreement to December 31, 2023, from the original termination date of December 31, 2022. This transaction has an effective date of July 1, 2022. The close of the transaction remains subject to regulatory approval.

The accounts are maintained using the accrual basis of accounting and the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are stated in United States dollars.

The accompanying consolidated financial statements include the accounts of THQ Appalachia I, LLC and its wholly owned subsidiaries THQ Appalachia I Midco, LLC, TH Exploration, LLC, TH Exploration II, LLC, TH Exploration III, LLC, TH Exploration IV, LLC, CLR Exploration, LLC, and THQ Marketing, LLC. CLR Exploration, LLC was dissolved on May 17, 2022. All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts in the consolidated financial statements and accompanying notes. The estimates that are and will be particularly significant to the consolidated financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (NGLs), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, and fair values of assets acquired and liabilities assumed. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions. These disclosures are material to the Company’s consolidated financial statements.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Historically, the markets for natural gas, NGLs, and oil have experienced significant price fluctuations. Price fluctuations can result from variations in weather, levels of production in the region, availability of transportation capacity to other regions of the country, and various other factors. Increases or decreases in the prices the Company receives for its production could have a significant impact on the Company’s future results of operations and reserve quantities.

The borrowing base under the Revolving Credit Facility discussed in footnote 7 may be reduced if commodity prices decline, which could hinder or prevent the Company from meeting future capital needs. The borrowing base under the Revolving Credit Facility was $850 million as of December 31, 2022. The borrowing base is subject to potential reductions based on a variety of factors such as commodity prices, operating difficulties, decline in reserves, lending requirements or regulations, or for any other reasons. The Company cannot be certain that funding will be available if needed, and to the extent required, on acceptable terms. In the event of a decrease in the borrowing base due to declines in commodity prices or otherwise, the Company may be unable to meet obligations as they come due and could be required to repay any indebtedness in excess of the redetermined borrowing base. As a result, the Company may be unable to implement the drilling and development plan, make acquisitions or otherwise carry out the Company’s business plan, which could have a material adverse effect on the financial condition and results of operations and impair the Company’s ability to service the indebtedness. The borrowing base is redetermined bi-annually by the lenders each May and October based on certain factors, including the Company’s reserves and hedge position. The borrowing base was redetermined in May 2022 to be $850 million. The next redetermination of the borrowing base is pending the close of the sale to EQT disclosed in footnote 1.

The Company relies on IT systems to conduct business, as well as systems of third-party vendors. These systems are subject to possible security breaches and cyber-attacks. Cyber-attacks are becoming more sophisticated, and U.S. government warnings have indicated that infrastructure assets, including pipelines, may be specifically targeted by certain groups. These attacks include, without limitation, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches. These attacks may be perpetrated by state-sponsored groups, criminal organizations, or private individuals. These cybersecurity risks include cyber-attacks on the Company and third parties who provide material services. In addition to disrupting operations, cybersecurity breaches could also affect the Company’s ability to operate or control facilities, render data or systems unusable, or result in the theft of sensitive, confidential or customer information. These events could also damage the Company’s reputation, and result in losses from remedial actions, loss of business or potential liability to third parties. The Company carries insurance specifically for cybersecurity events. However, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur. Increasing scrutiny and changing expectations from stakeholders with respect to our environment, social, and governance practices may impose additional costs on us or expose us to new or additional risks.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company considers all cash and highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

The amount of restricted cash reflected in long-term assets represents the amount of cash collateral the Company has posted in support of a letter of credit on the Company’s behalf to the pipeline company with which the Company has a firm transportation commitment shown in footnote 9.

The Company’s accounts receivable are primarily from purchasers of oil and natural gas. The Company extends credit as part of normal business procedures based on management’s assessment of credit worthiness. The Company records an allowance for doubtful accounts based on the age of accounts receivables and historical trends, as well as by specifically identifying receivables that may be uncollectible based upon the financial condition of the counterparty and other relevant facts and circumstances. The Company had no reserve as of December 31, 2022 or 2021, and has experienced no losses since 2016.

The Company follows the successful efforts method of accounting for its oil and natural gas properties, whereby costs of productive wells, developmental dry holes and productive leases are capitalized into appropriate groups of properties based on geographical and geological similarities. These capitalized costs are amortized using the unit-of-production method based on estimated proved reserves. Proceeds from sales of properties will be credited to property costs, and a gain or loss will be recognized when a significant portion of an amortization base is sold or abandoned.

Exploration expense, including geological and geophysical expenses and delay rentals, are charged to expense as incurred. Exploratory drilling costs, including the cost of stratigraphic test wells, are initially capitalized but charged to exploration expense if and when the well is determined to be nonproductive. The acquisition costs of unproved acreage are initially capitalized and are carried at cost, net of accumulated impairment provisions, until such leases are transferred to proved properties or charged to exploration expense as impairments of unproved properties. The Company had no significant costs which had been deferred for longer than one year at December 31, 2021. The Company charged $16.5 million and $9.1 million to exploration expense in 2022 and 2021, respectively. The 2022 exploration expense includes $16.5 million due to the expiration of certain oil and natural gas leases. The 2021 exploration expense includes $6.0 due to dry hole expenses and $3.1 million is due to the expiration of certain oil and natural gas leases.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company evaluates the carrying amount of its proved natural gas, NGLs, and oil properties for impairment on a geological reservoir basis whenever events or changes in circumstances indicate that a property’s carrying amount may not be recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company would estimate the fair value of its properties and record an impairment charge for any excess of the carrying amount of the properties over the estimated fair value of the properties. Factors used to determine fair value may include estimates of proved reserves, future commodity prices, future production estimates, anticipated capital expenditures, and a commensurate discount rate. Because estimated undiscounted future cash flows exceeded the carrying value of the Company’s proved properties, it has not been necessary for the Company to determine the fair value of its properties under GAAP for successful efforts accounting. As a result, the Company has not recorded any impairment expenses associated with its proved properties during the years ended December 31, 2022 and 2021.

