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 September 30, 2021
OR
☐ 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)
(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:
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Title of each class |
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Trading Symbol(s) |
Name of each exchange on which registered |
Common Units representing limited partner |
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interests |
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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.
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Large accelerated filer ◻ |
Accelerated filer ◻ |
Non-accelerated filer ⌧
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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 November 9, 2021: approximately 114,165,219 common units.
COMMONLY USED DEFINED TERMS
As used in this Quarterly Report on Form 10-Q (this “Form 10-Q”), unless the context indicates or otherwise requires, the following terms have the following meanings:
● | “Evolve Transition Infrastructure,” “the Partnership,” “we,” “us,” “our” or like terms refer collectively to Evolve Transition Infrastructure LP, its consolidated subsidiaries and, where the context provides, the entities in which we have a 50% ownership interest. |
● | “Bbl” means one barrel of 42 U.S. gallons of oil or other liquid hydrocarbons. |
● | “Board” means the board of directors of our general partner. |
● | “Class C Preferred Units” means our Class C Preferred Units representing limited partner interests in Evolve Transition Infrastructure. |
● | “common units” means our common units representing limited partner interests in Evolve Transition Infrastructure. |
● | “Credit Agreement” means collectively, the Third Amended and Restated Credit Agreement, dated as of March 31, 2015, among the Partnership, Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto, as amended by (i) Amendment and Waiver of Third Amended and Restated Credit Agreement, dated as of August 12, 2015, (ii) Joinder, Assignment and Second Amendment to Third Amended and Restated Credit Agreement, dated as of October 14, 2015, (iii) Third Amendment to Third Amended and Restated Credit Agreement, dated as of November 12, 2015, (iv) Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of July 5, 2016, (v) Fifth Amendment to Third Amended and Restated Credit Agreement, dated as of April 17, 2017, (vi) Sixth Amendment to Third Amended and Restated Credit Agreement, dated as of November 7, 2017, (vii) Seventh Amendment to Third Amended and Restated Credit Agreement, dated as of February 5, 2018, (viii) Eighth Amendment to Third Amended and Restated Credit Agreement, dated as of May 7, 2018, (ix) Ninth Amendment to Third Amended and Restated Credit Agreement, dated as of November 22, 2019, (x) Tenth Amendment to Third Amended and Restated Credit Agreement, dated as of November 6, 2020, (xi) Eleventh Amendment to Third Amended and Restated Credit Agreement, dated as of July 28, 2021 (individually, the “Eleventh Amendment”), and (xii) Twelfth Amendment to Third Amended and Restated Credit Agreement, dated as of August 20, 2021 (individually, the “Twelfth Amendment”). |
● | “Gathering Agreement” means the Firm Gathering and Processing Agreement, dated as of October 14, 2015, by and between Catarina Midstream, LLC and SN Catarina LLC, as amended by Amendment No. 1 thereto, dated June 30, 2017. |
● | “MBbl” means one thousand Bbls. |
● | “MBbl/d” means one thousand barrels of oil or other liquid hydrocarbons per day. |
● | “Mesquite” means (i) at all times prior to June 30, 2020, Sanchez Energy Corporation and its consolidated subsidiaries, and (ii) at all times after and including June 30, 2020, Mesquite Energy, Inc. and its consolidated subsidiaries. |
● | “Mesquite Chapter 11 Case” means the voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code filed by the SN Debtors in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”). |
● | “MMBtu” means one million British thermal units. |
● | “MMcf/d” means one million cubic feet of natural gas per day. |
● | “NGLs” means natural gas liquids such as ethane, propane, butane, natural gasolines and other components that when removed from natural gas become liquid under various levels of higher pressure and lower temperature. |
● | “NYSE American” means NYSE American LLC. |
● | “our general partner” refers to Evolve Transition Infrastructure GP LLC, our general partner. |
● | “our partnership agreement” means the Third Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of August 2, 2019, as amended by the Stonepeak Letter Agreement (as defined herein), as amended by Amendment No. 1 thereto, dated as of February 12, 2021. |
3
● | “SEC” means the United States Securities and Exchange Commission. |
● | “Settlement Agreement” means the Settlement Agreement, dated June 6, 2020, as amended by that certain Amendment Agreement, dated as of June 14, 2020 and effective as of June 6, 2020, in each case, by and among the Partnership, our general partner, Catarina Midstream, LLC, Seco Pipeline, LLC, the SN Debtors, SP Holdings, Carnero G&P LLC and TPL SouthTex Processing Company LP. |
● | “Shared Services Agreement” means the Amended and Restated Shared Services Agreement between SP Holdings and the Partnership, dated as of March 6, 2015. |
● | “SN Debtors” means collectively, Mesquite, SN Palmetto, LLC, SN Marquis LLC, SN Cotulla Assets, LLC, SN Operating, LLC, SN TMS, LLC, SN Catarina, LLC, Rockin L Ranch Company, LLC, SN Payables, LLC, SN EF Maverick, LLC and SN UR Holdings, LLC. |
● | “SP Holdings” means SP Holdings, LLC, the sole member of our general partner. |
● | “Stonepeak” means Stonepeak Catarina and its subsidiaries, other than the Partnership. |
● | “Stonepeak Catarina” means Stonepeak Catarina Holdings, LLC. |
● | “Stonepeak Letter Agreement” means that certain letter agreement, dated as of November 16, 2020, by and between the Partnership and Stonepeak Catarina, wherein the parties agreed that Stonepeak Catarina 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 noticed to the Partnership no later than the last day of the calendar month following the end of such quarter. |
● | “Stonepeak Warrant” means (i) at all times prior to February 24, 2021, that certain Warrant Exercisable for Junior Securities, issued to Stonepeak Catarina on August 2, 2019 (the “Original Warrant”); (ii) at all times from February 24, 2021 to May 4, 2021, the Original Warrant, as amended by Amendment No. 1 thereto, dated February 24, 2021; (iii) at all times from May 4, 2021 to August 2, 2021, the Original Warrant, as amended by Amendment No. 1 thereto, dated February 24, 2021, and Amendment No. 2 thereto, dated May 4, 2021; and (iv) at all times from August 2, 2021 through September 30, 2021, the Original Warrant, as amended by Amendment No. 1 thereto, dated February 24, 2021, Amendment No. 2 thereto, dated May 4, 2021, and Amendment No. 3 thereto, dated August 2, 2021. |
4
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. Except for statements of historical fact, all statements in this Form 10-Q constitute forward-looking statements. Forward-looking statements may be identified by words like “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other similar expressions. The absence of such words or expressions does not necessarily mean the statements are not forward-looking.
The forward-looking statements contained in this Form 10-Q are largely based on our current expectations, which reflect estimates and assumptions made by the management of our general partner. Although we believe such estimates and assumptions to be reasonable, statements made regarding future results are not guarantees of future performance and are subject to numerous assumptions, uncertainties and risks that are beyond our control. Actual outcomes and results may be materially different from the results stated or implied in such forward-looking statements included in this report. You should not put any undue reliance on any forward-looking statement. All forward-looking information in this Form 10-Q and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.
Important factors that could cause our actual results to differ materially from the expectations reflected in the forward looking statements include, among others:
● | our ability to successfully execute our business, acquisition and financing strategies, including our business strategy to focus on the ongoing energy transition in the industries in which we operate; |
● | our ability to successfully finance and develop the Initial Project (as defined herein) with HOBO Renewable Diesel LLC; |
● | changes in general economic conditions, including market and macro-economic disruptions resulting from the ongoing pandemic caused by a novel strain of coronavirus and related governmental responses; |
● | the ability of our customers to meet their drilling and development plans on a timely basis, or at all, and perform under gathering, processing and other agreements; |
● | the creditworthiness and performance of our counterparties, including financial institutions, operating partners, customers and other counterparties; |
● | our ability to grow enterprise value; |
● | the ability of our partners to perform under our joint ventures; |
● | the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities; |
● | our ability to access the credit and capital markets to obtain financing on terms we deem acceptable, if at all, and to otherwise satisfy our capital expenditure requirements; |
● | the timing and extent of changes in prices for, and demand for, natural gas, NGLs and oil; |
● | competition in the oil and natural gas industry for employees and other personnel, equipment, materials and services and, related thereto, the availability and cost of employees and other personnel, equipment, materials and services; |
● | the extent to which our assets operated by others are operated successfully and economically; |
● | our ability to compete with other companies in the oil and natural gas and energy transition infrastructure industries; |
● | the impact of, and changes in, government policies, laws and regulations, including tax laws and regulations, environmental laws and regulations relating to air emissions, waste disposal, hydraulic fracturing and access to and use of water, laws and regulations imposing conditions and restrictions on drilling and completion operations; |
● | the use of competing energy sources and the development of alternative energy sources; |
● | unexpected results of litigation filed against us or other legal proceedings we are involved in; |
● | disruptions due to extreme weather conditions, such as extreme rainfall, hurricanes or tornadoes; |
● | the extent to which we incur uninsured losses and liabilities or losses and liabilities in excess of our insurance coverage; and |
5
● | the other factors described under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q and in our other public filings with the SEC. |
Management cautions all readers that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements. The forward-looking statements speak only as of the date made, and other than as required by law, we do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
6
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)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues |
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Gathering and transportation sales |
$ |
— |
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$ |
— |
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$ |
— |
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$ |
785 |
Gathering and transportation lease revenues |
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16,868 |
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10,670 |
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35,304 |
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34,615 |
Total revenues |
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16,868 |
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10,670 |
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35,304 |
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35,400 |
Expenses |
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Operating expenses |
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Transportation operating expenses |
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2,065 |
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2,455 |
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6,421 |
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7,641 |
General and administrative expenses |
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4,460 |
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2,693 |
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13,964 |
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10,980 |
Unit-based compensation expense |
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206 |
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779 |
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749 |
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1,902 |
Depreciation and amortization |
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5,143 |
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5,193 |
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15,430 |
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15,512 |
Accretion expense |
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98 |
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89 |
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287 |
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263 |
Total operating expenses |
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11,972 |
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11,209 |
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36,851 |
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36,298 |
Other (income) expense |
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Interest expense, net |
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31,141 |
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24,015 |
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89,525 |
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70,188 |
Loss (earnings) from equity investment |
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1,734 |
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441 |
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1,406 |
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(2,254) |
Other (income) expense |
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687 |
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(2) |
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(114) |
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(10) |
Total other expenses |
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33,562 |
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24,454 |
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90,817 |
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67,924 |
Total expenses |
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45,534 |
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35,663 |
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127,668 |
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104,222 |
Loss before income taxes |
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(28,666) |
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(24,993) |
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(92,364) |
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(68,822) |
Income tax expense (benefit) |
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(19) |
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43 |
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(17) |
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140 |
Loss from continuing operations |
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(28,647) |
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(25,036) |
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(92,347) |
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(68,962) |
Income (loss) from discontinued operations |
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187 |
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|
419 |
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1,289 |
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(19,613) |
Net loss |
$ |
(28,460) |
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$ |
(24,617) |
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$ |
(91,058) |
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$ |
(88,575) |
Loss from continuing operations per unit |
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Common units - Basic and Diluted |
$ |
(0.34) |
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$ |
(1.30) |
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$ |
(1.48) |
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$ |
(3.60) |
Loss from discontinued operations per unit |
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Common units - Basic and Diluted |
$ |
0.00 |
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$ |
0.02 |
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$ |
0.02 |
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$ |
(1.02) |
Net loss per unit |
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Common units - Basic and Diluted |
$ |
(0.34) |
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$ |
(1.28) |
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$ |
(1.45) |
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$ |
(4.62) |
Weighted Average Units Outstanding |
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Common units - Basic and Diluted |
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84,338,011 |
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|
19,264,636 |
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|
62,599,574 |
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|
19,164,245 |
See accompanying notes to condensed consolidated financial statements.
7
EVOLVE TRANSITION INFRASTRUCTURE LP and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except unit data)
(Unaudited)
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September 30, |
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December 31, |
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2021 |
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2020 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
1,403 |
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$ |
1,718 |
Accounts receivable |
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11,388 |
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|
5,259 |
Prepaid expenses |
|
694 |
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|
404 |
Fair value of warrants |
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160 |
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|
— |
Current assets from discontinued operations |
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516 |
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|
1,602 |
Total current assets |
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14,161 |
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|
8,983 |
Gathering and transportation assets, net |
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99,908 |
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|
105,267 |
Intangible assets, net |
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121,693 |
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131,786 |
Equity investments |
|
76,515 |
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|
89,635 |
Other non-current assets |
|
75 |
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|
25 |
Long-term assets from discontinued operations |
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— |
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|
18,082 |
Total assets |
$ |
312,352 |
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$ |
353,778 |
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LIABILITIES AND PARTNERS' CAPITAL |
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Current liabilities |
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Accounts payable and accrued liabilities |
$ |
3,127 |
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$ |
4,079 |
Accounts payable and accrued liabilities - related entities |
|
12,869 |
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|
25,737 |
Royalties payable |
|
359 |
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|
359 |
Short-term debt, net of debt issuance costs |
|
8,888 |
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|
110,233 |
Class C Preferred Units |
|
382,876 |
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|
345,205 |
Current liabilities from discontinued operations |
|
— |
|
|
341 |
Total current liabilities |
|
408,119 |
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|
485,954 |
Other liabilities |
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Long term accrued liabilities - related entities |
|
16,930 |
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|
12,137 |
Asset retirement obligation |
|
4,600 |
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|
4,313 |
Long-term debt, net of discount and debt issuance costs |
|
45,131 |
|
|
— |
Other liabilities |
|
11,990 |
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|
1,766 |
Long-term liabilities from discontinued operations |
|
— |
|
|
3,152 |
Total other liabilities |
|
78,651 |
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|
21,368 |
Total liabilities |
|
486,770 |
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|
507,322 |
Commitments and contingencies (See Note 12) |
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Partners' deficit |
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|
Common units, 96,465,219 and 19,953,880 units issued and outstanding as of September 30, 2021 and December 31, 2020, respectively |
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(174,418) |
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|
(153,544) |
Total partners' deficit |
|
(174,418) |
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|
(153,544) |
Total liabilities and partners' capital |
$ |
312,352 |
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$ |
353,778 |
See accompanying notes to condensed consolidated financial statements.
8
EVOLVE TRANSITION INFRASTRUCTURE LP and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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|
2021 |
|
2020 |
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Cash flows from operating activities: |
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Net loss |
$ |
(91,058) |
|
$ |
(88,575) |
Adjustments to reconcile net loss to cash provided by operating activities: |
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|
|
|
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Depreciation, depletion and amortization |
|
5,777 |
|
|
7,275 |
Amortization of debt issuance costs |
|
828 |
|
|
553 |
Accretion of Class C discount |
|
37,671 |
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|
28,110 |
Class C distribution accrual |
|
— |
|
|
37,448 |
Asset impairments |
|
— |
|
|
23,247 |
Accretion expense |
|
360 |
|
|
422 |
Distributions from equity investments |
|
11,946 |
|
|
7,624 |
Equity earnings in affiliate |
|
1,406 |
|
|
(2,254) |
Bad debt expense |
|
(1,926) |
|
|
— |
Gain on sale of assets |
|
(537) |
|
|
— |
Mark-to-market on Stonepeak Warrant |
|
10,234 |
|
|
(22) |
Net gain on commodity derivative contracts |
|
— |
|
|
(4,008) |
Net cash settlements received on commodity derivative contracts |
|
101 |
|
|
2,394 |
Gain on Nuvve Holding Warrants |
|
(160) |
|
|
— |
Unit-based compensation |
|
2,291 |
|
|
823 |
Amortization of intangible assets |
|
10,093 |
|
|
10,093 |
Changes in Operating Assets and Liabilities: |
|
|
|
|
|
Accounts receivable |
|
(5,161) |
|
|
(6,994) |
Accounts receivable - related entities |
|
— |
|
|
6,719 |
Prepaid expenses |
|
(99) |
|
|
393 |
Other assets |
|
118 |
|
|
(96) |
Accounts payable and accrued liabilities |
|
50,663 |
|
|
(300) |
Accounts payable and accrued liabilities- related entities |
|
(8,075) |
|
|
1,591 |
Other long-term liabilities |
|
338 |
|
|
— |
Net cash provided by operating activities |
|
24,810 |
|
|
24,443 |
Cash flows from investing activities: |
|
|
|
|
|
Proceeds from sales of oil and natural gas properties |
|
15,721 |
|
|
— |
Development of oil and natural gas properties |
|
— |
|
|
5 |
Construction of gathering and transportation assets |
|
(41) |
|
|
(182) |
Contributions to equity affiliates |
|
(232) |
|
|
— |
Net cash provided by (used in) investing activities |
|
15,448 |
|
|
(177) |
Cash flows from financing activities: |
|
|
|
|
|
Repayment of debt |
|
(61,800) |
|
|
(34,000) |
Proceeds from issuance of debt |
|
5,500 |
|
|
7,000 |
Issuance of common units |
|
17,051 |
|
|
— |
Payments for offering costs |
|
(582) |
|
|
— |
Units tendered by employees for tax withholdings |
|
— |
|
|
(41) |
Debt issuance costs |
|
(742) |
|
|
(132) |
Net cash used in financing activities |
|
(40,573) |
|
|
(27,173) |
Net decrease in cash and cash equivalents |
|
(315) |
|
|
(2,907) |
Cash and cash equivalents, beginning of period |
|
1,718 |
|
|
5,099 |
Cash and cash equivalents, end of period |
$ |
1,403 |
|
$ |
2,192 |
Supplemental disclosures of cash flow information: |
|
|
|
|
|
Cash paid during the period for income tax |
$ |
139 |
|
$ |
243 |
Cash paid during the period for interest |
$ |
2,184 |
|
$ |
4,259 |
See accompanying notes to condensed consolidated financial statements.
9
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) |
Unit-based compensation programs |
— |
|
|
206 |
|
|
206 |
Issuance of common units, net of offering costs of $0.2 million |
9,728,854 |
|
|
9,753 |
|
|
9,753 |
Common units issued as Class C Preferred distributions |
8,012,850 |
|
|
12,869 |
|
|
12,869 |
Net loss |
— |
|
|
(28,460) |
|
|
(28,460) |
Partners' Deficit, September 30, 2021 |
96,465,219 |
|
$ |
(174,418) |
|
$ |
(174,418) |
See accompanying notes to condensed consolidated financial statements.
10
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.
11
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.
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, including the impact of final 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 $0.3 million on the sale.
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 final post-closing adjustments expected in the fourth quarter of 2021 (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, which remains subject to final post-closing adjustments expected in the fourth quarter of 2021 (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 Divestiture (the “Updated Maverick 2 Assets”) and the base purchase price was adjusted downward by approximately $31,000.
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
12
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.