Expenditures for construction, installation, major additions, and improvements to property, plant, and equipment that is not directly related to production are capitalized, whereas minor replacements, maintenance, and repairs are expensed as incurred. Gathering pipelines and compressor stations are depreciated using the straight-line method over their estimated useful lives of 20 years. Depreciation expense for gathering pipelines, compressor stations, and water handling and treatment systems was $0.9 million and $0.8 million in 2022 and 2021, respectively. A gain or loss is recognized upon the sale or disposal of property and equipment.

Other property and equipment consists primarily of field equipment, facilities, and office equipment and are recorded at cost. Major renewals and betterments are capitalized while repairs and maintenance are charged to expense as incurred. The costs of assets retired or otherwise disposed of and the applicable accumulated depreciation are removed from the accounts, and any gain or loss is included in operating income in the accompanying statements of operations.

Other property and equipment, including major replacements and improvements, are capitalized and are depreciated using the straight-line method over the estimated useful lives of 3 to 7 years. Depreciation expense for the other property and equipment was $0.3 million in 2022 and 2021.

The Company computes its provision for DD&A on a unit-of-production method. Each quarter, the Company uses the following formulas to compute the provision for DD&A for each of its producing properties (or appropriate groups of properties based on geographical and geological similarities):

DD&A Rate = Unamortized Cost / Beginning of Period Reserves
Provision for DD&A = DD&A Rate x Current Period Production

Reserve estimates have a significant impact on the DD&A rate. If reserve estimates for a property or group of properties are revised downward in future periods, the DD&A rate for that property or group of properties will increase as a result of the revision. Alternatively, if reserve estimates are revised upward, the DD&A rate will decrease.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

At each year end, the Company reviews its unproved oil and natural gas properties to determine if there has been, in the Company’s judgment, impairment in value of each prospect that the Company considers individually significant. To the extent that the carrying cost of a prospect exceeds its estimated fair value, the Company makes a provision for impairment of unproved properties, and records the provision as abandonments and impairments within exploration expense on its statement of income. If the value is revised upward in a future period, the Company does not reverse the prior provision and continues to carry the prospect at a net cost that is lower than its estimated value. If the value is revised downward in a future period, an additional provision for impairment is made in that period. As stated in footnote 2(g), the Company charged $16.5 million and $9.1 million to exploration expense in 2022 and 2021, respectively. The 2022 exploration expense includes $16.5 million due to the expiration of certain oil and natural gas leases. The 2021 exploration expense includes $6.0 million for dry hole expenses and $3.1 million due to the expiration of certain oil and natural gas leases.

Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of a reserve estimate depends on the quality of available geological and engineering data, the precision of and the interpretation of that data, and judgment based on experience and training. Annually, the Company engages independent petroleum engineering firms to independently prepare estimates of its oil and natural gas reserves.

Deferred financing costs represent loan origination fees and are offset against the related debt instrument in the consolidated balance sheets. These costs are amortized over the term of the related debt instrument using the effective interest method. The Company charges expense for unamortized deferred financing costs if credit facilities are retired prior to their maturity date. At December 31, 2022 and 2021, respectively, the Company had $1.2 million and $2.3 million of unamortized deferred financing costs that are netted against the Company’s debt balances. The amounts amortized were $1.4 million and $1.1 million for the years ended December 31, 2022 and 2021, respectively.

In order to manage its exposure to natural gas, NGLs, and oil price volatility, the Company enters into derivative transactions from time to time, including commodity swap agreements, basis swap agreements, collar agreements, and other similar agreements relating to the price risk associated with a portion of its production. To the extent legal right of offset exists with a counterparty, the Company reports derivative assets and liabilities on a net basis. The Company has exposure to credit risk to the extent that the counterparty is unable to satisfy its settlement obligations. The Company actively monitors the creditworthiness of counterparties and assesses the impact, if any, on its derivative position.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company records derivative instruments on the consolidated balance sheets as either an asset or liability measured at fair value and records changes in the fair value of derivatives in current earnings as they occur. Cash settlements for derivatives and changes in the fair value of commodity derivatives are reflected in gain (loss) on derivative instruments on the Company’s consolidated statements of income. The Company’s derivatives have not been designated as hedges for financial accounting purposes.

The Company estimates the present value of the amount it will incur to plug, abandon and remediate its producing properties at the end of their productive lives in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 410, Asset Retirement and Environmental Obligation. The Company will compute its liability for asset retirement obligations by calculating the present value of estimated future cash flows related to each property. This will require the Company to use significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and its risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligations.

In accordance with FASB ASC 410, an asset retirement obligation is recorded as a liability at its estimated present value at the asset’s inception, with an offsetting increase to producing properties in the accompanying balance sheets which is allocated to expense over the useful life of the asset. Periodic accretion of the discount on asset retirement obligations is recorded as an expense in depreciation, depletion, and amortization in the accompanying consolidated statement of income.

Removal and restoration costs associated on the retirement of gathering facilities and water delivery pipelines are undeterminable as the Company cannot predict when these facilities would be decommissioned or become obsolete. As such, no asset retirement obligation has been recorded related to gathering facilities as of December 31, 2022 or 2021.

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The ASC 606 core principle is that a company will recognize revenue when it transfers promised goods or services to customers and in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

Our revenues are primarily derived from the sale of natural gas and oil production, as well as the sale of NGLs that are extracted from our natural gas. Sales of natural gas, NGLs, and oil are recognized when we satisfy a performance obligation by transferring control of a product to a customer. Payment is generally received in the month following the sale.

Under our natural gas sales contracts, we deliver natural gas to the purchaser at an agreed upon delivery point where title to the product passes to the purchaser. Natural gas is transported from our wellheads to delivery points specified under sales contracts. Our sales contracts provide that we receive a specific index price adjusted for pricing differentials. We transfer control of the product at the delivery point and recognize revenue based on the contract price. A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than the expected remaining proved reserves.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

NGLs, which are extracted from natural gas through processing, are either sold by a third party marketing firm or by the processor under processing contracts. For NGLs sold on behalf of us by a third party marketing firm, our sales contracts provide that we deliver the product to the purchaser at an agreed upon delivery point and that we receive a specific index price adjusted for pricing differentials. We transfer control of the product to the purchaser at the delivery point and recognize revenue based on the contract price. For NGLs sold by the processor, our processing contracts provide that we transfer control to the processor at the tailgate of the processing plant and we recognize revenue based on the price received from the processor.

Under our oil sales contracts, we generally sell oil to purchasers and collect a contractually agreed upon index price, net of pricing differentials. We recognize revenue based on the contract price when we transfer control of the product to a purchaser.

The Company’s revenues are derived principally from uncollateralized sales to purchasers in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because purchasers may be similarly affected by changes in economic and other conditions. The Company has a large, investment-grade purchaser who has served as the Company’s major customer accounting for approximately 41% of total revenue in 2022 and approximately 33% of total revenue in 2021. Five other large, investment-grade companies comprise an additional 32% of total revenue in 2022 and 27% of total revenue in 2021. The Company has not experienced any losses on its receivables from the purchasers and believes its counterparties represent acceptable credit risk.

The Company is also exposed to credit risk on its commodity derivative portfolio. Any default by the counterparty to these derivative contracts when they become due could have a material adverse effect on the Company’s financial condition and results of operations. The Company has economic hedges in place with several of its lenders under the Company’s Credit Facility. The fair value of the Company’s commodity derivative contracts was a net liability of $266.6 million at December 31, 2022, and a net liability of $266.9 million at December 31, 2021. The Company believes that its lenders represent acceptable credit risk.

The Company maintains deposits primarily in two financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). The Company has not experienced any losses related to amounts in excess of FDIC limits.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:

Level 1:  Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2:  Inputs to the valuation methodology include:

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurements.

In accordance with the reporting requirements of FASB ASC 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of accounts receivable, accounts payable, and revolving credit facility approximates the carrying amount due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.

The Company follows the provisions of ASC Topic 820, Fair Value Measurement, for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. As it relates to the Company, ASC Topic 820 applies to the initial recognition of AROs, for which fair value is used.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company has an ongoing business relationship with an affiliate, Tug Hill Operating, LLC (THO). THO is responsible for acquisitions, drilling and operation of wells owned by the Company. As it incurs costs on behalf of the Company for these operations, THO bills the Company through its joint interest billing (JIB) process; and the Company reimburses THO for these costs at least monthly. THO is also responsible for the administration of the Company’s business. In exchange for these services, the Company pays a quarterly fee that includes (a) THO employees’ time and related expenses charged to the Company for the operation of its oil and natural gas properties, (b) an allocated amount of THO overhead expense calculated based on the number of hours THO employees spend working on Company projects, and (c) an additional percentage markup of the overall total of (a) and (b) to cover benefits and other employee-related costs and any unforeseen or difficult to allocate costs. The Company’s board approves the operating budgets. For years ended December 31, 2022 and 2021, THO billed the Company $720.1 million and $429.7 million through the JIB process. The amounts due to THO for these services, which are included in the Company’s affiliate payables balance were $99.8 million and $111.4 million as of December 31, 2022 and 2021, respectively. Allocations consist of $47.7 million and $23.7 million relating to acquisition of oil and natural gas properties, $43.0 million and $19.6 million of lease operating expenses, $12.7 million and $11.6 million in salaries and bonus for the operation of its oil and natural gas properties, $0.8 million and $1.0 million for overhead expenses, $11.7 million and $6.5 million of direct general and administrative expenses, and $604.2 million and $367.3 million of capital expenditures for the periods ended December 31, 2022 and 2021, respectively.

THO collects certain revenues from customers on behalf of the Company. The amounts due from THO, which are included in the Company’s oil and gas accounts receivable balance were $84.6 million and $112.8 million as of December 31, 2022 and 2021, respectively.

The Company incurred $82.2 million and $75.2 million in gathering, processing and transportation for the periods ended December 31, 2022 and 2021, respectively, payable to an affiliate, THQ-XCL Holdings I, LLC (XCL), a Quantum and R2K controlled entity.

For the year ended December 31, 2022, the Company paid $3.1 million and $58.4 million in lease bonuses income and royalties, respectively, to an affiliate, Stone Hill Minerals Holdings I, LLC (SHMH), a Quantum and R2K controlled entity. For the year ended December 31, 2021, the Company paid $4.6 million and $26.3 million in lease bonuses income and royalties, respectively, to SHMH. Additionally, the Company had a affiliate note payable to SHMH as of December 31, 2020 in the amount of $35 million as discussed in footnote 7 herein. On December 3, 2021, the Company paid the $39.5 million in principal and interest. As of December 31, 2022, the Company has no remaining balance under this affiliate note payable.

The Company is a limited liability company and, therefore, is treated as a flow through entity for federal income tax purposes. As a result, the net taxable income of the Company and any related tax credits, for federal income tax purposes, are allocated to the members and are included in the members’ tax returns even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no federal tax provision has been made in the financial statements of the Company. However, Texas imposes an entity-level tax on all forms of business regardless of federal entity classification. At December 31, 2022 and 2021, the Company had not accrued a liability for the Texas franchise tax as the liability, if any, is not expected to be material. The Company applies the provisions of ASC Topic 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax positions. The Company analyzed its tax filing positions in the U.S. federal, state and local jurisdictions where it is required to file income tax returns, for all open tax years. Based on this review, no liabilities for uncertain income tax positions were required to have been recorded pursuant to ASC 740. The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by U.S. federal and certain state and local tax regulators. As of December 31, 2022 and 2021, the Company's U.S. federal income tax returns and state and local returns are open under the normal three-year statute of limitations and therefore subject to examination.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Effective with the adoption of ASC 842, contracts are reviewed to determine whether the arrangement contains a lease. To the extent an arrangement is determined to include a lease, it is classified as either an operating or a finance lease, which dictates the pattern of expense recognition in the income statement. Operating leases are reflected as “Right-of-use assets”, “Lease liabilities” and “Long-term lease liabilities” on the consolidated balance sheets. The Company does not have any finance leases.

A right-of-use (“ROU”) asset representing our right to use an underlying asset for the lease term and a lease liability representing our obligation to make lease payments arising from the lease are recognized on the consolidated balance sheets for all leases with a lease term greater than one year, regardless of operating or finance lease classification. The ROU asset is initially measured as the present value of the lease liability adjusted for any payments made prior to lease commencement, including any initial direct costs incurred and incentives received. Lease liabilities are initially measured at the present value of future minimum lease payments, excluding variable lease payments, over the lease term. Given that the Company’s leases do not provide an implicit rate in the contract, the Company uses an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date.