On August 13, 2021, but effect as of the Maverick Effective Time, SEP IV and Maverick Buyer entered into a Purchase Agreement (the “Maverick 3 PSA”) pursuant to which SEP IV sold to Maverick Buyer specified wellbores and other associated assets located in Zavala County, Texas, including the remaining Maverick 2 Assets excluded from the original closing of the Maverick 2 Divestiture (the “Maverick 3 Assets”) for a base purchase price of approximately $31,000, which remains subject to final post-closing adjustments expected in the fourth quarter of 2021 (the “Maverick 3 Divestiture” and together with the Maverick 1 Divestiture and the Maverick 2 Divestiture, the “Maverick Divestitures”). Pursuant to the Maverick 3 PSA, other than a limited amount of retained obligations, Maverick Buyer agreed to assume all obligations and liabilities related to the Maverick 3 Assets that arose on or after the Maverick Effective Time. The Maverick 3 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 3 Divestiture closed simultaneously with the execution of the Maverick 3 PSA.
We recorded a net gain of approximately $0.2 million related to the Maverick Divestitures.
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):
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 approximately $16.9 million and $35.3 million for the three and nine months ended September 30, 2021, respectively. We disaggregate revenue based on 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
13
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 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 historically accounted 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
Pursuant to 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 September 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.
14
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 September 30, 2021 (in thousands):
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):
As of September 30, 2021 and 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):
(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 approximately $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.
15
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.”
Nuvve Holding Warrants – 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 Holding 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.
Stonepeak Warrant – As part of the Exchange (as defined in Note 15. “Partners’ Capital”), the Partnership issued to Stonepeak Catarina the Stonepeak Warrant which entitles the holder to receive junior securities of the Partnership representing ten percent of junior securities deemed outstanding when exercised. The Stonepeak Warrant is valued using ten percent of the Partnership’s 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 Stonepeak 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 September 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 Holding Warrants fair value are recognized in earnings and included in other income on the condensed consolidated statements of operations.
16
The following table sets forth a reconciliation of the changes in fair value of the Partnership’s Nuvve Holding Warrants for the periods indicated (in thousands):
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2021 |
|
Beginning fair value of warrants |
|
$ |
— |
Net gain (loss) on warrants |
|
|
160 |
Ending fair value of warrants |
|
$ |
160 |
To reduce the impact of fluctuations in oil and natural gas prices on our revenues, we historically entered 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. We did not hedge any of our expected production volumes for 2021. Our historical hedging activities were intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It was 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):
The effect of derivative instruments on our condensed consolidated statements of operations for each of the three and nine months ended September 30, 2020 was as follows (in thousands). As disclosed above, we did not hedge any of our expected production volumes for 2021.
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 through the date of the Twelfth Amendment to Third Amended and Restated Credit Agreement, dated as of August 20, 2021 (the “Credit Agreement”). The Credit Agreement provides a quarterly amortizing term loan of $65.0 million (the “Term Loan”) and a maximum revolving credit amount of $5.0 million (the “Revolving Loan”). The Credit Agreement matures on September 30, 2023. Borrowings under the Credit Agreement are secured by various mortgages of midstream properties that we own as well as various security and pledge agreements among us, certain of our subsidiaries and the administrative agent.
17
Borrowings under the Credit Agreement are available for limited direct investment in 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. As of September 30, 2021, we had approximately $54.7 million of debt outstanding, consisting of approximately $52.2 million under the Term Loan and approximately $2.5 million under the Revolving Loan. We are required to make mandatory amortizing payments of outstanding principal on the Term Loan of (i) $3.0 million per fiscal quarter commencing with the quarter ending December 31, 2021, and (ii) $2.0 million per fiscal quarter commencing with the quarter ending March 31, 2023. The maximum revolving credit amount is $5.0 million leaving us with approximately $2.5 million in unused borrowing capacity. There were no letters of credit outstanding under our Credit Agreement as of September 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 2.75% and 3.50% per annum based on net debt to EBITDA or (ii) a domestic bank rate (“ABR”) plus an applicable margin between 1.75% and 2.50% per annum based on net debt to EBITDA plus (iii) a commitment fee of 0.500% per annum based on the unutilized portion of the Revolving Loan. 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 3.25 to 1.00. |
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 September 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.
We are required to make mandatory amortizing payments of the outstanding principal on the Term Loan, we expect these quarterly amortizing payments will be made from our operating cash flows and other capital resources. However, there can be no assurance that operations and other capital resources will provide cash in sufficient amounts to make these mandatory amortizing payments.
Debt Issuance Costs
As of September 30, 2021 and December 31, 2020, our unamortized debt issuance costs were approximately $0.7 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 September 30, 2021 and 2020 was approximately $0.3 million and $0.2 million, respectively. Amortization of debt issuance costs recorded during the nine months ended September 30, 2021 and 2020 was approximately $0.8 million and $0.6 million, respectively.
18
8. GATHERING AND TRANSPORTATION ASSETS
Gathering and transportation assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
2021 |
|
2020 |
||
Gathering and transportation assets |
|
|
|
|
|
|
Midstream assets |
|
$ |
187,899 |
|
$ |
187,977 |
Less: Accumulated depreciation and impairment |
|
|
(87,991) |
|
|
(82,710) |
Total gathering and transportation assets, net |
|
$ |
99,908 |
|
$ |
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):
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 nine months ended September 30, 2021 and the year ended December 31, 2020 (in thousands):
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 nine months ended
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September 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 nine months ended September 30, 2021, obligations were relieved as part of the Palmetto Divestiture and the Maverick Divestitures.
10. INTANGIBLE ASSETS
Intangible assets are comprised of customer and marketing contracts. The intangible assets balance as of September 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 nine months ended September 30, 2021 and 2020 was approximately $10.1 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):
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
2021 |
|
2020 |
||
Beginning balance |
|
$ |
131,786 |
|
$ |
145,246 |
Amortization |
|
|
(10,093) |
|
|
(13,460) |
Ending balance |
|
$ |
121,693 |
|
$ |
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.
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, volumes from the Comanche Asset 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
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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 September 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 September 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 nine months ended September 30, 2021, the Partnership recorded losses of approximately $0.5 million in equity investments from the Carnero JV, which was compounded by approximately $0.9 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 nine months ended September 30, 2021.
Summarized financial information of unconsolidated entities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
||||
|
|
2021 |
|
2020 |
||
Sales |
|
$ |
78,026 |
|
$ |
55,578 |
Total expenses |
|
|
74,662 |
|
|
44,965 |
Net income |
|
$ |
3,364 |
|
$ |
10,613 |
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 September 30, 2021. For the nine months ended September 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 September 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 September 30, 2021, 7,619,823 common units remained available for future issuance to participants under the LTIP.
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15. PARTNERS’ CAPITAL
Outstanding Units
As of September 30, 2021, we had 36,474,436 Class C Preferred Units outstanding and 96,465,219 common units outstanding which included 2,194,309 unvested restricted common units issued under the LTIP.
Common Unit Issuances
We entered into a letter agreement with SP Holdings providing that during the period beginning with the fiscal quarter ended September 30, 2019 and continuing until the end of the fiscal quarter after the fiscal quarter in which we redeem all of our issued and outstanding Class C Preferred Units, SP Holdings agrees to delay receipt of its fees, not including reimbursement of costs, as a result, we have not issued any common units to SP Holdings in connection with providing services under the Shared Services Agreement for any quarter following the quarter ended June 30, 2019. As of September 30, 2021, the number of units to be issued under the Shared Services Agreement is 14,611,540.
Class C Preferred Units
On August 2, 2019, Stonepeak exchanged all of their current equity ownership for newly issued Class C Preferred Units and the Stonepeak Warrant in a private placement transaction (the “Exchange”). On February 24, 2021, the Partnership and Stonepeak entered into Amendment No. 1 to the Stonepeak Warrant, on May 4, 2021, the Partnership and Stonepeak entered into Amendment No. 2 to the Stonepeak Warrant, and on August 2, 2021, the Partnership and Stonepeak entered into Amendment No. 3 to the Stonepeak Warrant.
The holders of the Class C Preferred Units receive a quarterly distribution of 12.5% per annum payable in cash. To the extent that Available Cash (as defined in the Third Amended and Restated Agreement of Limited Partnership of the Partnership (the “Amended Partnership Agreement”)) is insufficient to pay the distribution in cash, all or a portion of the distribution may be paid in Class C Preferred PIK Units. Commencing with the quarter ending March 31, 2022, the distribution rate will increase to 14% per annum. Distributions are to be paid on or about the last day of each of February, May, August and November following the end of each quarter and are charged to interest expense in our condensed consolidated statements of operations. Beginning January 1, 2022, Adjusted Available Cash (as defined in the Amended Partnership Agreement) will be distributed to holders of the Class C Preferred Units to redeem a number of Class C Preferred Units to be determined based on the amount of Adjusted Available Cash.
The Class C Preferred Units are accounted for as a current liability on our condensed consolidated balance sheet consisting of the following (in thousands):
The table below reflects the payment of distributions on Class C Preferred Units related to the periods indicated.
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.
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The table below reflects distributions on Class C Preferred Units which were elected to be paid in common units related to the periods indicated.
Stonepeak Warrant
On August 2, 2019, in connection with the Exchange, the Partnership issued to Stonepeak the Stonepeak Warrant, which entitles the holder to receive junior securities representing ten percent of junior securities deemed outstanding when exercised. The Stonepeak 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 Stonepeak Warrant. The Stonepeak 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 Stonepeak 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 $76.5 million.
As of September 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 September 30, 2021 and December 31, 2020 (in thousands):
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17. SUBSEQUENT EVENTS
NYSE American Update
On October 4, 2021, the NYSE American informed us that we regained compliance with the NYSE American Company Guide (the “Company Guide”) by meeting the requirements of the $50 million market capitalization exemption from the stockholders’ equity requirement in Section 1003(a) of the Company Guide. At the opening of trading on October 5, 2021, the below compliance (“.BC”) indicator was no longer disseminated and the Partnership was removed from the list of NYSE American noncompliant issuers on the NYSE American’s website.
Mesquite Adversary Proceeding
On October 15, 2021, Mesquite and SN Catarina, LLC (collectively, the “Mesquite Plaintiffs”) initiated adversary proceeding 21-03931 (MI) against the Partnership and Catarina Midstream, LLC (“Catarina Midstream”) in the Bankruptcy Court (the “Mesquite Adversary”). In the Mesquite Adversary, the Mesquite Plaintiffs seek recharacterization of the September 2015 transaction pursuant to which the Partnership acquired from SN Catarina all of SN Catarina’s interest in Catarina Midstream, including the gathering assets then-owned by SN Catarina (the “Catarina Arrangement”), as a disguised financing. The Mesquite Plaintiffs claim that SN Catarina is the legal owner of the gathering system subject to that transaction and demand its return.
The Mesquite Plaintiffs also assert various claims for constructive and actual fraudulent transfer arising from (1) the Catarina Arrangement; (2) payments made by SN Catarina to Catarina Midstream under the Gathering Agreement after Catarina Midstream increased tariff rates for interruptible throughput volumes from the eastern portion (“Eastern Catarina”) of Mesquite’s acreage position in Dimmit, La Salle and Webb counties in Texas; and (3) payments made by SN Catarina to Catarina Midstream for the incremental infrastructure fee under the Gathering Agreement amendment and on a month-to-month basis by mutual agreement of the parties after the amendment’s expiration. The Mesquite Plaintiffs seek declaratory relief related to the recharacterization claim as well as avoidance of the alleged constructive and actual fraudulent transfers and recovery of the amounts transferred to Catarina Midstream.
Stonepeak Letter Agreement Election
On October 29, 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 September 30, 2021, in common units. In accordance with the Stonepeak Letter Agreement, the Partnership will issue 10,832,186 common units to Stonepeak on November 22, 2021 (the “Q321 Stonepeak Units”).
HOBO Transaction; New Management Team Hires
On November 3, 2021, the Partnership entered into a Framework Agreement (the “Framework Agreement”) with HOBO Renewable Diesel LLC (“HOBO”). The Framework Agreement provides that, subject to the satisfaction of applicable conditions precedent, the Partnership will fund certain development expenses of HOBO as HOBO seeks to develop, construct, own and operate renewable fuels facilities. HOBO’s initial project is a 9,000 barrel per day (120 million gallons per year) renewable diesel production facility to be located in Clinton, Iowa (the “Initial Project”).
Subject to the satisfaction of certain conditions, including HOBO securing a long-term strategic offtake agreement for the Initial Project, the Partnership will exclusively fund the development and construction of the Initial Project and future renewable fuels projects that can produce renewable diesel and sustainable aviation fuel (“SAF”) and contribute to the advancement of the transition to a low-carbon world. Renewable diesel and SAF are unique drop-in fuels that are immediately consumable by existing automotive and airplane engines and reduce carbon emissions relative to petroleum based products. These drop-in fuels are in increasingly high demand by customers, including the US federal government, as more organizations embrace de-carbonization. HOBO and the Partnership are also considering incorporation of additional carbon reduction opportunities into the Initial Project and future projects which the management teams believe could result in the production of some of the lowest carbon intensity fuels in the US. We refer to the transactions described above or otherwise contemplated by the Framework Agreement as the “HOBO Transaction.”
In furtherance of the Initial Project and to support the Partnership’s energy transition focus, key members of the HOBO leadership team will join the Partnership’s management team effective December 1st, 2021. HOBO Co-Founder and Chief Executive Officer Randy Gibbs will join as the new Chief Executive Officer, and as a member of the Board, HOBO Co-Founder and President Mike Keuss will join as the new President and Chief Operating Officer, and HOBO’s Chief Financial Officer Jonathan Hartigan will join as the new President and Chief Investment Officer (the “New Executives”). Each of the New Executives accepted employment effective November 3, 2021, and will transition to their respective director and executive roles effective December 1, 2021. The New Executives have each had long and successful careers in both the fossil fuel and renewable energy spaces and bring extensive experience in project development, engineering, operations, and financing to the Partnership’s management team.
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In connection with the management team hires, the Partnership’s general partner entered into Executive Services Agreements with each of the New Executives and issued awards under the Evolve Transition Infrastructure 2021 Equity Inducement Award Plan totaling 14,100,000 common units, and under the Partnership’s Long-Term Incentive Plan (the “LTIP”) totaling 3,600,000 common units (such 17,700,000 common units, collectively, the “New Executive Units”). The New Executive Units are subject to vesting in three separate tranches if certain performance conditions with respect to the Initial Project are satisfied or if certain performance metrics relating to total unitholder return are satisfied.
Resignation of Chief Executive Officer; Transition Agreement
On November 3, 2021, Gerald Willinger, the current Chief Executive Officer of the Partnership’s general partner, resigned from his position as Chief Executive Officer of the Partnership’s general partner and a member of the Board, effective November 30, 2021 and at such time that is immediately prior to December 1, 2021. Mr. Willinger will assist in the onboarding of new management in November to ensure a smooth transition. In connection with Mr. Willinger’s departure, on November 3, 2021, the Partnership’s general partner entered into a Separation and Transition Agreement with Mr. Willinger.
Amendments to Stonepeak Warrant
As previously disclosed, 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 (each such increase, an “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 October 29, 2021, the Board determined that the LTIP Increase with respect to the Q321 Stonepeak Units will be fifteen percent (15%). On November 5, 2021, the Partnership and Stonepeak entered into Amendment No. 4 to the Stonepeak Warrant to exclude from the Stonepeak Warrant the 1,624,828 Common Units included in the LTIP Increase resulting from the issuance of the Q321 Stonepeak Units, resulting in an additional 1,624,828 Common Units being reserved for delivery with respect to the LTIP.
On November 9, 2021, the Board determined that the LTIP Increase with respect to the New Executive Units will be fifteen percent (15%), resulting in an additional 2,655,000 common units being reserved for delivery with respect to the LTIP. On November 9, 2021, the Partnership and Stonepeak entered into Amendment No. 5 to the Stonepeak Warrant to exclude from the Stonepeak Warrant both the New Executive Units and the 2,655,000 Common Units included in the LTIP Increase resulting from the issuance of the New Executive Units.
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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.”
On February 26, 2021, in connection with our management team’s focus on expanding our business strategy to focus on the ongoing energy transition in the industries in which we operate, we changed our name to Evolve Transition Infrastructure LP and our general partner changed its name to Evolve Transition Infrastructure GP LLC.
Developments during the Quarter Ended September 30, 2021
Eleventh Amendment to Credit Agreement
On July 28, 2021, we entered into the Eleventh Amendment with the guarantors party thereto, Royal Bank of Canada, as administrative agent (“RBC”) and the lenders party thereto. 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 us for the purposes of making a Levo JV Investment (as defined in the Credit Agreement), (ii) cash and cash equivalents of up to $1 million for the proceeds of the issuance or at-the-market sale of our equity interests, and (iii) cash and cash equivalents received by us from Stonepeak Investors (as defined in the Credit Agreement) 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 our intention to use such amounts for purposes of making a Levo JV Investment in accordance with the Credit Agreement; and (b) expand the exemptions under the Investments, Loans and Advances negative covenant to permit (i) the payment or reimbursement by us of up to $350,000 in legal and due diligence costs of Levo Mobility LLC (“Levo”), (ii) any Levo JV Investment made by us using cash or cash equivalent proceeds of a concurrent contribution of capital to us from Stonepeak Investors, or (iii) additional Levo JV Investments, capped at $1 million, made by us from the proceeds of the issuance or at-the-market sale by us of any equity interests in the Partnership.
Carnero JV Litigation
On July 30, 2021, the Carnero G&P, LLC (“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.
Levo JV Completion
On August 4, 2021, the Partnership, Stonepeak Rocket Holdings LP (“Stonepeak Rocket”) and Nuvve Holding Corp. (“Nuvve Holdings”) completed the formation of Levo Mobility LLC (“Levo” and such proposed joint venture, the “Levo JV”).
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, we 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 us.
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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 us, 441,000 Class C Common Units to Stonepeak Rocket, 49,000 Class C Common Units to us 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. We agreed to pay to Levo an aggregate purchase price of $1,004.90 for our Class B Preferred Unit and Class C Common Units. Each of us and Stonepeak Rocket are able to receive additional Class B Preferred Units in consideration for each $1,000 in additional capital contributions we make.
Maverick Divestiture
On August 13, 2021, but effect as of March 1, 2021 (the “Maverick Effective Time”), SEP Holdings IV, LLC (“SEP IV”) and Bayshore Energy TX LLC (“Maverick Buyer”) entered into a Purchase Agreement (the “Maverick 3 PSA”) pursuant to which SEP IV sold to Maverick Buyer specified wellbores and other associated assets located in Zavala County, Texas, including the remaining assets excluded from the closing of the Maverick 2 Divestiture (as defined in Part I, Item 1. Note 3 “Discontinued Operations”) (the “Maverick 3 Assets”) for a base purchase price of approximately $31,000, which remains subject to final post-closing adjustments expected in the fourth quarter of 2021 (the “Maverick 3 Divestiture”). Pursuant to the Maverick 3 PSA, other than a limited amount of retained obligations, Maverick Buyer agreed to assume all obligations and liabilities related to the Maverick 3 Assets that arose on or after the Maverick Effective Time. The Maverick 3 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 3 Divestiture closed simultaneously with the execution of the Maverick 3 PSA.