The Company has elected, as an accounting policy, not to record short-term leases with terms of twelve months or less on the consolidated balance sheets. In determining the lease term, the Company only includes contractual options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

The Company has also elected to account for lease and non-lease components in its contracts as a single lease component for all asset classes.

See Note 5 — Leases for additional information.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Since inception, the Company has been involved in acquiring and leasing oil and natural gas properties in the southwest Appalachian Basin in the Northeastern United States.

Oil and natural gas properties consist of the following at December 31:

Depreciation, depletion, and amortization expense for proved oil and natural gas properties was $204.3 million and $164.7 million for the years ended December 31, 2022 and 2021, respectively. Exploration and abandonment and write off was $16.5 million and $9.1 million for the years ended December 31, 2022 and 2021, respectively. Additions to capitalized exploratory well costs that are pending the determination of proved reserves were $64.3 million and $68.8 million for the years ended and as of December 31, 2022 and 2021, respectively. Capitalized exploratory well costs that were reclassified to wells, equipment and facilities based on the determination of proved reserves were $59.1 million and $42.9 million for the years ended December 31, 2022 and 2021, respectively which excludes costs that were incurred in the current year. The Company had no significant costs which had been deferred for longer than one year as of December 31, 2022.

On April 30, 2020, the Company acquired an 80% working interest in CLR Exploration, LLC for approximately $7.0 million from R2K as discussed in footnote 12. The assets are located in Schleicher and Sutton Counties, Texas. This transaction was considered a purchase of assets. On June 1, 2021, the Company sold the 80% working interest in CLR Exploration, LLC to a third party for approximately $0.1 million, which resulted in a loss of $4.7 million on the sale.

On April 1, 2021, THQA settled a claim regarding disputed royalty payments.  The total settlement was for $6.5 million which consisted of a payment of $5.2 million to purchase the mineral rights owned by the plaintiffs as well as a settlement payment of $1.3 million for alleged damages.  The majority of mineral rights purchased are included in THQA proved properties and the payment for damages is included in general and administrative expenses.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

On July 9, 2021, the Company and XcL Midstream Operating, LLC (“XcLM”), entities under common control, acquired the 100% interest in High Road Minerals, LLC, High Road Operating, LLC, and High Road Midstream, LLC from High Road Resources Holdings, LLC, for $27.8 million in cash consideration. The assets are located in Marshall and Wetzel Counties, West Virginia, Harrison and Jefferson Counties, Ohio, and Greene County, Pennsylvania. The Company purchased the assets associated with High Road Operating, LLC and High Road Minerals, LLC for $22.7 million cash consideration. On behalf of XcLM, the Company purchased the assets of High Road Midstream, LLC for $5.1 million. The payment of $5.1 million was reimbursed by XcLM in August 2021.

Gathering facilities and other property and equipment consists of the following at December 31:

On December 10, 2021, the Company’s board approved the purchase of the water pipelines, water pipeline systems, and all associated water infrastructure, including the corresponding rights-of-way in Marshall and Wetzel Counties, WV, Belmont and Monroe Counties, OH and Greene County, PA, (the “XcL Water System”), from XcL Midstream Operating, LLC (“XcLM”) in return for the sale of all gas and condensate gathering assets, including the corresponding rights-of-way, (the “The Legacy Gathering System”) to XcLM. This transaction was treated as an exchange of assets between entities under common control. The net book value of the XcL Water System was approximately $1.0 million in excess of the Legacy Gathering System’s carrying value; this excess amount was treated as a capital contribution to the Company.

Depreciation expense for gathering facilities and other property and equipment was $1.3 million and $1.1 million for the years ended December 31, 2022 and 2021, respectively.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company will recognize the fair value of its asset retirement obligations related to the plugging, abandonment, and remediation of oil and natural gas producing properties. The present value of the estimated asset retirement costs will be capitalized as part of the carrying amount of the related long-lived assets. The following is a reconciliation of the Company’s asset retirement obligations for the year ended December 31:

The Company adopted Accounting Standards Codification Topic 842, Leases, (“ASC 842”) for the annual period beginning January 1, 2022. The Company elected the package of practical expedients at transition that allowed the Company not to reassess the following at the transition date: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) whether unamortized initial direct costs for existing leases meet the definition of initial direct costs under the new guidance. In addition, at transition, the Company elected the practical expedient for land easements; accordingly, the Company was not required to evaluate under ASC 842 land easements that existed or expired before the entity’s adoption of ASC 842 and that were not previously accounted for as leases under legacy lease accounting guidance.

The Company has operating leases for office space and compressors. These leases have initial terms ranging from 1 to 5.5 years and include renewal options ranging from 0 to 1 year. The Company does not include the renewal options in the lease term, as it is not reasonably certain such options will be exercised. Payments are for fixed amounts as contractually designated in the lease agreements.

The components of the Company’s lease costs are set forth in the table below:

As of December 31, 2022, the weighted average lease term was 2.7 years and the weighted average discount rate was 3.61%.

The table below presents other supplemental lease information about the Company’s operating leases for the period presented:

On December 23, 2022, the Company entered into a senior unsecured promissory note with EQT Production Company under the amended and restated purchase agreement referenced in footnote 1. Per the agreement, the escrow funds of $150 million plus accrued interest were released to the Company with the stipulation that the funds would be exclusively used to pay down the current credit facility. The maturity date of the note is one year after the Termination Date, as defined in the amended and restated purchase agreement. Before the termination date, interest on the note will accrue on the outstanding principal at 0% per year; thereafter, interest will accrue on the outstanding principle at a rate of 10% per year, with the rate increasing in increments of 0.50% each quarter. Upon the successful close of the acquisition, the note will be applied towards the cash consideration to be paid by EQT and extinguish the note. As defined in the amended agreement, if the purchase agreement is terminated and the Company is entitled to retain the escrow funds, the outstanding balance would be applied towards releasing the escrow and extinguishing the note.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Senior Secured Revolving Credit Facility

The Company has a senior secured revolving bank credit facility (the Credit Facility) with a group of large, commercial lenders. Borrowings under the Credit Facility are subject to borrowing base limitations based on the collateral value of the Company’s proved properties and commodity hedge positions and are subject to regular semiannual redeterminations or more frequently if requested by the Company. The borrowing base was redetermined in May 2022 to be $850 million. As of December 31, 2022 and 2021, the Company had an outstanding balance under the Credit Facility of $510 million and $550 million, respectively, with a weighted average interest rate of approximately 7.64% and 3.61%, respectively. The amounts reflected in the Company’s December 31, 2022 and 2021 consolidated balance sheets are shown net of the debt issuance costs of $1.2 million and $2.3 million, respectively. The maturity date of the Credit Facility is January 1, 2025.

The Credit Facility is secured by liens on substantially all of the Company’s properties and guarantees from the Company’s restricted subsidiaries, as applicable. The Credit Facility contains certain covenants, including restrictions on indebtedness and dividends and requirements with respect to working capital and leverage coverage ratios. Interest is payable at a variable rate based on LIBOR or the prime rate, determined by the Company’s election at the time of borrowing. The Company was in compliance with all of the financial covenants under the Credit Facility as of December 31, 2022.

Commitment fees on the unused portion of the Credit Facility are due quarterly at a rate of 0.50% of the unused portion, based on utilization.

Senior Note

On July 31, 2020, as required under the Twelfth Amendment to the Credit Facility, the Company entered into a Subordinated Promissory Note (the Senior Note) with Stone Hill Minerals Holdings, LLC for the principal capacity amount of $50 million. The Senior Note had a stated interest rate of 9.0%, compounding annually. On December 3, 2021, the Company paid the outstanding balance of $39.5 million in principal and interest. As of December 31, 2022, the Company has no remaining balance under the Senior Note.

The Company periodically enters into natural gas, NGLs, and oil derivative contracts with counterparties to hedge the price risk associated with a portion of its production. These derivatives are not held for trading purposes. To the extent that changes occur in the market prices of natural gas, NGLs, and oil, the Company is exposed to market risk on these open contracts. This market risk exposure is generally offset by the change in market prices of natural gas, NGLs, and oil recognized upon the ultimate sale of the Company’s production.

During the years ended December 31, 2022 and 2021, the Company was party to various natural gas fixed price swap contracts and costless collars. When actual commodity prices exceed the fixed price provided by the swap contracts, the Company pays the excess to the counterparty. When actual commodity prices are below the contractually provided fixed price, the Company receives the difference from the counterparty. When actual commodity prices fall within the band provided by the costless collars, the Company receives the actual prices from the counterparty. When actual commodity prices fall outside the band provided by the costless collars, the Company receives the price provided by the collar from the counterparty and pays the actual price to the counterparty.

THQ APPALACHIA I, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

In addition, the Company has entered into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (NYMEX) index price and a local index price. The Company’s derivative swap contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s statements of operations.

As of December 31, 2022, the Company’s fixed price natural gas collar and swap positions were as follows:

The following is a summary of derivative fair value gains which are recorded in the consolidated statements of operations included in net gain on derivative instruments for the years ended December 31:

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

THQ-XcL Holdings I, LLC (the Company) is a midstream energy company engaged in the acquisition, development and operation of oil, natural gas, natural gas liquids, and processing assets in the Appalachia Basin, namely the Marcellus and Point Pleasant shale trends in the Northeastern United States. Its executive offices are located in Fort Worth, Texas.

The operations of the Company are governed by the provisions of a Limited Liability Company Agreement (the Agreement) dated December 20, 2017, as executed by and among its members. The Company’s majority member is Q-XcL Holdings I (VI) Investment Partners, LLC (Quantum), with Radler 2000, LP (R2K) and certain members of management comprising the remaining capital members. The Agreement includes specific provisions with respect to the maintenance of the capital accounts of each of the Company’s members (see footnote 9).

On September 6, 2022, the Company entered into a purchase agreement with EQT Corporation to sell the Company’s gathering and processing assets along with the upstream assets of affiliate company THQ Appalachia I, LLC for total consideration of $2.6 billion of cash and 55 million shares of common stock of EQT Corporation (EQT). The Company will be selling 100% of its membership interests in THQ-XCL Holdings I Midco, LLC (“THQ-XcL Midco”) along with the 100% membership interests of the subsidiaries of THQ-XcL Midco (“EQT Acquisition”). On December 23, 2022, the parties entered into an amended and restated purchase agreement to extend the right to terminate the agreement to December 31, 2023, from the original termination date of December 31, 2022. This transaction has an effective date of July 1, 2022. The close of the transaction remains subject to regulatory approval.

The accounts are maintained using the accrual basis of accounting and the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are stated in United States dollars.

The accompanying consolidated financial statements include the accounts of THQ-XcL Holdings I, LLC and its wholly owned subsidiaries THQ-XcL Holdings I Midco, LLC, XcL Holdings Corporation, XcL Midstream, LLC, XcL Midstream Operating, LLC, XcL Processing, LLC, and XcL Processing Operating, LLC. XcL Holdings Corporation was dissolved on May 17, 2022. All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of the consolidated financial statements and notes in conformity with U.S. GAAP requires that management formulate estimates and assumptions that affect revenues, expenses, assets, liabilities and the disclosure of contingent assets and liabilities. Items subject to estimates and assumptions include the useful lives of property and equipment and valuation of accrued liabilities, among others. Although management believes these estimates are reasonable, actual results could differ from these estimates.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company considers all cash and highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

Property and equipment primarily consists of gathering pipelines, processing plant, fresh water delivery pipelines, and facilities stated at historical cost less accumulated depreciation. The Company capitalizes construction-related direct labor and material costs. Maintenance and repair costs are expensed as incurred.

Depreciation is computed using the straight-line method over the estimated useful lives and considering the estimated salvage values of assets. Uncertainties that may impact these estimates of useful lives include, among others, changes in laws and regulations relating to environmental matters, including air and water quality, restoration and abandonment requirements, economic conditions, and supply and demand for the Company’s services in the areas in which the Company operates. When assets are placed into service, management makes estimates with respect to useful lives and salvage values that management believes are reasonable. However, subsequent events could cause a change in estimates, thereby impacting future depreciation amounts.