Twelfth Amendment to Credit Agreement
On August 20, 2021, we entered into the Twelfth Amendment with the guarantors party thereto, each of the lenders party thereto and RBC, as administrative agent, collateral agent and letter of credit issuer (the Credit Agreement, as amended prior to the effectiveness of the Twelfth Amendment, the “Existing Credit Agreement”). Immediately prior to the effectiveness of the Twelfth Amendment, RBC, in its capacity as a lender under the Existing Credit Agreement, entered into that certain Assignment of Secured Indebtedness with each of the other lenders under the Existing Credit Agreement pursuant to which RBC purchased from each such other lender, all of such lender’s right, title and interest in and to the Existing Credit Agreement, including such lender’s portion of outstanding revolving loans, term loans and letter of credit participations. As a result, RBC is currently the sole lender under the Credit Agreement and will provide the entire principal amount of the Amended Credit Facilities (as defined below).
The terms of the Credit Agreement provide for, among other things: (a) extension of the maturity date to September 30, 2023, (b) removal of the borrowing base, and related provisions addressing borrowing base deficiencies and recalculations, (c) a term loan facility in an aggregate principal amount of up to $65 million (the “Term Loan Facility”), (d) a revolving credit facility in an aggregate principal amount of $5 million (the “Revolving Facility” and, together with the Term Loan Facility the “Amended Credit Facilities”), (e) reduction of our mandatory quarterly amortizing payments of outstanding principal of term loans from $10,000,000 per quarter to (i) on September 30, 2021, $3,000,000, which was the amount necessary to reduce the aggregate principal amount under the Term Loan Facility to $62 million, (ii) $3,000,000 per quarter commencing with the quarter ending December 31, 2021, and (iii) $2,000,000 for the quarters ending March 31, 2023 and June 30, 2023, (f) adoption of a Benchmark Replacement (as defined in the Credit Agreement) or Term SOFR (as defined in the Credit Agreement) as the Benchmark (as defined in the Credit Agreement) upon the occurrence of certain specified transition events, (g) a new mandatory principal prepayment requirement with respect to certain types of distributions and other payments received from Carnero JV, (h) reduction of our permitted maximum cash balance from $7,500,000 to $3,500,000, (i) permitted energy transition investments with the proceeds of capital contributions and certain equity issuances, and (j) removal of certain representations, warranties, covenants, reporting requirements and agreements of us and the guarantors related to oil and gas properties and interests owned by the guarantors.
In addition, pursuant to the Twelfth Amendment, SEP IV was released as a guarantor under the Credit Agreement.
The terms of the Twelfth Amendment also provide for our ability to implement additional amendments, supplements and other modifications to the Credit Agreement upon achieving certain specified milestone events, which include (a) the closing of certain acquisition and transaction opportunities or (b) the making of certain energy transition investments or realization of other improvements to our midstream business that result in free cash flow projections of us and the guarantors rising above certain levels for the immediately succeeding three-year period. If we achieve a specified milestone event and comply with certain other conditions precedent under the Twelfth Amendment, then the parties agree to implement amendments to the Credit Agreement as described in Exhibit C to the Twelfth Amendment.
27
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, effective February 12, 2020, of the Firm Transportation Service Agreement, dated September 1, 2017, by and between Seco Pipeline, LLC and SN Catarina, LLC. 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. Please note that the gathering and transportation lease revenues utilized to determine net loss for the three months ended September 30, 2021 do not net out the approximately $8.3 million of such revenues that have not been collected from Mesquite.
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.
28
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):
Significant Operational Factors
Throughput. The following table sets forth selected throughput data pertaining to the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||
|
|
September 30, |
|
September 30, |
||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Western Catarina Midstream: |
|
|
|
|
|
|
|
|
Oil (MBbl/d) |
|
5.4 |
|
7.0 |
|
5.8 |
|
7.6 |
Natural gas (MMcf/d) |
|
74.1 |
|
92.2 |
|
76.8 |
|
96.6 |
Water (MBbl/d) |
|
1.8 |
|
3.1 |
|
1.9 |
|
3.3 |
Seco Pipeline: |
|
|
|
|
|
|
|
|
Natural gas (MMcf/d) |
|
— |
|
— |
|
— |
|
0.1 |
Subsequent Events
NYSE American Update
On October 4, 2021, the NYSE American informed us that we regained compliance with the NYSE American Company Guide (the “Company Guide”) by meeting the requirements of the $50 million market capitalization exemption from the stockholders’ equity requirement in Section 1003(a) of the Company Guide. At the opening of trading on October 5, 2021, the below compliance (“.BC”) indicator was no longer disseminated and we were removed from the list of NYSE American noncompliant issuers on the NYSE American’s website.
Mesquite Adversary Proceeding
On October 15, 2021, Mesquite and SN Catarina, LLC (collectively, the “Mesquite Plaintiffs”) initiated adversary proceeding 21-03931 (MI) against us and Catarina Midstream, LLC (“Catarina Midstream”) in the Bankruptcy Court (the “Mesquite Adversary”). In the Mesquite Adversary, the Mesquite Plaintiffs seek recharacterization of the September 2015 transaction pursuant to which we acquired from SN Catarina all of SN Catarina’s interest in Catarina Midstream, including the gathering assets then-owned by SN Catarina (the “Catarina Arrangement”), as a disguised financing. The Mesquite Plaintiffs claim that SN Catarina is the legal owner of the gathering system subject to that transaction and demand its return.
The Mesquite Plaintiffs also assert various claims for constructive and actual fraudulent transfer arising from (1) the Catarina Arrangement; (2) payments made by SN Catarina to Catarina Midstream under the Gathering Agreement after Catarina Midstream increased tariff rates for interruptible throughput volumes from Eastern Catarina; and (3) payments made by SN Catarina to Catarina Midstream for the incremental infrastructure fee under the Gathering Agreement amendment and on a month-to-month basis by mutual agreement of the parties after the amendment’s expiration. The Mesquite Plaintiffs seek declaratory relief related to the recharacterization claim as well as avoidance of the alleged constructive and actual fraudulent transfers and recovery of the amounts transferred to Catarina Midstream.
29
Stonepeak Letter Agreement Election
On October 29, 2021, pursuant to the terms of the Stonepeak Letter Agreement, we received written notice of Stonepeak’s election to receive distributions on the Class C Preferred Units for the quarter ended September 30, 2021, in common units. In accordance with the Stonepeak Letter Agreement, we will issue 10,832,186 common units to Stonepeak on November 22, 2021 (the “Q321 Stonepeak Units”).
HOBO Transaction; New Management Team Hires
On November 3, 2021, we entered into a Framework Agreement (the “Framework Agreement”) with HOBO Renewable Diesel LLC (“HOBO”). The Framework Agreement provides that, subject to the satisfaction of applicable conditions precedent, we will fund certain development expenses of HOBO as HOBO seeks to develop, construct, own and operate renewable fuels facilities. HOBO’s initial project is a 9,000 barrel per day (120 million gallons per year) renewable diesel production facility to be located in Clinton, Iowa (the “Initial Project”).
Subject to the satisfaction of certain conditions, including HOBO securing a long-term strategic offtake agreement for the Initial Project, we will exclusively fund the development and construction of the Initial Project and future renewable fuels projects that can produce renewable diesel and sustainable aviation fuel (“SAF”) and contribute to the advancement of the transition to a low-carbon world. Renewable diesel and SAF are unique drop-in fuels that are immediately consumable by existing automotive and airplane engines and reduce carbon emissions relative to petroleum based products. These drop-in fuels are in increasingly high demand by customers, including the US federal government, as more organizations embrace de-carbonization. HOBO and the Partnership are also considering incorporation of additional carbon reduction opportunities into the Initial Project and future projects which the management teams believe could result in the production of some of the lowest carbon intensity fuels in the US.
In furtherance of the Initial Project and to support our energy transition focus, key members of the HOBO leadership team will join our management team effective December 1st, 2021. HOBO Co-Founder and Chief Executive Officer Randy Gibbs will join as the new Chief Executive Officer, and as a member of the Board, HOBO Co-Founder and President Mike Keuss will join as the new President and Chief Operating Officer, and HOBO’s Chief Financial Officer Jonathan Hartigan will join as the new President and Chief Investment Officer (the “New Executives”). Each of the New Executives accepted employment effective November 3, 2021, and will transition to their respective director and executive roles effective December 1, 2021. The New Executives have each had long and successful careers in both the fossil fuel and renewable energy spaces and bring extensive experience in project development, engineering, operations, and financing to our management team.
In connection with the management team hires, our general partner entered into Executive Services Agreements with each of the New Executives and issued awards totaling 14,100,000 common units under the Evolve Transition Infrastructure 2021 Equity Inducement Award Plan, and totaling 3,600,000 common units under our Long-Term Incentive Plan (the “LTIP”) (such 17,700,000 common units, collectively, the “New Executive Units”). The New Executive Units are subject to vesting in three separate tranches if certain performance conditions with respect to the Initial Project are satisfied or if certain performance metrics relating to total unitholder return are satisfied.
Resignation of Chief Executive Officer; Transition Agreement
On November 3, 2021, Gerald Willinger, the current Chief Executive Officer of our general partner, resigned from his position as Chief Executive Officer of our general partner and a member of the Board, effective November 30, 2021 and at such time that is immediately prior to December 1, 2021. Mr. Willinger will assist in the onboarding of new management in November to ensure a smooth transition. In connection with Mr. Willinger’s departure, on November 3, 2021, our general partner entered into a Separation and Transition Agreement with Mr. Willinger.
Amendments to Stonepeak Warrant
As previously disclosed, 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 (each such increase, an “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 October 29, 2021, the Board determined that the LTIP Increase with respect to the Q321 Stonepeak Units will be fifteen percent (15%). On November 5, 2021, the Partnership and Stonepeak entered into Amendment No. 4 to the Stonepeak Warrant to exclude from
30
the Stonepeak Warrant the 1,624,828 Common Units included in the LTIP Increase resulting from the issuance of the Q321 Stonepeak Units, resulting in an additional 1,624,828 Common Units being reserved for delivery with respect to the LTIP.
On November 9, 2021, the Board determined that the LTIP Increase with respect to the New Executive Units will be fifteen percent (15%), resulting in an additional 2,655,000 common units being reserved for delivery with respect to the LTIP. On November 9, 2021, the Partnership and Stonepeak entered into Amendment No. 5 to the Stonepeak Warrant to exclude from the Stonepeak Warrant both the New Executive Units and the 2,655,000 Common Units included in the LTIP Increase resulting from the issuance of the New Executive Units.
Results of Operations
Three months ended September 30, 2021 compared to three months ended September 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 |
|||||||||
|
|
September 30, |
|
|
|
|
|
||||
|
|
2021 |
|
2020 |
|
|
Variance |
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Gathering and transportation lease revenues |
|
$ |
16,868 |
|
$ |
10,670 |
|
$ |
6,198 |
|
58% |
Total revenues |
|
|
16,868 |
|
|
10,670 |
|
|
6,198 |
|
58% |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Transportation operating expenses |
|
|
2,065 |
|
|
2,455 |
|
|
(390) |
|
(16)% |
General and administrative expenses |
|
|
4,460 |
|
|
2,693 |
|
|
1,767 |
|
66% |
Unit-based compensation expense |
|
|
206 |
|
|
779 |
|
|
(573) |
|
(74)% |
Depreciation and amortization |
|
|
5,143 |
|
|
5,193 |
|
|
(50) |
|
(1)% |
Accretion expense |
|
|
98 |
|
|
89 |
|
|
9 |
|
10% |
Total operating expenses |
|
|
11,972 |
|
|
11,209 |
|
|
763 |
|
7% |
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
31,141 |
|
|
24,015 |
|
|
7,126 |
|
30% |
Loss from equity investment |
|
|
1,734 |
|
|
441 |
|
|
1,293 |
|
NM (a) |
Other (income) expense |
|
|
687 |
|
|
(2) |
|
|
689 |
|
NM (a) |
Total other expenses |
|
|
33,562 |
|
|
24,454 |
|
|
9,108 |
|
37% |
Total expenses |
|
|
45,534 |
|
|
35,663 |
|
|
9,871 |
|
28% |
Loss before income taxes |
|
|
(28,666) |
|
|
(24,993) |
|
|
(3,673) |
|
15% |
Income tax (benefit) expense |
|
|
(19) |
|
|
43 |
|
|
(62) |
|
(144)% |
Loss from continuing operations |
|
|
(28,647) |
|
|
(25,036) |
|
|
(3,611) |
|
14% |
Income (loss) from discontinued operations |
|
|
187 |
|
|
419 |
|
|
(232) |
|
(55)% |
Net loss |
|
$ |
(28,460) |
|
$ |
(24,617) |
|
$ |
(3,843) |
|
16% |
(a) | Variances deemed to be Not Meaningful “NM.” |
Gathering and transportation lease revenues. Gathering and transportation lease revenues increased approximately $6.2 million, or 58%, to approximately $16.9 million for the three months ended September 30, 2021, compared to approximately $10.7 million for the same period in 2020. This increase was primarily the result of an increase in the rate charged for hydrocarbons transported on Western Catarina Midstream that was produced from outside the dedicated acreage under the Gathering Agreement. This increase was partially offset by a decrease in throughput. As discussed in “Part II-Other Information, Item 1. Legal Proceedings,” SN Catarina has failed to pay the increased rate for the throughput outside the dedicated acreage. For the three months ended September 30, 2021, approximately $8.3 million of the gathering and transportation lease revenues have not been collected.
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 $0.4 million, or 16%, to approximately $2.1 million for the three months ended September 30, 2021 compared to approximately $2.5 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 September 30, 2021 compared to the same period in 2020.
31
Loss from equity investment. Loss from equity investments increased approximately $1.3 million to a loss of approximately $1.7 million for the three months ended September 30, 2021, compared to a loss of approximately $0.4 million for the same period in 2020. The increase in loss 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 $1.8 million, or 66%, to approximately $4.5 million for the three months ended September 30, 2021 compared to approximately $2.7 million for the same period in 2020. The increase was primarily the result of an increase in the market-to-market impact on indirect costs billed in connection with the Shared Services Agreement of approximately $1.9 million as a result of the increase in the market price of our common units during the period.
Unit-based compensation expense. Unit-based compensation expense decreased approximately $0.6 million, or 74%, to approximately $0.2 million for the three months ended September 30, 2021, compared to approximately $0.8 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 Stonepeak Warrant and cash interest expense from borrowings under the Credit Agreement. Interest expense increased approximately $7.1 million, or 30%, to approximately $31.1 million for the three months ended September 30, 2021 compared to approximately $24.0 million for the same period in 2020. This increase was the result of an increase in common unit price and junior securities deemed outstanding causing the Stonepeak Warrant value to increase. Cash interest expense for the three months ended September 30, 2021 was approximately $0.5 million compared to approximately $1.1 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 (benefit) expense. Income tax benefit was approximately $19.3 thousand for the three months ended September 30, 2021, compared to an expense of approximately $42.8 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) expense. Other (income) expense includes the mark-to-market impact of the Nuvve Holding Warrants as well as other expenses and income not associated with our operations. Other expense for the three months ended September 30, 2021, was an approximate $0.7 million compared to an insignificant of income during the three months ended September 30, 2020. The primary loss for the three months ended September 30, 2021, relates to the mark-to-market impact of the Nuvve Holding Warrants which we received in May 2021.
Results of Operations
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
The following table sets forth the selected financial and operating data pertaining to our continuing operations for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|||||||||
|
|
September 30, |
|
|
|
|
|
||||
|
|
2021 |
|
2020 |
|
Variance |
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Gathering and transportation sales |
|
$ |
— |
|
$ |
785 |
|
$ |
(785) |
|
(100)% |
Gathering and transportation lease revenues |
|
|
35,304 |
|
|
34,615 |
|
|
689 |
|
2% |
Total revenues |
|
|
35,304 |
|
|
35,400 |
|
|
(96) |
|
(0)% |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Transportation operating expenses |
|
|
6,421 |
|
|
7,641 |
|
|
(1,220) |
|
(16)% |
General and administrative expenses |
|
|
13,964 |
|
|
10,980 |
|
|
2,984 |
|
27% |
Unit-based compensation expense |
|
|
749 |
|
|
1,902 |
|
|
(1,153) |
|
(61)% |
Depreciation and amortization |
|
|
15,430 |
|
|
15,512 |
|
|
(82) |
|
(1)% |
Accretion expense |
|
|
287 |
|
|
263 |
|
|
24 |
|
9% |
Total operating expenses |
|
|
36,851 |
|
|
36,298 |
|
|
553 |
|
2% |
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
89,525 |
|
|
70,188 |
|
|
19,337 |
|
28% |
Loss (earnings) from equity investment |
|
|
1,406 |
|
|
(2,254) |
|
|
3,660 |
|
NM (a) |
Other income, net |
|
|
(114) |
|
|
(10) |
|
|
(104) |
|
NM (a) |
Total other expenses |
|
|
90,817 |
|
|
67,924 |
|
|
22,893 |
|
34% |
32
Total expenses |
|
|
127,668 |
|
|
104,222 |
|
|
23,446 |
|
22% |
Loss before income taxes |
|
|
(92,364) |
|
|
(68,822) |
|
|
(23,542) |
|
34% |
Income tax (benefit) expense |
|
|
(17) |
|
|
140 |
|
|
(157) |
|
(112)% |
Loss from continuing operations |
|
|
(92,347) |
|
|
(68,962) |
|
|
(23,385) |
|
34% |
Income (loss) from discontinued operations |
|
|
1,289 |
|
|
(19,613) |
|
|
20,902 |
|
(107)% |
Net loss |
|
$ |
(91,058) |
|
$ |
(88,575) |
|
$ |
(2,483) |
|
3% |
(a) | Variances deemed to be Not Meaningful “NM.” |
Gathering and transportation lease revenues. Gathering and transportation lease revenues increased approximately $0.7 million, or 2%, to approximately $35.3 million for the nine months ended September 30, 2021, compared to approximately $34.6 million for the same period in 2020. This increase was primarily the result of an increase in the rate charged for hydrocarbons transported on Western Catarina Midstream that was produced from outside the dedicated acreage under the Gathering Agreement, effective as of July 1, 2021. This increase was partially offset by a decrease in throughput. As discussed in “Part II-Other Information, Item 1. Legal Proceedings,” SN Catarina has failed to pay the increased rate for the throughput outside the dedicated acreage. For the nine months ended September 30, 2021, approximately $8.3 million of the gathering and transportation lease revenues have not been collected.
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 $1.2 million, or 16%, to approximately $6.4 million for the nine months ended September 30, 2021 compared to approximately $7.6 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 nine months ended September 30, 2021 compared to the same period in 2020.
Loss (earnings) from equity investment. Loss from equity investments increased approximately $3.7 million to loss of approximately $1.4 million for the nine months ended September 30, 2021, compared to earnings of approximately $2.3 million for the same period in 2020. This increase 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 $3.0 million, or 27%, to approximately $14.0 million for the nine months ended September 30, 2021 compared to approximately $11.0 million for the same period in 2020. The increase was primarily the result of bad debt expenses of approximately $1.9 million and an increase in the market-to-market impact on indirect costs billed in connection with the Shared Services Agreement of approximately $2.4 million as a result of the increase in the market price of our common units during the period, partially offset by a reduction in legal and professional services. Cash general and administrative expense for the nine months ended September 30, 2021 was approximately $7.2 million compared to approximately $8.6 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 nine months ended September 30, 2020.
Unit-based compensation expense. Unit-based compensation expense decreased approximately $1.2 million, or 61%, to approximately $0.7 million for the nine months ended September 30, 2021, compared to approximately $1.9 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 Stonepeak Warrant and cash interest expense from borrowings under the Credit Agreement. Interest expense increased approximately $19.3 million, or 28%, to approximately $89.5 million for the nine months ended September 30, 2021 compared to approximately $70.2 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 Stonepeak Warrant value to increase. Cash interest expense for the nine months ended September 30, 2021 was approximately $2.2 million compared to approximately $4.2 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 (benefit) expense. Income tax benefit was approximately $16.6 thousand for the nine months ended September 30, 2021, compared to an expense of approximately $139.9 thousand for the same period in 2020. The decrease in income tax expense resulted from a decrease in taxable margin over the comparable periods.
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Other income, net. Other income, net includes the mark-to-market impact of the Nuvve Holding Warrants as well as other expenses and income not associated with our operations. Other income, net for the nine months ended September 30, 2021, was approximately $0.1 million compared to an insignificant of income during the nine months ended September 30, 2020. The primary income for the nine months ended September 30, 2021, relates to the mark-to-market impact of the Nuvve Holding Warrants which we received in May 2021.
Liquidity and Capital Resources
As of September 30, 2021, we had approximately $1.4 million in cash and cash equivalents and $2.5 million available for borrowing under the Credit Agreement, as discussed further below.
During the three and nine months ended September 30, 2021, we paid approximately $0.5 and approximately $2.2 million, respectively, in cash for interest on borrowings under our Credit Agreement.
Our capital expenditures during the nine months ended September 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. 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, amortizing debt payments on the Term Loan, 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 $65.0 million (the “Term Loan”) and a maximum revolving credit amount of $5.0 million (the “Revolving Loan”). The Term Loan and Revolving Loan both have a maturity date of September 30, 2023. Borrowings under the Credit Agreement are secured by various mortgages of midstream 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 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. As of September 30, 2021, we had approximately $54.7 million of debt outstanding, consisting of approximately $52.2 million under the Term Loan and approximately $2.5 million under the Revolving Loan. We are required to make mandatory amortizing payments of outstanding principal on the Term Loan of (i) $3.0 million per fiscal quarter commencing with the quarter ending December 31, 2021, and (ii) $2.0 million per fiscal quarter commencing with the quarter ending March 31, 2023. The maximum revolving credit amount is $5.0 million leaving us with approximately $2.5 million in unused borrowing capacity. There were no letters of credit outstanding under our Credit Agreement as of September 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 2.75% and 3.50% per annum based on net debt to EBITDA or (ii) a domestic bank rate (“ABR”) plus an applicable margin between 1.75% and 2.50% per annum based on net debt to EBITDA plus (iii) a commitment fee of 0.500% per annum based on the unutilized portion of the Revolving Loan. 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 3.25 to 1.00. |
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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 September 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.
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.
At September 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.
Sources of Debt and Equity Financing
As of September 30, 2021, we had approximately $52.2 million of debt outstanding under the Term Loan and approximately $2.5 million of debt outstanding under the Revolving Loan, leaving us with approximately $2.5 million in unused borrowing capacity. There were no letters of credit outstanding under our Credit Agreement as of September 30, 2021. Our Credit Agreement matures on September 30, 2023.
Operating Cash Flows
We had net cash flows provided by operating activities for the nine months ended September 30, 2021 of approximately $24.8 million, compared to net cash flows provided by operating activities of approximately $24.4 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 nine months ended September 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 nine months ended September 30, 2020 were approximately $0.2 million, substantially all of which were related to midstream activities.
Financing Activities
Net cash flows used in financing activities was approximately $40.6 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we repaid borrowings of $56.3 million under our Credit Agreement.
Net cash flows used in financing activities was approximately $27.2 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2020, we repaid borrowings of $34.0 million under our Credit Agreement and withdrew $7.0 million under the Revolving Loan.
Off-Balance Sheet Arrangements
As of September 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.
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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 September 30, 2021, there were no changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. 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 September 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 September 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.
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On August 30, 2021, Catarina Midstream, LLC (“Catarina Midstream”) initiated a non-administered arbitration against SN Catarina, LLC (“SN Catarina”) pursuant to the International Institute for Conflict Prevention & Resolution Non-Administered Arbitration Rules (the “Catarina Arbitration”). In the Catarina Arbitration, Catarina Midstream asserts claims for declaratory judgment and breach of contract arising from SN Catarina’s failure to pay increased tariff rates for interruptible throughput volumes from Eastern Catarina and its refusal to pay the incremental infrastructure fee since July 2021. Catarina Midstream also seeks its attorneys’ fees, costs, and pre- and post-judgment interest from SN Catarina. SN Catarina filed a counterclaim against Catarina Midstream alleging Catarina Midstream’s June 24, 2021 tariff rate increase, and its two prior tariff rate increases under the Gathering Agreement, constitute breaches of contract. SN Catarina also alleges that Catarina Midstream’s continued addition of the incremental infrastructure fee on a month-to-month basis after March 31, 2018 constitutes an additional breach of the Gathering Agreement. SN Catarina seeks declaratory and injunctive relief, monetary damages, and attorneys’ fees and costs.
Item 1A. Risk Factors
Carefully consider the risk factors under “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. 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 November 9, 2021, the liquidation preference for the Class C Preferred Units was approximately $417.4 million. Our total revenues for the three months ended September 30, 2021 were approximately $16.9 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 November 9, 2021, Stonepeak and its affiliates owned (i) 61,399,542 common units, representing approximately 54% of our outstanding common units, and (ii) the Stonepeak Warrant, which 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.
The New Executives have significant duties with, and spend significant time serving, HOBO and may have conflicts of interests in allocating time or pursuing business opportunities.
The New Executives who, together with the Board and our existing officers and employees, will be responsible for managing the direction of our operations, hold positions of responsibility with HOBO and other entities. Subject to restrictions in the Framework Agreement and their respective Executive Services Agreements, the New Executives may pursue other business or investment ventures while employed with us. Additionally, as a result of their ownership of HOBO, the New Executives are incentivized to achieve specific milestones with respect to the Initial Project, which may result in additional time being allocated to the Initial Project and the HOBO Transaction. Accordingly, each of the New Executives may have conflicts of interest in allocating time among various business activities and potentially competitive fiduciary and pecuniary interests that conflict with our interests. These conflicts may not be resolved in our favor.
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. As a result of the Stonepeak Letter Agreement, we have issued a total of 56,496,459 common units to Stonepeak Catarina representing all distributions made to Stonepeak Catarina since the third quarter of 2020. In accordance with the Stonepeak Letter Agreement, on October 29, 2021, we received written notice of Stonepeak Catarina’s election to receive distributions on the Class C Preferred Units
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for the quarter ended September 30, 2021 in common units. In accordance with the Stonepeak Letter Agreement, we will issue 10,832,186 common units to Stonepeak on November 22, 2021. Additionally, in order to fulfill our funding and reimbursement obligations in connection with the Levo JV and the HOBO Transaction, we may issue additional common units, which will result in current common unitholders experiencing dilution. Finally, Stonepeak Catarina may elect to receive future distributions on their Class C Preferred Units in common units instead of Class C Preferred PIK Units. As a result of the foregoing, you may experience substantial future dilution.
The market price of our common units has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control.
The market price of our common units has fluctuated, and may continue to fluctuate, widely, due to various factors, many of which are beyond our control. These factors include, without limitation:
• | comments by securities analysts or other third parties, including blogs, articles, message boards and social and other media; |
• | actual or anticipated fluctuations in our financial and operating results; |
• | provisions in our Amended Credit Agreement which currently prohibit us from paying distributions to our common unitholders other than in certain limited circumstances set forth in our Amended Credit Agreement; |
• | announcements by us or our competitors of significant contracts or acquisitions; |
• | changes in accounting standards, policies, guidance, interpretations or principles; |
• | general economic conditions, including interest rates and governmental policies impacting interest rates; |
• | future sales of our common units; and |
• | other factors described in the documents incorporated by reference herein. |
Stock markets in general and our common unit price in particular have recently experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies impacted, including us. For example, since September 1, 2021, our common units have closed at a high of $1.34 per common unit and a low of $0.88 per common unit. In addition, during that same period, daily trading volume ranged from approximately 1,498,300 to 32,673,900 common units. These broad market fluctuations may adversely affect the trading price of our common units, which may limit or prevent investors from readily selling their common units and may otherwise negatively affect the liquidity of our common units.
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 of Eastern Catarina by Mesquite 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 acreage position in Dimmit, La Salle and Webb counties in Texas 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. Despite the increase, Mesquite short-paid the initial invoice and continues to pay the tariff rate in effect prior to the June 24, 2021 increase. We are currently engaged in arbitration with Mesquite on a commercial resolution for Eastern Catarina. Additionally, we are also involved in the Mesquite Adversary. 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.
We may be unable to maintain compliance with the NYSE American listing standards. If our common units are delisted, it could adversely affect our business, cash flows and results of operations.
Our common units are currently listed on the NYSE American. On April 3, 2020, we received notice from the NYSE American stating that we were below compliance with the continued listing standards set forth in Section 1003(a)(i) of the Company Guide. On April 29, 2021, we received a second notice from the NYSE American that we were not in compliance with the continued listing standards set forth in Section 1003(a)(ii) of the Company Guide. On October 4, 2021, the NYSE American informed us that we have regained compliance by meeting the requirements of the $50 million market capitalization exemption from the stockholders’ equity requirement in Section 1003(a) of the Company Guide.
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Going forward, we will be subject to the NYSE American’s normal continued listing monitoring. If we are again determined to be below any of the continued listing standards of the NYSE American prior to October 4, 2022, then the NYSE American will examine the relationship between the incidents of noncompliance and re-evaluate our method of financial recovery from the prior incidents. The NYSE American may, among other things, truncate the compliance procedures described in Section 1009 of the Company Guide or immediately initiate delisting proceedings with respect to our common units.
If we are unable to maintain compliance with the NYSE American listing standards, the NYSE American may delist our common units, which could adversely affect our business, cash flows and results of operations.
We may be unable to fund our capital requirements for the Levo JV and the HOBO Transaction.
Upon completion of certain milestones or execution of specific contracts, we will be asked to provide capital to fulfill our funding and reimbursement obligations in connection with the Levo JV and the HOBO Transaction. If we cannot provide capital for such opportunities from cash on hand or borrowings under our Amended Credit Facilities, we may need to raise additional funds through the issuance of securities, including equity, debt or a combination of both. Additional financing may not be available to us on favorable terms, or at all. If we are unable to access the capital markets and other adequate financing is not available to us on acceptable terms, we may be unable to fund these capital requirements, which could adversely affect our business and limit our ability to expand and grow.
We can provide no assurance that we will be successful in implementing our new energy transition infrastructure business due to competition and other factors, which could limit our ability to grow and extend our dependence on Mesquite and our midstream business.
Part of our new business strategy is to grow our business through the acquisition and development of infrastructure critical to the transition of energy supply to lower carbon sources. This will involve identifying opportunities to offer services to third parties with our existing assets or constructing or acquiring new assets.
We are currently pursuing energy transition infrastructure opportunities and while we have entered into the Framework Agreement with HOBO and completed the formation of the Levo joint venture, we have not developed any project in connection with this business strategy. We can provide no assurance that we will be successful in implementing our new energy transition infrastructure business, which could limit our ability to grow and extend our dependence on Mesquite and our midstream business. Moreover, we may fail to realize the anticipated benefit of any project under the Framework Agreement, in connection with the Levo joint venture or any acquisition we make, or we may be unable to integrate businesses we acquire effectively. Finally, to the extent that Stonepeak, SP Holdings or our general partner are successful in pursuing energy transition opportunities, there is no guarantee that such opportunities will be offered to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As previously discussed, on August 20, 2021, pursuant to the terms of the Stonepeak Letter Agreement, we issued 8,012,850 common units to Stonepeak Catarina in response to Stonepeak Catarina’s election to receive distributions on the Class C Preferred Units for the quarter ended June 30, 2021 in common units. The issuance of these common units was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction by an issuer not involve public offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the exhibit index below and are incorporated herein by reference.
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EXHIBIT INDEX
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Filed herewith. |
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Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Evolve Transition Infrastructure LP, the Registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Evolve Transition Infrastructure LP By: Evolve Transition Infrastructure GP LLC, its general partner |
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Date: November 10, 2021 |
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/s/ Charles C. Ward |
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Charles C. Ward |
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Chief Financial Officer and Secretary (Duly Authorized Officer and Principal Financial Officer) |
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Exhibit 10.3
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Levo Mobility LLC |
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AMENDED AND RESTATED LIMITED LIABILITY COMPANY
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Dated as of August 4, 2021 |
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THE UNITS ISSUED UNDER THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. SUCH UNITS MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE DISPOSED OF AT ANY TIME WITHOUT EFFECTIVE REGISTRATION UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM THE ACT AND THE APPLICABLE STATE ACTS, AND COMPLIANCE WITH THE OTHER RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN, INCLUDING THE PROVISIONS OF ARTICLE IX. |
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KE 76918675
TABLE OF CONTENTS
Page
Article I DEFINITIONS1
Article II ORGANIZATIONAL MATTERS23
Section 2.1Formation of the Company; Ratification23
Section 2.2Limited Liability; Limited Liability Company Agreement23
Section 2.3Name23
Section 2.4Purpose23
Section 2.5Registered Office; Registered Agent; Principal Office23
Section 2.6Term24
Section 2.7Restriction on Jurisdiction of Organization; Foreign Qualification24
Section 2.8No State-Law Partnership24
Section 2.9Title to the Assets24
Article III UNITS; CAPITAL CONTRIBUTIONS; REPRESENTATIONS24
Section 3.1Units and Capital Contributions24
Section 3.2Capital Contributions25
Section 3.3Preemptive Rights27
Section 3.4Capital Accounts29
Section 3.5Negative Capital Accounts30
Section 3.6No Withdrawal30
Section 3.7Transfer of Capital Accounts30
Section 3.8Additional Members31
Section 3.9Substituted Members31
Section 3.10Representations and Warranties.31
Section 3.11Incentive Units33
Section 3.12Spouses.35
Article IV DISTRIBUTIONS AND ALLOCATIONS36
Section 4.1Tax Distributions36
Section 4.2Distributions36
Section 4.3Distributions upon a Fundamental Change38
Section 4.4Distributions to Class D Incentive Unit Members.39
Section 4.5Allocations40
Section 4.6Special Allocations40
Section 4.7Tax Allocations42
Section 4.8Withholding and Indemnification for Payments on Behalf of a Member42
Article V MANAGEMENT43
Section 5.1Management of the Company43
Section 5.2Board Composition; Term; Removal; Vacancies43
Section 5.3Board Actions; Meetings45
Section 5.4Actions by Consent45
i
Section 5.5Minutes46
Section 5.6Board Observer46
Section 5.7Board Approval Requirement46
Section 5.8Additional Approval Requirements49
Section 5.9Bankruptcy Events50
Section 5.10Committee Membership; Subsidiary Governance50
Section 5.11Officers50
Section 5.12Limitation of Liability; Manager and Officer Insurance51
Section 5.13Enforcement of Affiliate Contracts51
Section 5.14Separateness52
Article VI EXCULPATION AND INDEMNIFICATION; DUTIES; BUSINESS OPPORTUNITIES53
Section 6.1Indemnification53
Section 6.2Liability of Indemnitees54
Section 6.3Duties55
Section 6.4Lack of Authority57
Section 6.5Business Opportunities57
Section 6.6Conflicts of Interest60
Section 6.7Other Business of Independent Manager.61
Article VII BOOKS, RECORDS, ACCOUNTING AND REPORTS; INSPECTION62
Section 7.1Records and Accounting62
Section 7.2Information Rights; Reports62
Section 7.3Inspection by Members63
Section 7.4Public Disclosure64
Article VIII TAX MATTERS64
Section 8.1Preparation of Tax Returns64
Section 8.2Tax Elections64
Section 8.3Tax Controversies65
Section 8.483(b) Elections.65
Article IX UNIT TRANSFERS; OTHER EVENTS65
Section 9.1Transfer Restrictions65
Section 9.2Effect of Transfer66
Section 9.3Additional Restrictions on Transfer67
Section 9.4Transfer Fees and Expenses67
Section 9.5No Appraisal Rights67
Section 9.6Transfer Closing Date67
Section 9.7Tag-Along Rights67
Section 9.8Right of First Offer70
Section 9.9Drag-Along Rights71
Section 9.10Blocker Corporation Sale71
Section 9.11Forfeiture and Repurchase Rights71
ii
Article X DISSOLUTION AND LIQUIDATION73
Section 10.1Dissolution73
Section 10.2Liquidation and Termination73
Section 10.3Cancellation of Certificate74
Section 10.4Reasonable Time for Winding Up74
Section 10.5Return of Capital74
Section 10.6Hart-Scott-Rodino74
Article XI REDEMPTION AND EXIT PROVISIONS74
Section 11.1Redemption of Class B Preferred Units74
Section 11.2Monetization Sale75
Section 11.3IPO; Conversion to a Corporation79
Article XII MISCELLANEOUS PROVISIONS82
Section 12.1Addresses and Notices82
Section 12.2Confidentiality82
Section 12.3Fees and Expenses83
Section 12.4Amendments84
Section 12.5Remedies84
Section 12.6Successors and Assigns85
Section 12.7Severability85
Section 12.8Counterparts; Binding Agreement85
Section 12.9Creditors85
Section 12.10No Waiver85
Section 12.11Further Action86
Section 12.12No Offset Against Amounts Payable86
Section 12.13Entire Agreement86
Section 12.14Governing Law86
Section 12.15Consent to Jurisdiction; Waiver of Trial by Jury86
Section 12.16Construction; Interpretation87
Section 12.17No Third Party Beneficiaries87
Section 12.18Time is of the Essence88
Section 12.19No Recourse88
Section 12.20Termination of Employment Arrangements.88
SCHEDULES
Schedule of Members
EXHIBITS
Exhibit A Initial Budget
Exhibit BQualified Opportunities
Exhibit C Incentive Unit Award Agreement (Form)
Exhibit D Spousal Consent
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Levo Mobility LLC
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
This AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”) of Levo Mobility LLC, a Delaware limited liability company (the “Company”), is made and entered into as of August 4, 2021 (the “Execution Date”), by and among Nuvve Corporation, a Delaware corporation (“Nuvve”), Stonepeak Rocket Holdings LP, a Delaware limited partnership (“Stonepeak”), and Evolve Transition Infrastructure LP, a Delaware limited partnership (“Evolve”).