The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the related carrying values of the assets may not be recoverable. Generally, the basis for making such assessments are undiscounted future cash flow projections for the asset group being assessed. If the carrying values of the assets are deemed not recoverable, the carrying values are reduced to the estimated fair values, which are based on discounted future cash flows using assumptions as to revenues, costs and discount rates typical of third party market participants, which is a Level 3 fair value measurement.

Under FASB ASC 410, an asset retirement obligation is recorded as a liability at its estimated present value at the asset’s inception, with an offsetting increase to producing properties in the accompanying balance sheets which is allocated to expense over the useful life of the asset. Periodic accretion of the discount on asset retirement obligations is recorded as an expense in depreciation, depletion, and amortization in the accompanying consolidated statement of income.

The Company’s gathering pipelines, processing plant, compressor stations and fresh water delivery pipelines and facilities have an indeterminate life, if properly maintained. Accordingly, the Company is not able to make a reasonable estimate of when future dismantlement and removal dates of the Company’s pipelines, processing plant, compressor stations and facilities will occur. The Company is under no legal obligations, neither contractually nor under the doctrine of promissory estoppel, to restore or dismantle the Company’s gathering pipelines, processing plant, compressor stations, water delivery pipelines and water treatment facility upon abandonment. It has been determined by the Company’s operational management team that abandoning all other ancillary equipment, outside of the assets stated above, would require minimal costs. For the reasons stated above, the Company has not recorded asset retirement obligations on the gathering pipelines, processing plant, compressor stations, water delivery pipelines and water treatment facilities at December 31, 2022 or 2021.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company recognizes revenue in accordance with ASC 606. The ASC 606 core principle is that a company will recognize revenue when it transfers promised goods or services to customers and in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

The Company provides gathering, processing, compression, and water handling and treatment services under fee-based contracts primarily based on throughput. Under these arrangements, the Company receives fees for gathering and processing oil and gas products, compression services, and water handling and treatment services. The revenue the Company earns from these arrangements is directly related to (1) in the case of natural gas gathering, processing and compression, the volumes of metered natural gas that the Company gathers, processes, compresses and delivers to natural gas compression sites or other transmission delivery points, (2) in the case of oil gathering, the volumes of metered oil that the Company gathers and delivers to other transmission delivery points, (3) in the case of fresh water services, the quantities of fresh water delivered to the Company’s customers for use in their well completion operations, or (4) in the case of flowback and produced water, the quantities of flowback and produced water treated for the Company’s customers.

For midstream service contracts in which there is no commodity purchase, control of the commodity never passes to the Company; and the Company simply earns a fee for services. The Company considers these contracts to contain performance obligations for the Company’s services. Accordingly, the satisfaction of these performance obligations are considered to be revenue-generating, and the Company recognizes the fees received for satisfying these performance obligations as midstream service revenue over time as the Company satisfies the performance obligations.

Effective October 1, 2021, the Company no longer provides water handling and treatment services. The Company sold the water delivery assets to TH Exploration II, LLC (“TH Exploration II”) in exchange for the gas and condensate gathering assets owned by TH Exploration II (see footnote 8).

The Company’s revenues are derived principally from providing gathering, processing, compression, and water handling services to operators in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because purchasers may be similarly affected by changes in economic and other conditions. Additionally, as the Company operates in the oil and gas industry, this concentration may impact the Company’s business risk, either positively or negatively, in that commodity prices, customers and suppliers may be similarly affected by changes in economic, political or other conditions related to the industry.

The Company’s main customer is its affiliate, THQA Appalachia I, LLC (“THQA”). THQA comprised approximately 72% and 74% of the Company’s revenue in twelve months ended December 31, 2022 and 2021, respectively.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). The Company has not experienced any losses related to amounts in excess of FDIC limits.

The Company relies on IT systems to conduct business, as well as systems of third-party vendors. These systems are subject to possible security breaches and cyber-attacks. Cyber-attacks are becoming more sophisticated, and U.S. government warnings have indicated that infrastructure assets, including pipelines, may be specifically targeted by certain groups. These attacks include, without limitation, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches. These attacks may be perpetrated by state-sponsored groups, criminal organizations, or private individuals. These cybersecurity risks include cyber-attacks on the Company and third parties who provide material services. In addition to disrupting operations, cybersecurity breaches could also affect the Company’s ability to operate or control facilities, render data or systems unusable, or result in the theft of sensitive, confidential or customer information. These events could also damage the Company’s reputation, and result in losses from remedial actions, loss of business or potential liability to third parties. The Company carries insurance specifically for cybersecurity events. However, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur. Increasing scrutiny and changing expectations from stakeholders with respect to the environment, social, and governance practices may impose additional costs on the Company or expose the Company to new or additional risks.

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company follows the provisions of ASC Topic 820, Fair Value Measurement, for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. As it relates to the Company, ASC Topic 820 applies to the measurement of property impairments.

The Company has an ongoing business relationship with an affiliate, Tug Hill Operating, LLC (THO). THO is responsible for acquisitions, construction and operation of gathering systems and related facilities owned by the Company. As it incurs costs on behalf of the Company for these operations, THO bills the Company through its joint interest billing (JIB) process; and the Company reimburses THO for these costs at least monthly. THO is also responsible for the administration of the Company’s business. In exchange for these services, the Company pays a quarterly fee that includes (a) THO employees’ time and related expenses charged to the Company for the operation of its oil and natural gas properties, (b) an allocated amount of THO overhead expense calculated based on the number of hours THO employees spend working on Company projects, and (c) an additional percentage markup of the overall total of (a) and (b) to cover benefits and other employee-related costs and any unforeseen or difficult to allocate costs. The Company’s board approves the operating budgets. For years ended December 31, 2022 and 2021, THO billed the Company $18.6 million and $16.1 million, respectively through the JIB process. The amounts due to THO for these services, which are included in the Company’s affiliate payables balance were $5.7 million and $6.5 million as of December 31, 2022 and 2021, respectively. The remaining affiliate payable balance of $1.9 million as of December 31, 2022 is for revenues received by the Company that were due to THQA. Allocations consist of $0.0 million and $0.1 million relating to acquisition of surface use agreements and rights-of-way, $2.1 million and $2.4 million of construction expenditures and operating expenses, $11.9 million and $11.1 million in salaries and bonus for the operation of its business, $0.6 million and $0.8 million for overhead expenses, and $4.0 million and $1.7 million of direct general and administrative expenses for the periods ended December 31, 2022 and 2021, respectively.