WHEREAS, the Company was formed as a limited liability company in accordance with the Delaware Act on July 15, 2021;
WHEREAS, the Company and Nuvve are parties to that certain Limited Liability Agreement of the Company, dated as of July 15, 2021 (the “Original LLC Agreement”);
WHEREAS, each of Stonepeak and Evolve agreed to make certain Capital Contributions in cash to the Company in exchange for certain Class B Preferred Units and the Class C Common Units, in each case in accordance with the terms of this Agreement;
WHEREAS, each of Stonepeak and Evolve agree to make Capital Contributions from time to time in cash to the Company in exchange for additional Class B Preferred Units in accordance with the terms of this Agreement; and
WHEREAS, as a condition to, and in connection with, each of Stonepeak and Evolve agreeing to make certain Capital Contributions, the Company and the Members desire to enter into the mutual covenants and agreements set forth in this Agreement and to amend and restate the Original LLC Agreement in its entirety.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members, intending to be legally bound, hereby agree as follows:
Capitalized terms used but not otherwise defined herein shall have the following meanings:
“Accepted Opportunity” has the meaning set forth in Section 6.5(b).
“Accredited Investor” has the meaning set forth in Regulation D promulgated under the Securities Act.
“Additional Member” means a Person admitted to the Company as a Member pursuant to Section 3.8.
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“Adjusted Capital Account Deficit” with respect to any Capital Account as of the end of any Taxable Year means the amount by which the balance in such Capital Account is less than zero. For this purpose, such Person’s Capital Account balance shall be (a) reduced for any items described in Treasury Regulations Section 1.704-l(b)(2)(ii)(d)(4), (5), and (6), and (b) increased for any amount such Person is obligated to contribute or is treated as being obligated to contribute to the Company pursuant to Treasury Regulations Sections 1.704-l(b)(2)(ii)(c) (relating to partner liabilities to a partnership) or 1.704-2(g)(1) and 1.704-2(i) (relating to minimum gain).
“Affiliate” of any Person means any other Person, directly or indirectly, Controlling, Controlled by or under common Control with such particular Person. For the purposes of this Agreement, (a) none of Stonepeak, Evolve or their respective Affiliates shall be deemed to be an “Affiliate” of Nuvve Parent, Nuvve or any of their respective Affiliates or minority owned subsidiaries by virtue of their ownership of Units, (b) none of Stonepeak, Evolve or their respective Affiliates shall be deemed to be an “Affiliate” of the Company or its Subsidiaries or minority owned subsidiaries and (c) Nuvve Parent, Nuvve and their respective Affiliates shall each be deemed an “Affiliate” of the Company.
“Affiliate Contract” means any contract, agreement or arrangement between the Company (or any of its Subsidiaries), on the one hand, and any Affiliate of the Company, any Member or Affiliate of any Member or any of the Company’s or its Affiliates’ Officers, Managers or directors (each an “Affiliated Counterparty”), on the other hand, including and as applicable, the Transaction Documents (excluding the Board Rights Agreement and the Initial Signing Documents).
“Aggregate Upsized Commitment Amount” has the meaning set forth in Section 3.2(c).
“Agreement” has the meaning set forth in the preamble to this Agreement.
“Annual Budget” means (a) with respect to the period from the Execution Date until December 31, 2021, the Initial Budget and (b) with respect to each Fiscal Year following the Fiscal Year ended December 31, 2021, the annual budget prepared for the Company and its Subsidiaries by the Service Provider and approved by the Board acting with Special Approval in accordance with the terms of this Agreement. In the event, however, of a failure to adopt a new Annual Budget in accordance with this Agreement by the first (1st) day of the applicable Fiscal Year, the most recent Annual Budget previously approved, subject to an increase to the operating expenses in the then applicable Annual Budget in the aggregate equal to the percentage increase, if any, in the consumer price index (CPI-U) from the effective date of such Annual Budget most recently previously approved by the Board until the first (1st) day of such Fiscal Year, shall continue unless and until a new Annual Budget is approved in accordance with this Agreement; provided that such default budget shall only include those capital expenditures for capital projects previously approved by the Board.
“Annual Statements” has the meaning set forth in Section 7.2(a).
“Available Cash” means, as of any relevant time of determination, an amount equal to (a) all cash of the Company and its Subsidiaries, minus (b) an amount determined by the Board in good faith that is, for the six-month period following such time of determination, required to be
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retained to meet any liabilities or proposed expenditures of the Company and its Subsidiaries that are (i) accrued or reasonably foreseeable, including in accordance with any Annual Budget or (ii) otherwise reasonably necessary to be retained, including, for the avoidance of doubt, (A) liabilities or proposed expenditures with respect to Preferred Distributions, (B) following the occurrence of a Redemption Event or in anticipation of a reasonably foreseeable Redemption Event, redemptions of the Class B Preferred Units in accordance with this Agreement, and (C) debt service, if any.
“Available Securities” has the meaning set forth in Section 3.3(c).
“Award Agreement” means any grant agreement that the Company enters into with respect to the issuance of Class D Incentive Units.
“Award Date” means, with respect to any Class D Incentive Unit, the date on which the vesting period for such Class D Incentive Unit begins, whether pursuant to the terms of this Agreement, an Award Agreement or otherwise.
“Bad Leaver Termination” has the meaning set forth in Section 9.11..
“Bankruptcy Event” with respect to the Company or any of its Subsidiaries means (a) commencement of any case, proceeding or other voluntary action seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, arrangement, adjustment, winding-up, reorganization, dissolution, composition under any Bankruptcy Law or other relief with respect to it or its debts; (b) applying for, or consent or acquiesce to, the appointment of, a receiver, administrator, administrative receiver, liquidator, sequestrator, trustee or other official with similar powers for itself or any substantial part of its assets; (c) making a general assignment for the benefit of its creditors; (d) commencement of any involuntary case seeking liquidation or reorganization under any Bankruptcy Law, or seeking issuance of a warrant of attachment, execution or distraint, or commencement of any similar proceedings against the Company under any other applicable law and (i) consent to the institution of the involuntary case against it, (ii) the petition commencing the involuntary case is not timely controverted, (iii) the petition commencing the involuntary case is not dismissed within sixty (60) days of its filing, (iv) an interim trustee is appointed to take possession of all or a portion of the property, or to operate all or any part of the business of the Company or any of its Subsidiaries and such appointment is not vacated within sixty (60) days, or (v) an order for relief shall have been issued or entered therein; (e) entry of a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, administrator, administrative receiver, liquidator, sequestrator, trustee or other official having similar powers, over the Company or all or a part of its property; (f) the granting of any other similar relief under any applicable Bankruptcy Law, filing a petition or consent or shall otherwise institute any similar proceeding under any other applicable law, or taking any action in furtherance of, or indicating its consent to, approval of, or acquiescence in any of the acts set forth above in this definition; (g) the Company taking any form of corporate action to be liquidated or dissolved; or (h) admitting in writing its inability to pay its debts as they become due.
“Bankruptcy Law” means title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq. or any similar federal or state law.
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“Base Preferred Return Amount” for each Class B Preferred Unit, as of any relevant time of determination, means an amount required to be paid with respect to such Class B Preferred Unit to cause the applicable Class B Preferred Member to receive Total Distributions sufficient to achieve the greater of (i) a twelve and a half percent (12.5%) IRR and (ii) a 1.55x MOIC.
“Beneficial Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular “person” (as that term is used in Section 13(d)(3) of the Exchange Act), such “person” will be deemed to have beneficial ownership of all securities that such “person” has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only after the passage of time. The terms “Beneficially Owns” and “Beneficially Owned” have corresponding meanings. For purposes of this definition, a Person shall be deemed not to Beneficially Own securities that are the subject of a stock purchase agreement, merger agreement, amalgamation agreement, arrangement agreement or similar agreement until consummation of the transactions or, as applicable, a series of related transactions contemplated thereby.
“Blocker Corporation” means a special purpose Person that is classified as a corporation for U.S. federal income tax purposes that is an Affiliate of Stonepeak (or any Transferee of Stonepeak) and directly or indirectly owns Units.
“Board” has the meaning set forth in Section 5.1.
“Board Observer” has the meaning set forth in Section 5.6.
“Board Rights Agreement” means that certain Board Rights Agreement, dated as of the Execution Date, by and between Stonepeak and Nuvve Parent.
“Book Value” with respect to any asset of the Company means the asset’s adjusted basis for federal income tax purposes, except that the Book Value of all assets of the Company may be adjusted to equal their respective Fair Market Values, in accordance with the rules set forth in Treasury Regulations Section 1.704-1(b)(2)(iv)(f) immediately prior to: (a) the date of the acquisition of any additional Units by any new or existing Member in exchange for more than a de minimis amount of cash or contributed property or as consideration for the provision of more than a de minimis amount of services; (b) the date of the distribution of more than a de minimis amount of cash or property of the Company to a Member; (c) the date a Unit is relinquished to the Company or (d) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g)(1). Adjustments pursuant to clauses (a), (b) and (c) above shall be made, however, only if the Board reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members. The Book Value of any asset contributed (or deemed contributed for tax purposes) by a Member to the Company will be the Fair Market Value of the asset at the date of its contribution thereto. If the Book Value of an asset has been determined or adjusted pursuant to the above, such Book Value will thereafter be adjusted by the amount of depreciation, depletion and amortization calculated for purposes of the definitions of “Profits” and “Losses” rather than the amount of depreciation, depletion and amortization for U.S. federal income tax purposes.
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“Business” means the business of (a) acquiring, owning, selling, leasing, developing and managing electric buses, vehicles, transportation assets, and related charging infrastructure and ancillary assets, in each case, that are provided to third parties that are utilizing financing, leasing or other similar arrangements in respect of such assets and (b) participating in or otherwise providing equity, debt or other financing to any entity or other person engaged in the businesses described in the foregoing clause (a).
“Business Day” means any day other than a Saturday, Sunday or a day on which commercial banks are authorized or required to close in New York, New York.
“Business Opportunities” has the meaning set forth Section 6.5(a).
“Buyer” has the meaning set forth in Section 3.3(a).
“Capital Account” means the capital account maintained for a Member pursuant to Section 3.4.
“Capital Contributions” means the aggregate dollar amounts of any cash, cash equivalents, promissory obligations (but only to the extent issued and repaid prior to the applicable date of determination), or the Fair Market Value (at the time of such contribution or deemed contribution) of other property which a Member contributes or is deemed to have contributed to the Company with respect to any Unit pursuant to Section 3.1.
“Cause” has the meaning set forth in the applicable Award Agreement.
“Certificate of Formation” means the Company’s Certificate of Formation as filed with the Secretary of State of Delaware, as the same may be amended.
“Change of Control” means (a) a sale of all or substantially all of the outstanding Units, or (b) a single transaction or series of related transactions in which all or substantially all of the assets of the Company are sold, leased or otherwise disposed of.
“Class A Common Member” means any Member holding Class A Common Units.
“Class A Common Unit” means a Unit in the Company designated as a “Class A Common Unit” and which shall provide the holder thereof with the rights and obligations specified with respect to a Class A Common Unit in this Agreement.
“Class B Offered Interests” has the meaning set forth in Section 9.7(b).
“Class B Preferred Member” means any Member holding Class B Preferred Units.
“Class B Preferred Proportional Share” means, as of any relevant time of determination with respect to each Class B Preferred Member, as applicable, the quotient equal to (a) the total number of Class B Preferred Units held by such Class B Preferred Member as of such time, divided by (b) the total number of Class B Preferred Units held by all Class B Preferred Members as of such time.
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“Class B Preferred Unit” means a Unit in the Company designated as a “Class B Preferred Unit” and which shall provide the holder thereof with the rights and obligations specified with respect to a Class B Preferred Unit in this Agreement.
“Class B Proposed Third-Party Sale” has the meaning set forth in Section 9.7(b).
“Class B Representative” means a Person selected by a majority of the Class B Preferred Units (voting as a class), which shall initially be Stonepeak; provided, that so long as Stonepeak holds any Class B Preferred Units, the Class B Representative shall be a Person selected by Stonepeak.
“Class B Selling Member” has the meaning set forth in Section 9.7(b).
“Class B Tag-Along Member” has the meaning set forth in Section 9.7(b).
“Class B Tag-Along Right” has the meaning set forth in Section 9.7(b).
“Class B Tag-Along Units” has the meaning set forth in Section 9.7(b).
“Class C Common Member” means any Member holding Class C Common Units.
“Class C Common Unit” means a Unit in the Company designated as a “Class C Common Unit” and which shall provide the holder thereof with the rights and obligations specified with respect to a Class C Common Unit in this Agreement.
“Class D Incentive Unit” means a Unit representing a profits interest in the Company issued in accordance with Section 3.11 of this Agreement. Class D Incentive Units are not Common Units or Class B Preferred Units.
“Class D Incentive Unit Member” means any Member holding Class D Incentive Units. To the extent a Member holds Common Units and one or more series of Class D Incentive Units, such Member will be treated as a Class D Incentive Unit Member only with respect to the Class D Incentive Units held thereby.
“Clawback Notice” has the meaning set forth in Section 9.11(g).
“Clawback Party” has the meaning set forth in Section 9.11(g).
“Clawback Payment” has the meaning set forth in Section 9.11(g).
“Code” means the United States Internal Revenue Code of 1986, as amended from time to time.
“Commission” means the United States Securities and Exchange Commission.
“Commitment Amount” means, with respect to each Class B Preferred Member, the amount set forth opposite its name on the Schedule of Members attached hereto under the heading
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“Commitment Amount,” as such amount may be reduced or increased in accordance with this Agreement including pursuant to Section 3.2(c).
“Commitment Period” means the period beginning on the Execution Date and ending on the earliest to occur of (unless waived, in whole or in part, in writing by the Class B Representative): (a) the third (3rd) anniversary of the Execution Date; provided, that clause (a) shall be extended to (i) the fourth (4th) anniversary of the Execution Date if the Company has entered into contracts in accordance with this Agreement (including, for the avoidance of doubt, with Special Approval) with third parties to spend at least two hundred and fifty million dollars ($250,000,000) in aggregate of capital expenditures or (ii) such other date as may be determined from time to time by the Class B Representative in its sole discretion, (b) the occurrence of a Monetization Event or (c) the occurrence of a Bankruptcy Event.
“Commitment Ratio” means, with respect to each Class B Preferred Member, the ratio equal to (a) such Class B Preferred Member’s Commitment Amount divided by (b) the sum of the aggregate Commitment Amounts of all Class B Preferred Members; provided, however, for purposes of this definition, no Member’s Commitment Amount (nor the sum of all Commitment Amounts of all Class B Preferred Members) shall include any Aggregate Upsized Commitment Amount until such time as the Class B Preferred Member exercises its right in accordance with Section 3.2(c).
“Common Member” means any Class A Common Member or Class C Common Member.
“Common Units” means the Class A Common Units and Class C Common Units it being understood that in no instance shall any Class D Incentive Unit be designated by the Board as a Common Unit).
“Company” has the meaning set forth in the preamble to this Agreement.
“Company Minimum Gain” has the meaning given to the term “partnership minimum gain” in Treasury Regulations Section 1.704-2(b)(2) and the amount of which shall be determined in accordance with the principles of Treasury Regulations Section 1.704-2(d).
“Competitor” means any Person that directly engages in activities similar to the Business or directly or indirectly engages in business activities similar to those engaged in by Nuvve Parent; provided, that no private equity or similar investment fund shall be deemed to engage in activities similar to the Business or business activities similar to those engaged in by Nuvve Parent by virtue of any such fund’s ownership or Control of portfolio companies or individual investments.
“Confidential Information” has the meaning set forth in Section 12.2.
“Consideration Period” has the meaning set forth in Section 6.5(b).
“Control” means the possession, directly or indirectly, of the power to direct, or cause the direction of, the management and policies of a Person whether through the ownership of voting securities or other ownership interests, by contract or otherwise. The terms “Controlled” and “Controlling” shall have correlative meanings.
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“Covenant Breach” has the meaning set forth in Section 9.11(c).
“D-Eligible Distribution” has the meaning set forth in Section 4.4(a).
“Debt Securities” means any bonds, debentures, notes, or other similar evidences of Indebtedness of the Company or its Subsidiaries commonly known as “securities,” secured or unsecured, subordinated or otherwise, or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. Notwithstanding the foregoing, any such securities that also constitute Equity Securities shall not be considered Debt Securities.
“Delaware Act” means the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq., as it may be amended from time to time, and any successor to the Delaware Act.
“Distribution” means each distribution made by the Company to a Member, whether in cash, property or securities of the Company and whether by liquidating distribution, redemption, repurchase or otherwise.
“Distribution Failure” means a failure by the Company to pay a Preferred Distribution or a Preferred PIK Distribution with respect to any Class B Preferred Unit in full in cash or as an accrual to the Liquidation Preference, as applicable, within ten (10) days after the applicable Payment Date. A Distribution Failure shall be deemed to occur each time that any such failure to make such payment occurs, whether or not a prior Distribution Failure is then continuing.
“Dragging Member” has the meaning set forth in Section 9.9.
“DSA” means (a) that certain Development Services Agreement, dated as of the Execution Date, by and between the Company and Nuvve Parent, as may be amended or restated in accordance with its terms or (b) any similar agreement or arrangement entered into in replacement thereof as approved by the Board acting with Special Approval after the Execution Date.
“Employer” has the meaning set forth in Section 3.11(a).
“Employment Agreement” means, with respect to any Class D Incentive Unit Member (or Transferee thereof), at the time of determination, the then-effective employment agreement, if any, entered into between the Employer and such current or former Class D Incentive Unit Member.
“Equity Securities” means: (a) Units or other equity interests in the Company or its Subsidiaries; (b) obligations, evidences of Indebtedness or other securities or interests convertible or exchangeable into Units or other equity interests in the Company or its Subsidiaries; and (c) warrants, options or other rights to purchase or otherwise acquire Units or other equity interests in the Company or its Subsidiaries.
“Escrow Agent” means Iron Mountain Intellectual Property Management, Inc. and any successor third party providing escrow services to the Parties.
“Evolve” means Evolve Transition Infrastructure LP, a Delaware limited partnership.
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“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Execution Date” has the meaning set forth in the preamble to this Agreement.
“Exempted Business Opportunities” has the meaning set forth Section 6.5(a).
“Fair Market Value” with respect to any asset or equity interest means its fair market value determined by the Board acting with Special Approval in accordance with Section 5.7(xxii).
“Fair Value” with respect to any Class D Incentive Unit means the amount, as determined by the Board acting with Special Approval, that a Class D Incentive Unit Member (or his, her or its Transferee) would receive in respect of such Class D Incentive Unit pursuant to this Agreement, if the assets of the Company and its Affiliates were sold for Fair Market Value and the outstanding debt of the Company and its Affiliates were satisfied and the transaction proceeds (net of a reasonable estimate of fees and expenses that would be incurred in connection with such sale) were distributed in accordance with the terms set forth in Article IV of this Agreement.
“First Management Threshold Target” means for each Class B Preferred Unit, as of any relevant time of determination, an amount required to be paid with respect to such Class B Preferred Unit to cause the applicable Class B Preferred Member to receive Total Distributions sufficient to achieve the greater of (a) an eight percent (8.0%) IRR and (b) a 1.0x MOIC.
“Fiscal Quarter” means each calendar quarter ending March 31, June 30, September 30 and December 31, or such other quarterly accounting period as may be established by the Board acting with Special Approval.
“Fiscal Year” means the calendar year ending on December 31, or such other annual accounting period as may be established by the Board acting with Special Approval.
“Fully Exercising Preemptive Rights Holder” has the meaning set forth in Section 3.3(c).
“Fundamental Change” means: (a) a Nuvve Change of Control or a Nuvve Parent Change of Control; (b) any event after giving effect to which (i) any Person(s) (other than Nuvve Parent or its Affiliates) is entitled to receive directly or indirectly, or Nuvve Parent ceases to be entitled to receive, directly or indirectly through its Affiliates, more than fifty percent (50%) of the economic interest of the Common Units or (ii) Nuvve Parent does not, directly or indirectly, have the right to designate a majority of the Board; (c) the sale, exchange, lease or other disposition or transfer in a single transaction or series of related transactions of all or substantially all of the assets of the Company or its Subsidiaries; (d) any merger, reorganization, recapitalization, reclassification, consolidation or other change involving the Company or any other event pursuant to which the Class B Preferred Units are altered, exchanged or become entitled to receive consideration other than the Preferred Redemption Price in cash in connection therewith; (e) any Transfer by Nuvve or its Permitted Transferees of any of their Class A Common Units, other than Transfers permitted by, or otherwise made in accordance with, this Agreement; (f) any Bankruptcy Event of the Company; or (g) an initial public offering or direct listing of the Company, its Subsidiaries or of any Person that owns directly or indirectly fifty percent (50%) or more of the economic interest of the Class A Common Units (other than Nuvve Parent or its Affiliates).
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“GAAP” means United States generally accepted accounting principles, consistently applied and as in effect from time to time.
“Governing Documents” means this Agreement and the Certificate of Formation.
“Governmental Entity” means the United States of America or any other nation, any state or other political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of government including any taxing authority.
“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended from time to time.
“Indebtedness” with respect to the Company or any of its Subsidiaries means: (a) any indebtedness for borrowed money or issued in substitution for or exchange of indebtedness for borrowed money (including interest and prepayment penalties or obligations); (b) obligations evidenced by any note, bond, debenture or similar instrument; (c) obligations for the deferred purchase price for a company, business, or other property or services (excluding ordinary course trade payables and accrued expenses); (d) indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by the Company or any of its Subsidiaries (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (e) obligations by which the Company or any of its Subsidiaries assures a creditor against loss (including contingent reimbursement liabilities with respect to letters of credit); (f) capital lease obligations; (g) obligations, contingent or otherwise, as an account party or applicant under acceptance, letter of credit or similar facilities; (h) except with respect to the Company’s obligations contained in this Agreement, obligations of the Company or any of its Subsidiaries, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Equity Securities; (i) indebtedness secured by any lien on property owned by the Company or any of its Subsidiaries, whether or not such Person has assumed or become liable for the payment of such obligation; and (j) any guarantee of indebtedness in any manner by the Company or any of its Subsidiaries (including guarantees in the form of an agreement to repurchase or reimburse).
“Indemnitee” means (a) any Member or (b) any Person who is or was a Manager, Independent Manager, Officer, fiduciary, trustee, or managing member of the Company or a Member.
“Independent Manager” means a natural Person (a) retained through a nationally recognized independent director service mutually agreed to by Nuvve and Stonepeak, (b) who is duly appointed or elected in accordance with this Agreement as an Independent Manager or equivalent, and (c) who is not, shall not have been at any time during the preceding five (5) years, and during the continuation of his or her service as an Independent Manager shall not become: (i) a member, partner, shareholder, manager, officer (other than an Independent Manager), employee or attorney of the Company, an Affiliate of the Company or their respective equityholders; (ii) a customer, creditor, supplier or service provider (including provider of professional services) to, or other Person who purchases or derives its revenues from, the Company or any Affiliate thereof (other than a company that provides professional independent managers and other similar services to the Company or an Affiliate thereof in the ordinary course of its business); (iii) a Person that
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Controls (whether directly, indirectly or otherwise) or is under common Control with any Person described in clause (i) or (ii) above; or (iv) a member of the immediate family or other close relative of any Person described in clause (i), (ii) or (iii) above. To the extent possible, such Person shall have prior experience serving as an independent manager, independent director, independent member, or equivalent for a bankruptcy remote entity in the electric vehicle or renewables industries.
“Initial Budget” means the initial budget of the Company and its Subsidiaries for the period from the Execution Date until December 31, 2021, attached hereto as Exhibit A.
“Initial Signing Documents” means, collectively, (i) the Letter Agreement, (ii) the Nuvve Parent Warrants, (iii) the Registration Rights Agreement, and (iv) the Securities Purchase Agreement.
“Investment Company Act” means the Investment Company Act of 1940, as amended.
“IP Escrow Agreement” means that certain Three Party Escrow Agreement, dated as of the Execution Date, by and among Nuvve Parent, Escrow Agent, and the Company.
“IP License Agreement” means that certain Intellectual Property License and Escrow Agreement, dated as of the Execution Date, by and among Nuvve Parent, Escrow Agent, and the Company.
“IPO” means any firm commitment underwritten offering of equity interests on a Recognized Stock Exchange of any IPO Issuer (including any such offering of equity interests on a secondary basis) to the public pursuant to an effective registration statement under the Securities Act or a direct listing of equity interests of any IPO Issuer on a Recognized Stock Exchange.
“IPO Issuer” has the meaning set forth in Section 11.3(b).
“IRR” means, with respect to each Class B Preferred Unit, as of the relevant time of determination, an actual annual pre-tax return of the specified percentage, compounded annually, on the aggregate Capital Contributions attributable to such Class B Preferred Unit. IRR with respect to each Class B Preferred Unit shall be calculated (a) assuming (i) the Capital Contribution in respect of such Class B Preferred Unit was paid on the date it was funded and (ii) all relevant Distributions (other than Tax Distributions with respect to such Class B Preferred Unit under Section 4.1) in respect of such Class B Preferred Unit pursuant to Section 4.2 have been made on the date actually paid by the Company; and (b) using the XIRR function in the most recent version of Microsoft Excel (or if such program is no longer available, such other software program for calculating IRR determined by the Board acting with Special Approval in good faith).
“Key Employee” at any given time means an employee of the Company that (a) holds the title of Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer (or such other similar titles) or (b) has an annual salary of at least one hundred thousand dollars ($100,000).
“Letter Agreement” means that certain Letter Agreement, dated as of May 17, 2021, by and among Stonepeak, Evolve, and Nuvve Parent.
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“Liabilities” means, as to any Person, all liabilities and obligations of such Person, whether matured or unmatured, liquidated or unliquidated, primary or secondary, direct or indirect, absolute, fixed or contingent, and whether or not required to be considered pursuant to GAAP.
“Lien” means, with respect to any property or assets, any right or interest to such property or assets of a creditor to secure Liabilities owed to it or any other arrangement with such creditor that provides for the payment of such Liabilities out of such property or assets or that allows such creditor to have such Liabilities satisfied out of such property or assets prior to the general creditors of any owner of such property or assets, including any lien, mortgage, Equity Securities, pledge, deposit, production payment, rights of a vendor under any title retention or conditional sale agreement or lease substantially equivalent to the foregoing interests, tax lien (other than a lien for taxes that are not yet due and payable), mechanic’s or materialman’s lien, or any other charge or encumbrance for security purposes, whether arising by law or agreement or otherwise, but excluding any right of offset that arises without agreement in the ordinary course of business. “Lien” also means any filed financing statement, any registration of a pledge (such as with a lender of uncertificated securities), or any other arrangement or action that would serve to perfect a Lien described in the preceding sentence, regardless of whether such financing statement is filed, such registration is made, or such arrangement or action is undertaken before or after such Lien exists.
“Liquidation Preference” means, with respect to each Class B Preferred Unit as of the relevant time of determination, an amount equal to (a) one thousand dollars ($1,000) plus (b) all Unpaid Amounts with respect to such Class B Preferred Unit as of such time, minus (c) all Distributions paid in cash with respect to such Class B Preferred Unit pursuant to Section 4.2(a)(iii) as of such time.
“LLCA Breach” has the meaning set forth in Section 9.11(c).
“Manager” has the meaning set forth in Section 5.1.
“Member” means each of the Persons listed on the Schedule of Members attached hereto, and any Person admitted to the Company as a Substituted Member or Additional Member, but only so long as such Person is the owner of one or more Units, each in such Person’s capacity as a member of the Company.
“Member Nonrecourse Debt” has the meaning given to the term “partner nonrecourse debt” in Treasury Regulations Section 1.704-2(b)(4).
“Member Nonrecourse Debt Minimum Gain” has the meaning given to the term “partner nonrecourse debt minimum gain” in Treasury Regulations Section 1.704-2(i)(2).
“Member Nonrecourse Deductions” means any and all items of loss, deduction, expenditure (including any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulations Section 1.704-2(i), are attributable to Member Nonrecourse Debt.
“MOIC” means, as of any relevant time of determination and with respect to any Unit, a multiple on invested capital which shall be an amount equal to (a) Total Distributions with respect
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to such Unit divided by (b) the aggregate amount of Capital Contributions made with respect to such Unit as of such time.
“Monetization Event” means the consummation of an IPO or Monetization Sale.
“Monetization Sale” means (a) a consolidation, merger or other similar business combination of the Company with or into any other Person, after giving effect to which (i) the Members or their respective Affiliates (excluding any limited partners or portfolio companies thereof) immediately preceding such consolidation, merger or other similar business combination do not hold equity interests representing the right to receive a majority of the distributions of the Person surviving or resulting from such consolidation, merger or other similar business combination or (ii) the holders of the equity interests of the Company immediately prior to such transaction (excluding any limited partners or portfolio companies thereof) will no longer have the right to designate a majority of the Board or similar governing body of the Company or surviving entity, (b) a sale of all or substantially all of the outstanding Units or all or substantially all of the Class B Preferred Units, or (c) a single transaction or series of related transactions in which all or substantially all of the assets of the Company are sold, leased or otherwise disposed of.
“Non-Compete Period” has the meaning set forth in Section 6.5(c).
“Non-Fully Exercising Preemptive Rights Holder” has the meaning set forth in Section 3.3(c).
“Non-Funded Interests” has the meaning set forth in Section 3.2(f).
“Non-Funding Member” has the meaning set forth in Section 3.2(b).
“Nonrecourse Liability” has the meaning given to such term in Treasury Regulations Section 1.704-2(b)(3).
“Notice Period” has the meaning set forth in Section 9.7(e).
“Nuvve” means Nuvve Corporation, a Delaware corporation.
“Nuvve Change of Control” means the occurrence of any sale, exchange, lease or other disposition or transfer, in a single transaction or series of related transactions and however structured, including by way of any consolidation, conversion, merger or other similar business combination of any nature, following which the Permitted Persons, in the aggregate, (i) cease to be the beneficial owner, directly or indirectly, of at least fifty percent (50%) of the equity interests of Nuvve (or any surviving entity), or (ii) cease to own equity interests in Nuvve (or any surviving entity) that enable the Permitted Persons, in the aggregate, to elect a majority of the board of directors or similar governing body of Nuvve (or such surviving entity).
“Nuvve Manager” has the meaning set forth in Section 5.2(a).
“Nuvve Offered Interests” has the meaning set forth in Section 9.7(a).
“Nuvve Parent” means Nuvve Holding Corp., a Delaware corporation.
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“Nuvve Parent Change of Control” means the occurrence of any of the following: (a) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of Nuvve Parent and its Subsidiaries taken as a whole to any Person (including any “person” (as that term is used in Section 13(d)(3) of the Exchange Act)); (b) the adoption of a plan relating to the liquidation or dissolution of Nuvve Parent; or (c) the consummation of any transaction (including any merger or consolidation), the result of which is that any Person (including any “person” (as defined above)), becomes the Beneficial Owner, directly or indirectly, of more than fifty percent (50%) of the Voting Stock of the Company, measured by voting power rather than number of shares, units or the like.
“Nuvve Parent Shares” means the shares of common stock, par value $0.0001 per share, of Nuvve Parent.
“Nuvve Parent Warrants” means those certain Series B Warrants, Series C Warrants, Series D Warrants, Series E Warrants and Series F Warrants, in each case, dated as of May 17, 2021.
“Nuvve Proposed Third-Party Sale” has the meaning set forth in Section 9.7(a).
“Nuvve Selling Member” has the meaning set forth in Section 9.7(a).
“Nuvve Tag-Along Member” has the meaning set forth in Section 9.7(a).
“Nuvve Tag-Along Right” has the meaning set forth in Section 9.7(a).
“Nuvve Tag-Along Units” has the meaning set forth in Section 9.7(a).
“Offered Interests” means the Nuvve Offered Interests or the Class B Offered Interests, as applicable.
“Officers” means each Person designated as an officer of the Company to whom authority and duties have been delegated pursuant to Section 5.11, subject to any resolution of the Board appointing or removing such Person as an officer or relating to such appointment or such delegation of authority or duties.
“Original LLC Agreement” has the meaning set forth in the recitals to this Agreement.
“Other Investments” has the meaning set forth in Section 6.6(a)(i).
“Parent Letter Agreement” means that certain Parent Letter Agreement, dated as of the Execution Date, by and among Stonepeak, the Company and Nuvve Parent.
“Participating Members” has the meaning set forth in Section 11.2(f).
“Partnership Representative” means the “partnership representative” as defined in Section 6223 of the Code.
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“Partnership Tax Audit Rules” means Sections 6221 through 6241 of the Code, as amended by the Bipartisan Budget Act of 2015, together with any guidance issued thereunder or successor provisions and any similar provision of state and local tax laws.
“Party” or “Parties” means the Company, each Member, and each Additional Member (if any), individually and collectively, respectively.
“Payment Date” means, with respect to each Fiscal Quarter, as applicable, the date that is ten (10) Business Days following the end of such Fiscal Quarter (or if such date is on a day that is not a Business Day, the next Business Day immediately following such date).
“Permanent Disability” has the meaning set forth in the applicable Award Agreement.
“Permitted Beneficiary” means, with respect to any Ultimate Employee, such Ultimate Employee’s (a) spouse (or ex-spouse) and lineal descendants thereof (including by adoption), (b) lineal descendants (including by adoption) and spouses thereof, (c) siblings (including by adoption), spouses thereof and lineal descendants thereof (including by adoption) and (d) spouse’s siblings (including by adoption), spouses thereof and lineal descendants thereof (including by adoption).
“Permitted Estate Planning Transfer” means any direct or indirect Transfer of Class D Incentive Units: (a) occurring as a result of the death of a Class D Incentive Unit Member (whether any such Transfer is by will or intestacy or pursuant to the terms of the governance agreements of such Class D Incentive Unit Member) or (b) to a Trust or Permitted Beneficiary of the Class D Incentive Unit Member during their respective lifetimes for bona fide estate planning purposes so long as, after giving effect to such Transfer described in this clause (b), the applicable Class D Incentive Unit Member still Control their respective interests in the Trust during their respective lifetimes.
“Permitted Persons” means Nuvve Parent and its Affiliates.
“Permitted Transfer” means any Transfer to a Permitted Transferee.
“Permitted Transferee” with respect to any Member means: (a) any of such Member’s (other than the Class D Incentive Unit Member’s) Affiliates and (b) any Transferee in connection with a Monetization Event.
“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, association or other entity or a Governmental Entity.
“PIPE Commitment” means that certain commitment to purchase Nuvve Parent Shares pursuant to the Securities Purchase Agreement.
“Preemptive Rights Holder” has the meaning set forth in Section 3.3(a).
“Preemptive Rights Notice” has the meaning set forth in Section 3.3(a).
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“Preferred Distribution” means, with respect to each Class B Preferred Unit held by the applicable Class B Preferred Member, an amount equal to the product of (a)(i) the then-applicable Preferred Distribution Rate divided by (ii) four (4), multiplied by (b) the Liquidation Preference for such Class B Preferred Unit as of the end of the immediately preceding Fiscal Quarter.
“Preferred Distribution Rate” means eight percent (8.0%) per annum, compounded on the last day of each Fiscal Quarter. Notwithstanding the foregoing, upon the occurrence of a Distribution Failure, the Preferred Distribution Rate shall increase to an annual rate of nine percent (9.0%), accruing from the first (1st) day after the end of the Fiscal Quarter with respect to which such Distribution Failure occurs and if such Distribution Failure is a result of a second (2nd) Distribution not being paid in full, the Preferred Distribution Rate shall increase to an annual rate of ten percent (10.0%). If such Distribution Failure is cured and all unpaid Distributions that are due and payable as of such date have been paid in full, the annual rate will revert to eight percent (8.0%), accruing from the first (1st) day after the date on which such Distribution Failure is cured and subject to increase in the event another Distribution Failure occurs in the future.
“Preferred PIK Distribution” has the meaning set forth in Section 4.2(c).
“Preferred PIK Period” means the period beginning on the Execution Date and ending upon the end of the first (1st) full twelve (12) Fiscal Quarters following the date on which the Class B Preferred Members have made aggregate Capital Contributions of at least fifty million dollars ($50,000,000) in cash with respect to the aggregate Commitment Amount.