The Company’s most significant customer is THQA. The Company provides condensate gathering and stabilization, and gas gathering and processing, and related services to THQA and receives fees from THQA based on the volumes transported by the Company. On December 10, 2021, the Company sold the water delivery assets to TH Exploration II, a subsidiary of THQA, in exchange for the gas and condensate gathering assets owned by TH Exploration II (see footnote 8).

The Company is a limited liability company and, therefore, is treated as a flow through entity for federal income tax purposes. As a result, the net taxable income of the Company and any related tax credits, for federal income tax purposes, are allocated to the members and are included in the members’ tax returns even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no federal tax provision has been made in the financial statements of the Company. However, Texas imposes an entity-level tax on all forms of business regardless of federal entity classification. At December 31, 2022 and 2021, the Company had not accrued a liability for the Texas franchise tax as the liability, if any, is not expected to be material. The Company applies the provisions of ASC Topic 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax positions. The Company analyzed its tax filing positions in the U.S. federal, state and local jurisdictions where it is required to file income tax returns, for all open tax years. Based on this review, no liabilities for uncertain income tax positions were required to have been recorded pursuant to ASC 740. The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by U.S. federal and certain state and local tax regulators. As of December 31, 2022 and 2021, the Company's U.S. federal income tax returns and state and local returns are open under the normal three-year statute of limitations and therefore subject to examination.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Upon execution, contracts are reviewed to determine whether the arrangement contains a lease. To the extent an arrangement is determined to include a lease, it is classified as either an operating or a finance lease, which dictates the pattern of expense recognition in the income statement. Operating leases are reflected as “Right-of-use assets”, “Lease liabilities” and “Long-term lease liabilities” on the consolidated balance sheets. The Company does not have any finance leases.

A right-of-use (“ROU”) asset representing our right to use an underlying asset for the lease term and a lease liability representing our obligation to make lease payments arising from the lease are recognized on the consolidated balance sheets for all leases with a lease term greater than one year, regardless of operating or finance lease classification. The ROU asset is initially measured as the present value of the lease liability adjusted for any payments made prior to lease commencement, including any initial direct costs incurred and incentives received. Lease liabilities are initially measured at the present value of future minimum lease payments, excluding variable lease payments, over the lease term. Given that the Company’s leases do not provide an implicit rate in the contract, the Company uses an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date.

The Company has elected, as an accounting policy, not to record short-term leases with terms of twelve months or less on the consolidated balance sheets. In determining the lease term, the Company only includes contractual options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

The Company has also elected to account for lease and non-lease components in its contracts as a single lease component for all asset classes.

See Note 4 — Leases for additional information.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company began constructing gathering pipelines, fresh water delivery pipelines, and facilities in 2017 and a natural gas processing plant in 2019. A portion of the gathering pipelines, fresh water delivery pipelines, and facilities were placed into service in 2022 and 2021, while some of the gathering pipelines and facilities projects are still in the construction phase. In 2021, the fresh water delivery pipelines and water infrastructure assets were sold in exchange for the gas and condensate gathering assets owned by TH Exploration II (see footnote 8). The processing plant was placed into service in the third quarter of 2020. Property and equipment consists of the following at December 31:

Depreciation expense was recorded on certain pipelines, facilities, and the processing plant that were placed into service as of December 31, 2021 and 2022, using a 20-year life. For those pipelines and facilities that were still in the construction phase, no depreciation was recorded in 2021 or 2022.

At the end of 2020, the Company began work to build a second processing plant. Effective September 1, 2021, the Company decided to cease construction on the new plant. This resulted in a $0.9 million impairment in 2021 which was recorded to depreciation.

On July 9, 2021, the Company closed on the purchase of High Road Midstream, LLC for $5.2 million cash consideration. The assets were purchased by THQA, an entity under common control, on behalf of the Company for $5.1 million. The Company reimbursed THQA $5.1 million in August 2021 and incurred an additional $0.1 million in transaction costs. The assets include all equipment and associated agreements necessary to operate the midstream system including, but not limited to: all gas and water pipelines, taps, interconnect agreements, gas gathering agreements, right-of-way, easements, surface sites, withdrawal sites and licenses.

The Company adopted Accounting Standards Codification Topic 842, Leases, (“ASC 842”) for the annual period beginning January 1, 2022. The Company elected the package of practical expedients at transition that allowed the Company not to reassess the following at the transition date: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) whether unamortized initial direct costs for existing leases meet the definition of initial direct costs under the new guidance. In addition, at transition, the Company elected the practical expedient for land easements; accordingly, the Company was not required to evaluate under ASC 842 land easements that existed or expired before the entity’s adoption of ASC 842 and that were not previously accounted for as leases under legacy lease accounting guidance.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company has operating leases for compressors and storage space. These leases have initial terms ranging from 1 to 5 years and include renewal options ranging from 0 to 5 years. The Company does not include the renewal options in the lease term, as it is not reasonably certain such options will be exercised. Payments are for fixed amounts as contractually designated in the lease agreements.

The table below presents the lease related assets and liabilities recorded on our consolidated balance sheet:

The components of the Company’s lease costs are set forth in the table below:

As of December 31, 2022, the weighted average lease term was 3.11 years and the weighted average discount rate was 3.10%.

The table below presents other supplemental lease information about the Company’s operating leases for the period presented:

As referenced in footnote 2(l), the Company is billed by THO for an allocated amount of overhead expenses. For the year ended December 31, 2022, THO billed the Company $4.0 million of direct general and administrative, of which $0.4 million of expenses related to operating leases and short-term lease obligations held by THO.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Senior Secured Revolving Credit Facility

The Company has a $250 million senior secured revolving bank credit facility (the Credit Facility) with a group of large, commercial lenders, with a maturity date of May 2, 2025. Borrowings under the Credit Facility are limited based on meeting quarterly interest and leverage coverage ratios. The amounts outstanding were $158.7 million and $181.7 million at December 31, 2022 and 2021, respectively, with a weighted average interest rate of approximately 7.29% and 3.10%, respectively. The amount reflected in the Company’s December 31, 2022, balance sheet is shown net of the debt issuance costs of $1.5 million and $2.1 million, respectively.