“Preferred Redemption Price” means, as of any relevant time of determination with respect to each Class B Preferred Unit, an amount equal to the greater of (a) the Liquidation Preference of such Class B Preferred Unit and (b) the applicable Base Preferred Return Amount of such Class B Preferred Unit.
“Preferred to Value Ratio” means, as of any relevant time of determination, the ratio equal to (a) the sum of (i) the existing Indebtedness of the Company and any of its Subsidiaries, plus (ii) the aggregate Liquidation Preference of the issued and outstanding Class B Preferred Units, divided by (b) the net present value, discounted at eight percent (8.0%) per annum, of the forecasted future net contracted cash flows expected to accrue to the Company and its Subsidiaries, as determined by the Board in good faith. The Preferred to Value Ratio shall be calculated pro forma for the subject Distribution pursuant to Section 4.2.
“Prime Rate” means, as of any relevant time of determination, the prime rate of interest as published on that date in The Wall Street Journal, and generally defined therein as “the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation’s thirty (30) largest banks.” If The Wall Street Journal is not published on a date for which the Prime Rate must be determined, the Prime Rate shall be the prime rate published in The Wall Street Journal on the nearest-preceding date on which The Wall Street Journal was published and if The Wall Street Journal ceases to publish such rate, then the Class B Representative shall pick a substitute rate that most closely approximates such rate, as determined in the Class B Representative’s good faith judgment.
“Proceeding” has the meaning set forth in Section 6.1(a).
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“Profits” and “Losses” means the taxable income or loss, respectively, of the Company as determined for federal income tax purposes, as adjusted by Section 3.4(b). Profits and Losses shall be determined net of any amounts allocable in Section 4.6.
“Profits Interests” has the meaning set forth in Section 3.11(d).
“Proportional Share” means, as of any relevant time of determination with respect to each Common Member, as applicable, the quotient equal to (a) the total number of Common Units held by such Common Member as of such time divided by (b) the total number of Common Units held by all Common Members as of such time.
“Proposed Third-Party Sale” means the Nuvve Proposed Third-Party Sale or the Class B Proposed Third-Party Sale, as applicable.
“Proposed Transfer” has the meaning set forth in Section 9.8.
“Qualified Opportunity” means a Business Opportunity that meets the qualifying criteria set forth on Exhibit B, as may be amended, supplemented or modified from time to time in accordance with Section 6.5(e).
“Quarterly Statements” has the meaning set forth in Section 7.2(b).
“Recapitalization” has the meaning set forth in Section 11.3(d)(i).
“Recognized Stock Exchange” means the New York Stock Exchange or The NASDAQ Stock Market.
“Redemption Event” has the meaning set forth in Section 11.1(a).
“Registrable Securities” means any securities of an IPO Issuer owned by a Person that was a Member immediately prior to an IPO (or such Person’s Permitted Transferees), and any such securities which are the same class as, or convertible or exchangeable into, or redeemable for, the equity securities sold in the IPO.
“Registration Rights Agreement” means that certain Registration Rights Agreement, dated as of May 17, 2021, by and among Stonepeak, Evolve, and Nuvve Parent.
“Regulatory Allocations” has the meaning set forth in Section 4.6(g).
“Rejected Opportunity” has the meaning set forth in Section 6.5(d).
“Remaining Commitment Amount” means, as of the relevant time of determination with respect to each Class B Preferred Member, an amount equal to (a) its Commitment Amount, minus (b) the aggregate Capital Contributions made (and all unfunded Capital Contributions, if any, required to be made pursuant to previous capital calls) by such Class B Preferred Member prior to such time.
“Renounced Business Opportunity” has the meaning set forth in Section 6.6(b)(i)(C).
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“Reorganization” has the meaning set forth in Section 11.3(b).
“Repurchase Note” has the meaning set forth in Section 9.11(d).
“Repurchase Notice” has the meaning set forth in Section 9.11(d).
“Repurchase Period” has the meaning set forth in Section 9.11(d).
“Retained Distributions” has the meaning set forth in Section 4.4(c)
“ROFO Acceptance Notice” has the meaning set forth in Section 9.8.
“ROFO Holders” has the meaning set forth in Section 9.8.
“ROFO Notice” has the meaning set forth in Section 9.8.
“ROFO Offer” has the meaning set forth in Section 9.8.
“ROFO Offer Price” has the meaning set forth in Section 9.8.
“ROFO Offered Units” has the meaning set forth in Section 9.8.
“Sale Notice” has the meaning set forth in Section 9.7(c).
“Schedule of Members” means the Schedule of Members attached hereto.
“Second Management Threshold Target” means for each of Stonepeak and Evolve, each in its capacity as a Member, as of any relevant time of determination, an amount required to be paid with respect to the aggregate Class B Preferred Units and Class C Common Units held by such Member to cause such Member to receive Total Distributions with respect to such Units sufficient to achieve the greater of (i) a fifteen percent (15.0%) IRR and (ii) a 2.0x MOIC.
“Securities” means Debt Securities and Equity Securities.
“Securities Act” means the Securities Act of 1933, as amended, and any successor statute thereto and the rules and regulations of the Commission promulgated thereunder.
“Securities Purchase Agreement” means that certain Securities Purchase Agreement, dated as of May 17, 2021, by and among Stonepeak, Evolve, and Nuvve Parent.
“Selling Member” means the Nuvve Selling Member or the Class B Selling Member, as applicable.
“Selling ROFO Member” has the meaning set forth in Section 9.8.
“Service Provider” means Nuvve Parent under the DSA initially, and any other Person hereafter appointed as the “Service Provider” by approval of the Board and the Class B Representative.
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“Special Approval” means the prior written approval of the Class B Representative and at least one (1) Stonepeak Manager.
“Stonepeak” means Stonepeak Rocket Holdings LP, a Delaware limited partnership.
“Stonepeak Fund Group” means, collectively, Stonepeak, its Affiliates and its and their respective limited partners, general partners, members, managed accounts, stockholders and portfolio companies. Notwithstanding anything herein to the contrary, the Stonepeak Fund Group does not include the Company or any of its Subsidiaries.
“Stonepeak Fund Parties” means, collectively, the members of the Stonepeak Fund Group, their respective Affiliates and their respective Affiliates’ portfolio companies. Notwithstanding anything herein to the contrary, the Stonepeak Fund Parties do not include the Company or any of its Subsidiaries.
“Stonepeak Manager” has the meaning set forth in Section 5.2(a).
“Subject Repurchase Party” has the meaning set forth in Section 9.7(c).
“Subject Units” has the meaning set forth in Section 9.11(b)(i).
“Subsidiary” with respect to any Person means: any corporation, limited liability company, partnership, association or business entity of which (a) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or Controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof; or (b) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of limited liability, partnership or other similar ownership interests thereof with voting rights at the time owned or Controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes of this definition, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity (other than a corporation) if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or Control, directly or indirectly, the manager, managing member, managing director (or a board comprised of any of the foregoing) or general partner of such limited liability company, partnership, association or other business entity.
“Substituted Member” means a Person that is admitted as a Member to the Company pursuant to Section 3.9.
“Tag-Along Member” means the Nuvve Tag-Along Member or the Class B Tag-Along Member, as applicable.
“Tag-Along Notice” has the meaning set forth in Section 9.7(e).
“Tag-Along Right” means the Nuvve Tag-Along Right or the Class B Tag-Along Right, as applicable.
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“Tax Amount” means, with respect to any holder of Common Units or Class B Preferred Units, an amount that in the good faith judgment of the Board is equal to (a) the amount of taxable income or gain allocable in respect of the Common Units, Class B Preferred Units or Class D Incentive Units, as applicable, owned by such holder for the applicable period, less any taxable losses or deductions allocable in respect of such Units for the current taxable period or any prior taxable period, multiplied by (b) the combined maximum federal, state and local income tax rate to be applied with respect to such taxable income (calculated using the Board’s determination of the highest maximum combined marginal federal, state and local income tax rates applicable to an individual or corporation (whichever is higher) resident in or doing business in New York, New York, taking into account the character of such taxable income and the deductibility of state income tax for federal income tax purposes, subject to any applicable limitations on deductibility), but not taking into account any deduction allowable under Section 199A of the Code.
“Tax Distribution” has the meaning set forth in Section 4.1.
“Taxable Year” means the Company’s accounting period for federal income tax purposes determined pursuant to Section 8.2 or such other relevant period.
“Termination” means, as determined by the Board acting with Special Approval with respect to any Ultimate Employee, the termination of a Person’s employment or service with such Employer that such Person is principally employed by or to which such Person principally provides services for any or no reason, including as a result of (a) the termination of the DSA, (b) such Person no longer providing services under the DSA or other similar arrangement, or (c) the Employer no longer being a Subsidiary or Affiliate of the Company because of a sale, divestiture or other disposition of such Subsidiary or Affiliate by the Company (whether such disposition is effected by the Company or another Subsidiary or Affiliate thereof); provided, that notwithstanding the foregoing, to the extent any Dedicated Employee’s (as defined in the DSA) employment with Nuvve or its Affiliates is terminated and such Dedicated Employee is, in connection with such termination, subsequently employed by the Company or its Affiliates pursuant to the DSA, such termination shall not be deemed to be a “Termination”. No period of notice that is or ought to have been given under applicable law in respect of the termination of employment or service shall be taken into account in determining any entitlement under this Agreement. Furthermore, a Person who goes on a leave of absence approved by the Employer shall not be deemed to have ceased such Person’s employment or service with the Employer during the period of such approved leave. For the avoidance of doubt, except as may be set forth herein or in such Person’s Award Agreement, or as otherwise determined by the Board acting with Special Approval, a Termination shall be deemed to have occurred upon a Class D Incentive Unit Member’s status changing, such that the Class D Incentive Unit Member is no longer an employee, consultant or director of the Employer.
“Third Management Threshold Target” means, for each of Stonepeak and Evolve, each in its capacity as a Member, as of any relevant time of determination, an amount required to be paid with respect to the aggregate Class B Preferred Units and Class C Common Units held by such Member to cause such Member to receive Total Distributions with respect to such Units sufficient to achieve the greater of (a) a twenty percent (20.0%) IRR and (b) a 2.5x MOIC.
“Third Party Terms” has the meaning set forth in Section 9.7(c).
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“Threshold Value” has the meaning set forth in Section 3.11(d).
“Total Distributions” means, as of any relevant time of determination and with respect to any Unit, the sum of the total amount of cash and the Fair Market Value (as of such date of actual Distribution) of property or securities of all Distributions made as of such date of determination (and solely for purposes of Section 9.9, together with the sum of the total amount of cash reasonably expected to, in the good faith determination of the Dragging Member, be distributed in connection with such Monetization Sale, as applicable) with respect to such Unit (exclusive of Tax Distributions with respect to any such Class B Preferred Unit and inclusive of Tax Distributions with respect to any such Common Unit).
“Transaction Documents” means, collectively, (a) this Agreement, (b) the DSA, (c) the Parent Letter Agreement, (d) the IP Escrow Agreement, (e) the Board Rights Agreement and (f) the Initial Signing Documents.
“Transfer” means any direct or indirect sale, transfer, assignment, mortgage, exchange, hypothecation, gift, grant of a security interest or other direct or indirect disposition or encumbrance (whether with or without consideration, whether voluntarily or involuntarily or by operation of law) or the acts thereof, including derivative or similar transactions or arrangements whereby a portion or all of the economic interest in, or risk of loss or opportunity for gain with respect to, Units is transferred or shifted to another Person. The terms “Transferee,” “Transferor,” “Transferred,” and other forms of the word “Transfer” shall have the correlative meanings. For the avoidance of doubt, except as otherwise provided herein (including by use of the defined term “Transfer”), the use of the word “transfer” with respect to any Units shall mean the transfer of the direct ownership of such Units. Notwithstanding the foregoing, the use of the defined term “Transfer” shall not include (a) indirect transfers of Class A Common Units resulting solely from acquisitions and dispositions of Nuvve Parent Shares on a Recognized Stock Exchange unless such transfers would otherwise constitute a Nuvve Parent Change of Control or (b) indirect transfers of Units resulting solely from acquisitions and dispositions of the equity interests of Evolve.
“Treasury Regulations” means the income tax regulations promulgated under the Code, as amended from time to time.
“Trigger Event” means the occurrence of (a) a Distribution Failure with respect to two (2) consecutive Fiscal Quarters or with respect to any five (5) Fiscal Quarters whether or not consecutive, and whether or not any such Distribution Failure is continuing or has been cured; (b) a failure by the Company to timely redeem the applicable Class B Preferred Units in full and pay the full consideration to the Class B Preferred Members within ten (10) days of when required in accordance with this Agreement; (c) a material breach by Nuvve Parent, Nuvve or their applicable Affiliates under any of the Transaction Documents and such breach is incurable or is not cured within fifteen (15) days after the receipt of notice of such breach (or such longer period as may be specified under the applicable Transaction Document); (d) a failure by the Company or its Subsidiaries to obtain the consent of the Board and, if applicable, Special Approval, prior to taking or permitting any of the actions described in Section 5.7, Section 5.8, or as may be otherwise be required in this Agreement, and any such required approval, as applicable, is not granted, in the sole discretion of the Stonepeak Manager, the Class B Representative or such other Person, as
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applicable, in writing within ten (10) days after receipt of notice of such breach; (e) the Company or any of its Subsidiaries ceasing to be an unrestricted, non-guarantor Subsidiary under the existing and future debt agreements of Nuvve Parent, its Affiliates or any Person other than the Company and its Subsidiaries, without the prior written consent of the Board acting with Special Approval; or (f) any of Nuvve Parent or its Affiliates that provide services to the Company, own Licensed IP Rights (as defined in the IP License Agreement), have a business relationship with the Company, employs any employee providing services to the Company that (x) holds the title of Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer (or such other similar titles) or (y) has an annual salary of at least one hundred thousand dollars ($100,000), or otherwise have a material relationship to the Business experiences a Bankruptcy Event.
“Trust” means, with respect to any individual, a partnership, limited liability company, corporation, trust, private foundation or custodianship, the beneficiaries of which may include only such individual or such individual’s Permitted Beneficiaries.
“Ultimate Employee” has the meaning set forth in Section 3.11(a).
“Unit” means the ownership interest of a Member in the Company, and includes any and all benefits to which such Member is entitled as provided in this Agreement, together with all obligations of such Member to comply with the terms and provisions of this Agreement.
“Unpaid Amounts” means, as of the relevant time of determination with respect to a Class B Preferred Unit, the aggregate amount of all Preferred Distributions previously accrued in accordance with this Agreement but not paid in cash (including any Preferred PIK Distributions pursuant to Section 4.2(c) with respect to the Fiscal Quarter then ended or any preceding Fiscal Quarter) with respect to such Class B Preferred Unit as of such time, if any, solely to the extent such distributions have not subsequently been paid in cash. For the avoidance of doubt, with respect to any such Class B Preferred Unit that is redeemed in accordance with Section 11.1, such distributions previously accrued in accordance with this Agreement shall all be payable or included in such Class B Preferred Unit’s Preferred Redemption Price, on the date of such redemption.
“Unreturned Capital Proportional Share” means, as of any relevant time of determination with respect to each Common Member, as applicable, the quotient equal to (a) the total amount of Unreturned Common Capital Contributions with respect to the Common Units held by such Common Member as of such time, divided by (b) the total amount of Unreturned Common Capital Contributions with respect to Common Units held by all Common Members as of such time.
“Unreturned Common Capital Contributions” means, as of the relevant time of determination with respect to a Common Unit, (a) the Capital Contributions made in respect of such Common Unit, minus (b) the Total Distributions previously made in respect of such Common Unit, in each case, as of such time.
“Unvested Class D Incentive Unit” means any Class D Incentive Unit that is not a Vested Class D Incentive Unit.
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“Vested Class D Incentive Unit” means any Class D Incentive Unit that has become “vested” in accordance with the terms of the Award Agreement entered into in connection with the grant of such Class D Incentive Unit.
“Voting Stock” of any specified Person as of any date means the capital stock of such Person entitling the holders thereof (whether at all times or only so long as no senior class of capital stock has voting power by reason of any contingency) to vote in the election of members of the board of directors of such Person.
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designated in the Certificate of Formation or such other Person or Persons as the Board may designate from time to time in the manner provided by the Delaware Act. The principal office of the Company shall be located at such place as the Board may from time to time designate and provide written notice thereof to the Members. The Company may maintain offices at such other place or places within or outside the State of Delaware as the Board (a) determines to be necessary or appropriate and (b) identifies by written notice to the Members.
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The Capital Account of any Member whose interest in the Company shall be increased or decreased by means of the Transfer to it of all or part of the Units of another Member or the repurchase of Units shall be appropriately adjusted to reflect such Transfer or repurchase. Any reference in this Agreement to a Capital Contribution of or Distribution to a Member that has succeeded any other Member shall include any Capital Contributions or Distributions previously made by or to the former Member on account of the Units of such former Member Transferred to such Member.
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For the avoidance of doubt, any portion of the D-Eligible Distributions that is not distributed to the Class D Incentive Unit Members pursuant to this Section 4.4(a) (including if there exists any authorized but unissued Class D Incentive Units) shall be distributed to the other Members pursuant to the terms of the distribution waterfall set forth in Section 4.2 or Section 4.3, as applicable, unless otherwise determined by the Board acting with Special Approval.
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Section 4.8 will be treated as having been distributed to such Member. To the extent that the cumulative amount withheld or paid for any period exceeds the Distributions to which such Member is entitled for such period with respect to Units held by such Person, the Company will provide notice to such Member. Any such amount withheld or paid will (a) be treated as having been distributed to such Member as an advance against the next Distributions that would otherwise be made to such Member with respect to Units held by such Person, and such amount shall be satisfied by offset from such next Distributions or (b) if requested in writing by the Board, be contributed by such Member to the Company within fifteen (15) days of demand therefor. If a Member fails to comply with its obligation to contribute to the Company pursuant to clause (b) above, such Member shall indemnify the Company in full for the entire amount paid by the Company (including interest, penalties and related expenses). Each Member will furnish the Board with such information as may reasonably be requested by the Board from time to time to determine whether withholding is required and the amount thereof. In addition, each Member will promptly notify the Board if such Member determines at any time that it is subject to withholding. A Member’s obligation to indemnify and make contributions to the Company under this Section 4.8: (i) shall survive the termination, dissolution, liquidation, cancellation, and winding up of the Company, and for purposes of this Section 4.8, to the fullest extent permitted by applicable law, the Company shall be treated as continuing in existence; and (ii) shall also survive such Member ceasing to be a Member. The Company may pursue and enforce all rights and remedies it may have against each Member under this Section 4.8 if a Member does not comply with the provisions in this Section 4.8, including instituting a lawsuit to collect such amounts required to be paid to the Company or otherwise borne by such Member, with interest calculated at a rate equal to the Prime Rate plus three (3) percentage points per annum (but not in excess of the highest rate per annum permitted by applicable law), compounded on the last day of each Fiscal Quarter.
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be taken unless notice of such action has been provided to each Stonepeak Manager at least forty-eight (48) hours prior to the taking of such action. A copy of such written consent of the Board shall be provided to the Board Observer substantially concurrently with the delivery of such written consent to the Managers.
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and (c) so long as Stonepeak owns at least twenty percent (20%) or more of the issued and outstanding Common Units, the prior written approval of at least one (1) Stonepeak Manager:
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accordance with the terms and conditions of such Affiliate Contract. Additionally, at any time any Class B Preferred Units are outstanding, the Class B Representative shall have the right to enforce any right to claim a breach of an obligation relating to any Award Agreement by any Person holding Class D Incentive Units, including the provisions relating to non-competition, non-solicitation, confidentiality, non-disparagement and the devotion of substantial business time to the Company.
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rights in or to such independent ventures or the income or profits therefrom by virtue of this Agreement.
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Documents, up to and not to exceed $1,000,000, (ii) Stonepeak for its reasonable out-of-pocket expenses (including legal and accounting fees) incurred after February 11, 2021 and through the Execution Date in connection with the due diligence, documentation and negotiation of the Transaction Documents, (x) fifty percent (50%) of such expenses with respect to the first $1,800,000 and (y) one hundred percent (100%) of such expenses thereafter and (iii) Evolve for its reasonable out-of-pocket expenses (including legal and accounting fees) incurred after May 6, 2021 and through the Execution Date in connection with the due diligence, documentation and negotiation of the Transaction Documents, (x) fifty percent (50%) of such expenses with respect to the first two hundred thousand dollars ($200,000) and (y) one hundred percent (100%) of such expenses thereafter; provided, that any amounts reimbursed by the Company to Stonepeak or Evolve shall, at the option of Stonepeak or Evolve, as applicable, be netted from amounts contributed or payable to the Company under this Agreement. From and after the Execution Date until the date on which the Class B Preferred Units and Class C Common Units held by Stonepeak and Evolve or their respective Permitted Transferees, as applicable, are redeemed in full hereunder, the Company shall reimburse Stonepeak and Evolve for all documented reasonable out-of-pocket third party costs, fees and expenses incurred by Stonepeak and Evolve from time to time in responding to any request for approval under this Agreement, monitoring or enforcing its rights under this Agreement and/or amending this Agreement.
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or delay on the part of any Member in the exercise of any right hereunder shall impair such right or be construed as a waiver of, or acquiescence in, any breach of any agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right.
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[Signature Pages Follow]
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IN WITNESS WHEREOF, the undersigned have executed or caused to be executed on their behalf this Agreement as of the date first written above.
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Levo Mobility LLC By: Name: Title: |
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Nuvve Corporation By: Name: Title: |
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Stonepeak Rocket Holdings LP By: Stonepeak Associates IV LLC, its general partner By: Name:Jack Howell Title:Senior Managing Director |
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Evolve Transition Infrastructure LP By: Evolve Transition Infrastructure GP LLC, its general partner By:____________________________________
Name: Charles C. Ward
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Signature Page to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
SCHEDULE OF MEMBERS
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Class A Common Units |
Class B Preferred Units1 |
Class C Common Units |
Class D Incentive Units |
Commitment Amount |
Commitment Ratio |
Remaining Commitment Amount |
Capital Contributions (Date of Funding) |
Nuvve |
510,000 |
- |
- |
- |
- |
- |
- |
$51.002 (Execution Date) |
Stonepeak |
- |
2,800 |
441,000 |
- |
$675,000,000 |
90% |
$672,200,000 |
$2,800,044.103 (Execution Date) |
Evolve |
- |
1 |
49,000 |
- |
$75,000,000 |
10% |
$74,999,000 |
$1,004.904 (Execution Date) |
Addresses for notices to Members:
Nuvve: |
Nuvve Holding Corp.
|
1 |
Each of Stonepeak and Evolve’s initial Capital Contributions with respect to its Class B Preferred Units shall be made within fifteen (15) Business Days following the Execution Date; provided, that each of Stonepeak’s and Evolve’s obligations to make such initial Capital Contributions shall be subject to Nuvve Parent’s compliance with the requirements of Section 3(a) of the IP License Agreement (which, for the avoidance of doubt, includes Nuvve Parent’s obligation to complete the deposit of all Escrow Materials (as defined in the IP License Agreement) with the Escrow Agent within ten (10) calendar days. The amounts of such Capital Contributions and the respective number of Class B Preferred Units shall be adjusted such that the aggregate number of Class B Preferred Units is (except as may otherwise be agreed by the Parties) equal to (i) the sum of Levo’s expense reimbursement obligations to Nuvve, Stonepeak, and Evolve set forth herein, plus $250,000 (or such other amount as may be agreed by the Parties), divided by (ii) $1,000. |
2 |
Such Member’s Capital Contributions include $51.00 deemed Capital Contributions made with respect to its Common Units. |
3 |
Such Member’s Capital Contributions include $44.10 deemed Capital Contributions made with respect to its Common Units. |
4 |
Such Member’s Capital Contributions include $4.90 deemed Capital Contributions made with respect to its Common Units. |
Schedule of Members to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
Attention: Gregory Poilasne and Stephen Moran
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With a copy to (which shall not constitute notice): Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02110 Attention: Sahir Surmeli and Eric Macaux Email: ssurmeli@mintz.com and ewmacaux@mintz.com |
Stonepeak: |
Stonepeak Partners LP 55 Hudson Yards 550 W 34th Street, 48th Floor New York, NY 10001 Attention: Trent Kososki, William Demas and Adrienne Saunders Email: kososki@stonepeakpartners.com; demas@stonepeakpartners.com; LegalandCompliance@stonepeakpartners.com |
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With a copy to (which shall not constitute notice):
Kirkland & Ellis LLP
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Evolve: |
Evolve Transition Infrastructure LP 1360 Post Oak Blvd, Suite 2400 Houston, Texas 77056 Attention: Charles Ward |
Schedule of Members to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
Email: cward@evolvetransition.com |
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With a copy (which shall not constitute notice) to: Sidley Austin LLP 1000 Louisiana Street, Suite 5900 Houston, Texas 77002 Attention: Cliff Vrielink and George Vlahakos Email: cvrielink@sidley.com; gvlahakos@sidley.com |
Schedule of Members to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
EXHIBIT A - INITIAL BUDGET
(See attached.)
Exhibit A to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
EXHIBIT B - QUALIFIED OPPORTUNITIES
“Qualifying Criteria” means the following:
· | For development opportunities or other projects: |
o | a contracted asset life return on a portfolio basis of at least 12% per annum; provided, that after the first $250 million of deployments, such return shall be at least 8% per annum; provided further, that such return shall be net of any available subsidies, grants or incentives; |
o | an asset useful life to be mutually agreed by the parties in good faith with respect to the applicable asset type; |
o | a minimum contracted blended portfolio unlevered return of at least 12% per annum consisting of: |
◾ | transportation-as-a-service only contracted return; and |
◾ | additional grid services / capacity revenues based on pre-agreed assumptions (as to merchant revenues) or actual contracts in hand, if any; |
o | a contract tenor of no less than 10 years with respect to such contracted asset; |
o | an investment grade or investment grade-like credit profile as reasonably determined by Stonepeak in good faith; |
o | daily historical route mileage assumptions provided by the applicable customer for up to 2 years; |
o | charging cost assumptions provided based upon past 2 years of historical bills from the applicable customer; |
o | quotes provided from major equipment vendors and engineering, procurement, and construction contractors considered “Tier 1” or equivalent or reasonably acceptable to Stonepeak in good faith; and |
o | quotes provided from operation and maintenance provider(s) and asset management provider(s) reasonably acceptable to Stonepeak in good faith. |
Notwithstanding anything to the contrary in this Exhibit B, the following “deployment criteria” are provided solely for informational purposes to help guide Nuvve Parent in understanding certain factors and criteria (which are neither exhaustive nor definitive) that Stonepeak may consider when deciding to provide Special Approval with respect to approving or funding certain Qualified Opportunities.
“Deployment Criteria” may or may not include, among other things:
· | a signed contract with customer that meets Qualifying Criteria; |
· | signed contracts with major equipment vendors considered “Tier 1” or equivalent; |
· | a signed contract with engineering, procurement, and construction contractor considered “Tier 1” or equivalent; |
· | a signed operation and maintenance agreements and asset management agreements with service providers acceptable to and agreed in advance with Stonepeak; |
· | a signed interconnection agreement, where applicable; or |
· | a signed lease or land purchase agreement, where applicable. |
Exhibit B to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
EXHIBIT C - INCENTIVE UNIT AWARD AGREEMENT (FORM)
(See attached.)
Exhibit C to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
EXHIBIT D - SPOUSAL CONSENT
Spousal Agreement
The undersigned, the spouse of the principal party named below (the “Principal”), a natural person who is executing the Amended and Restated Limited Partnership Agreement (as amended, supplemented and restated from time to time, the “Agreement”) of Levo Mobility LLC, a Delaware limited liability company (the “Company”), in the capacity as a holder of equity interests or other securities of the Company (all such interests, collectively, the “Interests”), is aware of, understands and consents:
1. | to the provisions of the Agreement and each other transaction document contemplated by the Agreement, including, without limitation, any agreements by and among the Principal or any other affiliate of the Principal (each, a “Principal Party”) and the Company placing restrictions on or otherwise affecting any Principal Party’s Interests, that has been or will be executed by any Principal Party or is otherwise binding upon any Principal Party and the Agreement’s and each such other transaction document’s binding effect upon any community property interest or marital settlement awards the undersigned may now or hereafter own or receive; |
2. | agrees that the termination of the undersigned’s marital relationship with the Principal for any reason shall not have the effect of removing any Interests subject to the Agreement or any such other transaction documents from the coverage thereof; and |
3. | acknowledges that the undersigned’s awareness, understanding, consent and agreement is evidenced by the undersigned’s signature below. |
Signature: ________________________________
Name of Spouse:
Date (Print):
Name of Principal (Print):
Exhibit D to the Amended and Restated Limited Liability Company Agreement of Levo Mobility LLC
Exhibit 10.4
Gregory Poilasne
Chairman and Chief Executive Officer
2488 Historic Decatur Road, Suite 200
San Diego, California, USA 92106
August 4, 2021
Stonepeak Rocket Holdings LP
Attention: Jack Howell, Trent Kososki, William Demas and Adrienne Saunders
55 Hudson Yards
550 W 34th Street, 48th Floor
New York, NY 10001
Evolve Transition Infrastructure LP
Attention: Charles Ward
1360 Post Oak Blvd, Suite 2400
Houston, Texas 77056
Levo Mobility LLC
Attention: Board of Managers
2468 Historic Decatur Road
San Diego, California 92106
Re:Project Rocket Parent Letter Agreement
Dear Ladies and Gentlemen:
This letter agreement (this “Agreement”) is entered into by and among Nuvve Holding Corp., a Delaware corporation (“Nuvve Parent”), Stonepeak Rocket Holdings LP, a Delaware limited partnership (“Stonepeak”), Evolve Transition Infrastructure LP, a Delaware limited partnership (“Evolve”), and Levo Mobility LLC, a Delaware limited liability company (the “Company” and together with Nuvve Parent, Stonepeak and Evolve, each a “Party” and collectively, the “Parties”), to set forth certain agreements with respect to the Company and its Business. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Amended and Restated Limited Liability Company Agreement of the Company, dated as of the date hereof (the “LLCA”).
In consideration of the premises and the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties covenant and agree as follows:
KE 77111132
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if to Nuvve Parent:
Nuvve Holding Corp.
2468 Historic Decatur Road
San Diego, California 92106
Attention: Gregory Poilasne and Stephen Moran
Email: gregory@nuvve.com and smoran@nuvve.com
With a copy (which shall not constitute notice) to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02110
Attention: Sahir Surmeli and Eric Macaux
Email: ssurmeli@mintz.com and ewmacaux@mintz.com
if to the Company:
Levo Mobility LLC
2468 Historic Decatur Road
San Diego, California 92106
Attention: Board of Managers; Gregory Poilasne and Stephen Moran; Trent Kososki, William Demas and Adrienne Saunders
Email: gregory@nuvve.com and smoran@nuvve.com; kososki@stonepeakpartners.com; demas@stonepeakpartners.com; LegalandCompliance@stonepeakpartners.com
With a copy (which shall not constitute notice) to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02110
Attention: Sahir Surmeli and Eric Macaux
Email: ssurmeli@mintz.com and ewmacaux@mintz.com
With a copy (which shall not constitute notice) to:
Kirkland & Ellis LLP
609 Main St.
Houston, Texas 77002
Attention: John D. Pitts, P.C.
Email: john.pitts@kirkland.com
if to Stonepeak:
11
Stonepeak Partners LP
55 Hudson Yards
550 W 34th Street, 48th Floor
New York, NY 10001
Attention: Trent Kososki, William Demas and Adrienne Saunders
Email: kososki@stonepeakpartners.com; demas@stonepeakpartners.com; LegalandCompliance@stonepeakpartners.com
With a copy (which shall not constitute notice) to:
Kirkland & Ellis LLP
609 Main St.
Houston, Texas 77002
Attention: John D. Pitts, P.C.
Email: john.pitts@kirkland.com
if to Evolve:
Evolve Transition Infrastructure LP
1360 Post Oak Blvd, Suite 2400
Houston, Texas 77056
Attention: Charles Ward
Email: cward@evolvetransition.com
With a copy (which shall not constitute notice) to:
Sidley Austin LLP
1000 Louisiana Street, Suite 5900
Houston, Texas 77002
Attention: Cliff Vrielink and George Vlahakos
Email: cvrielink@sidley.com; gvlahakos@sidley.com
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[Remainder of page intentionally left blank]
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Each of the Parties have executed this Agreement through such Party’s duly authorized representative as of the day first above written.
Sincerely,
Nuvve Holding Corp.
By:____________________________________
Name: Gregory Poilasne
Title: Chairman and Chief Executive Officer
[Signature Page to Letter Agreement]
Acknowledged and Agreed:
Stonepeak Rocket Holdings LP
By: STONEPEAK ASSOCIATES IV LLC,
its general partner
By:____________________________________
Name: Jack Howell
Title: Senior Managing Director
[Signature Page to Letter Agreement]
Acknowledged and Agreed:
EVOLVE TRANSITION INFRASTRUCTURE LP
By: EVOLVE TRANSITION INFRASTRUCTURE GP LLC,
its general partner
By:____________________________________
Name: Gerald F. Willinger
Title: Chief Executive Officer
[Signature Page to Letter Agreement]
LEVO MOBILITY LLC
By:____________________________________
Name:
Title:
[Signature Page to Letter Agreement]
Exhibit A
“Qualifying Criteria” means the following:
· | For development opportunities or other projects: |
o | a contracted asset life return on a portfolio basis of at least 12% per annum; provided, that after the first $250 million of deployments, such return shall be at least 8% per annum; provided further, that such return shall be net of any available subsidies, grants or incentives; |
o | an asset useful life to be mutually agreed by the parties in good faith with respect to the applicable asset type; |
o | a minimum contracted blended portfolio unlevered return of at least 12% per annum consisting of: |
◾ | transportation-as-a-service only contracted return; and |
◾ | additional grid services / capacity revenues based on pre-agreed assumptions (as to merchant revenues) or actual contracts in hand, if any; |
o | a contract tenor of no less than 10 years with respect to such contracted asset; |
o | an investment grade or investment grade-like credit profile as reasonably determined by Stonepeak in good faith; |
o | daily historical route mileage assumptions provided by the applicable customer for up to 2 years; |
o | charging cost assumptions provided based upon past 2 years of historical bills from the applicable customer; |
o | quotes provided from major equipment vendors and engineering, procurement, and construction contractors considered “Tier 1” or equivalent or reasonably acceptable to Stonepeak in good faith; and |
o | quotes provided from operation and maintenance provider(s) and asset management provider(s) reasonably acceptable to Stonepeak in good faith. |
Notwithstanding anything to the contrary in this Exhibit A, the following “deployment criteria” are provided solely for informational purposes to help guide Nuvve Parent in understanding certain factors and criteria (which are neither exhaustive nor definitive) that Stonepeak may consider when deciding to provide Special Approval with respect to approving or funding certain Qualified Opportunities.
“Deployment Criteria” may or may not include, among other things:
· | a signed contract with customer that meets Qualifying Criteria; |
· | signed contracts with major equipment vendors considered “Tier 1” or equivalent; |
· | a signed contract with engineering, procurement, and construction contractor considered “Tier 1” or equivalent; |
· | a signed operation and maintenance agreements and asset management agreements with service providers acceptable to and agreed in advance with Stonepeak; |
· | a signed interconnection agreement, where applicable; or |
· | a signed lease or land purchase agreement, where applicable. |
[Exhibit A to Letter Agreement]
Exhibit 31.1
eVOLVE TRANSITION INFRASTRUCTURE LP
CERTIFICATION
I, Gerald F. Willinger, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Evolve Transition Infrastructure LP;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 10, 2021
/s/ Gerald F. Willinger |
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Gerald F. Willinger |
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Chief Executive Officer |
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Evolve Transition Infrastructure GP, LLC, as general partner of Evolve Transition Infrastructure LP
(Principal Executive Officer)
Exhibit 31.2
EVOLVE TRANSITION INFRASTRUCTURE LP
CERTIFICATION
I, Charles C. Ward, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Evolve Transition Infrastructure LP;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 10, 2021
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/s/ Charles C. Ward |
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Charles C. Ward |
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Chief Financial Officer and Secretary |
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Evolve Transition Infrastructure GP, LLC, as general partner of Evolve Transition Infrastructure LP
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald F. Willinger, Chief Executive Officer of Evolve Transition Infrastructure GP, LLC, as general partner of Evolve Transition Infrastructure LP, certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my knowledge:
(i) The accompanying Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Evolve Transition Infrastructure LP.
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/s/ Gerald F. Willinger |
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Gerald F. Willinger |
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Chief Executive Officer |
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Date: November 10, 2021 |
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles C. Ward, Chief Financial Officer and Secretary of Evolve Transition Infrastructure GP, LLC, as general partner of Evolve Transition Infrastructure LP, certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my knowledge:
(i) The accompanying Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Evolve Transition Infrastructure LP.
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/s/ Charles C. Ward |
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Charles C. Ward |
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Chief Financial Officer and Secretary |
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Evolve Transition Infrastructure GP, LLC, as general partner of Evolve Transition Infrastructure LP
(Principal Financial Officer)
Date: November 10, 2021