The Credit Facility is secured by liens on substantially all of the Company’s properties and guarantees from the Company’s restricted subsidiaries, as applicable. The Credit Facility contains certain other covenants, including restrictions on indebtedness and dividends. Interest is payable at a variable rate based on LIBOR or the prime rate, determined by the Company’s election at the time of borrowing. The Company was in compliance with all of the financial covenants under the Credit Facility as of December 31, 2022.

The following is a schedule of future minimum payments for fractionation services and purchase orders for cryogenic processing facilities, pipelines, and interconnections as of December 31, 2022.

The Company has entered into a firm fractionation agreement in order to facilitate the fractionation of natural gas liquids into purity products. This contract commits the Company to transport minimum daily natural gas liquids volumes at negotiated rates, or pay for any deficiencies at a specified fee beginning in the third quarter of 2021. Actual payments under this agreement will differ from the amounts shown in the table above as the Company expects to deliver volumes in excess of the minimum commitment. This commitment has varying terms, renewal rights and an escalation clause. The fractionation fee is escalated annually and is adjusted up or down in proportion to the lesser of 55% of the annual percentage change in the Oil Producer Price Index ended June of the year preceding the date of adjustment or 2%; provided, however, that in no event shall the adjustment fee ever be less than the initial fee.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

The Company is committed to regular maintenance services and repairs on the cryogenic processing facility.

The Company is committed to purchases of steel pipe, metering, and related materials during 2022.

The Company is subject to certain claims and litigation arising in the normal course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the results of operations or financial position of the Company.

On December 10, 2021, the Company’s board approved the purchase of the gas and condensate gathering assets, including the corresponding rights-of-way (the “Legacy Gathering System”), from TH Exploration II for the sale of all water pipelines, water pipeline systems, and all associated water infrastructure, including the corresponding rights-of-way, in Marshall and Wetzel Counties, WV, Belmont and Monroe Counties, OH and Greene County, PA, (the “XcL Water System”) to TH Exploration II. This transaction was treated as an exchange of assets between entities under common control. The net book value of the XcL Water System was approximately $1.0 million in excess of the Legacy Gathering System’s carrying value; this excess amount was treated as a distribution from the Company. TH Exploration II will reimburse the Company for all costs associated with in process construction projects on the XcL Water System.

There are two classes of membership interest – capital interests and management incentive interests. Capital interests held by Quantum, R2K and members of management have full voting rights and rights to share in the distributions of the Company. As described more fully in footnote 10, management incentive interests can be issued under the Incentive Pool Plan and are non-voting with no rights to share in distributions until the capital contributed interests have earned the full base return.

The members have no liability for the debts, obligations and liabilities of the Company, except as expressly required in the agreement. The Company shall dissolve and its affairs shall be wound up upon the earliest to occur of (a) the expiration of its term on December 20, 2025, if not extended by the members, (b) election by the Board of Directors by majority approval at any time or (c) entry of a decree of judicial dissolution of the Company under the Delaware Limited Liability Company Act.

The timing and amounts of distributions, other than tax advances, are determined by the Board of Directors. Capital contributions will receive a base return of 8% on their contributions (base return) which continues accruing until distributions exceed the total capital contributions plus the 8% base return. The first 10% of R2K’s Capital Interest will be treated as un-promoted capital (R2K’s Un-promoted Capital Interest). Distributions to members’ capital that is promoted is subject to certain distribution flips, whereby, distributions will be made in proportion to the agreed upon sharing ratios. Tax advances may be made quarterly based on projections of the entity’s taxable income for the year.

THQ-XCL HOLDINgS I, LLC and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

On December 10, 2021, the Company’s board approved the purchase of the Legacy Gathering System from TH Exploration II for the sale of the XcL Water System to TH Exploration II (footnote 8). This transaction was treated as an exchange of assets between entities under common control. The net book value of the XcL Water System was approximately $1.0 million in excess of the Legacy Gathering System’s carrying value; this excess amount was treated as a distribution from the Company.

On March 15, 2022, the Company paid $2.6 million of West Virginia withholding taxes on behalf of the members. This payment was treated as a distribution.

Total equity commitments from the members is $457 million, of which $358 million was funded as of December 31, 2022, leaving $99 million in available equity should the Company need additional funding.

Effective with the formation of the Company on December 20, 2017, the Company adopted an incentive unit plan, THQ-XcL Employee Holdings I, LLC, (the Plan) to provide profit awards to employees (management incentive units). The Company can issue up to 2,000,000 units to certain employees in consideration of services rendered and to be rendered by the holders, for the benefit of the Company in their capacities as employees. All of the incentive units will be subject to vesting over five years, forfeiture, and termination. The management incentive units have no voting rights, do not have an exercise price and are automatically forfeited except in extenuating circumstances if and when such person’s status as an employee is terminated.

Compensation expense for these awards will be recognized when all performance, market, and service conditions are probable of being satisfied in general upon a vesting event, which is defined as (i) the sale of all or substantially all of the outstanding capital interests or assets of the Company, (ii) the time of any distribution by the Company after capital contributions of substantially all of the capital commitments have been made by the capital members, and the Board has determined that the Company will not raise additional capital, (iii) one year after the expiration of a lockup period in the event of a transfer of all or substantially all of the outstanding capital interests or assets of the Company to an individual, estate or a corporation, partnership, joint venture, limited partnership, limited liability company, trust, unincorporated organization, association or any other entity (Person) in exchange for publicly tradable securities of such Person; or two years after the expiration of a lockup period in the event that securities received in connection with the transfer constitute 15% or more of the total shares of such Person then outstanding.

In preparing the consolidated financial statements, management has evaluated all subsequent events and transactions for potential recognition or disclosure through March 29, 2023, the date the consolidated financial statements were available for issuance, and no other items requiring disclosure were identified.