EVOLVE TRANSITION INFRASTRUCTURE LP 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 inSouth Texas and continue to pursue energy transition infrastructure opportunities. Our common units are currently listed on the NYSE American under the symbol "SNMP." OnFebruary 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 toEvolve Transition Infrastructure LP and our general partner changed its name toEvolve Transition Infrastructure GP LLC .
Developments during the Quarter Ended
Amended and Restated Executive Services Agreement
OnSeptember 2, 2022 , our general partner entered into an Amended and Restated Executive Services Agreement (the "Executive Services Agreement") withCharles C. Ward , Chief Financial Officer and Secretary of our general partner, which was approved by the Board onSeptember 1, 2022 .
Stonepeak Letter Agreement Election; Warrant Amendment 8
OnJuly 29, 2022 , we received written notice of Stonepeak Catarina's election to receive distributions on the ClassC Preferred Units for the quarter endedJune 30, 2022 in common units. The aggregate distribution of 27,442,638 common units was made to Stonepeak Catarina onAugust 22, 2022 , following the satisfaction of certain issuance conditions. OnAugust 1, 2022 , in connection with Stonepeak's election above, we entered into Warrant Amendment 8 with Stonepeak Catarina to exclude from the Stonepeak Warrant 4,116,396 common units issuable under theSanchez Production Partners LP Long-Term Incentive Plan.
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 Western Catarina, in order to maintain or increase throughput volumes on Western Catarina Midstream. Our success in connecting additional wells is impacted by successful drilling activity byMesquite on the acreage dedicated to the Western Catarina gathering system ("Western Catarina Midstream"), our ability to secure volumes fromMesquite 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. We own and operate a 30-mile natural gas pipeline with 400 MMcf/d capacity that 26
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is designed to transport dry gas to multiple markets inSouth Texas (the "Seco Pipeline"). Currently there are not any commercial volumes transported on the Seco Pipeline. Future throughput volumes on the pipeline are dependent on execution of a new transportation agreement withMesquite 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 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 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 presented in accordance with GAAP, we use
Adjusted EBITDA, a non-GAAP financial measure, in this Form 10-Q. We believe
that non-GAAP financial measures are helpful in understanding our past financial
performance and potential future results, particularly in light of the effect of
various transactions effected by us. We define Adjusted EBITDA as net income
(loss) adjusted by: (i) interest (income) expense, net, which includes interest
expense, interest expense net (gain) loss on interest rate derivative contracts,
and interest (income); (ii) income tax expense (benefit); (iii) depreciation,
depletion and amortization; (iv) asset impairments; (v) accretion expense; (vi)
(gain) loss on sale of assets; (vii) unit-based compensation expense; (viii)
unit-based asset management fees; (ix) distributions in excess of equity
earnings; (x) (gain) loss on mark-to-market activities; (xi) commodity
derivatives settled early; (xii) (gain) loss on embedded derivatives; and (xiii)
acquisition and divestiture costs.
Adjusted EBITDA is used as a quantitative standard by our management and by
external users of our financial statements such as investors, research analysts,
our lenders and others to assess: (i) the financial performance of our assets
without regard to financing methods, capital structure or historical cost basis;
(ii) the ability of our assets to generate cash sufficient to pay interest costs
and support our indebtedness; and (iii) our operating performance and return on
capital as compared to those of other companies in our industry, without regard
to financing or capital structure.
We believe that the presentation of Adjusted EBITDA provides useful information
to investors in assessing our financial condition and results of operations. The
GAAP measure most directly comparable to Adjusted EBITDA is net income (loss).
Our non-GAAP financial measure of Adjusted EBITDA should not be considered as an
alternative to GAAP net income (loss). Adjusted EBITDA has important limitations
as an analytical tool because it excludes some but not all items that affect net
income (loss). Adjusted EBITDA should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP. Because Adjusted
EBITDA may be defined differently by other companies in our industry, our
definition of Adjusted EBITDA may not be comparable to similarly titled measures
of other companies, thereby diminishing its utility.
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The following table sets forth a reconciliation of Adjusted EBITDA to net loss,
its most directly comparable GAAP performance measure, for each of the periods
presented (in thousands):
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 2022 2021
Net loss $ (16,014) $ (16,570) $ (42,317) $ (91,058)
Adjusted by:
Interest expense, net 14,466 14,572 44,550 89,525
Income tax expense 24 6 96 440
Depreciation and amortization 4,425 4,495 14,059 15,430
Accretion expense 106 104 312 287
(Gain) loss on sale of assets - 2,200 4,408 (537)
Unit-based compensation expense - - 53 749
Unit-based asset management fees (897) (1,137) (2,489) 4,793
Distributions in excess of equity earnings (377) 8,192 4,720 14,459
(Gain) loss on mark-to-market activities - - 664 (160)
Adjusted EBITDA $ 1,733 $ 11,862 $ 24,056 $ 33,928 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, June 30, September 30, September 30,
2022 2022 2022 2021
Western Catarina Midstream:
Oil (MBbl/d) 4.2 4.5 4.6 5.8
Natural gas (MMcf/d) 62.9 65.2 65.0 76.8
Water (MBbl/d) - - 0.6 1.9
Subsequent Events
On October 28, 2022 , the Partnership received written notice of Stonepeak's
election to receive distributions on the Class C Preferred Units for the quarter
ended September 30, 2022 in common units. The aggregate distribution of
27,442,638 common units (the "Q322 Stonepeak Units") is payable to Stonepeak
Catarina following satisfaction of certain issuance conditions, including, among
other things, the compliance by the Partnership and Stonepeak with any
applicable federal securities laws applicable to the issuance of the Q322
Stonepeak Units.
Following the issuance of the Q322 Stonepeak Units, Stonepeak will own (i)
200,107,218 common units, representing approximately 80.3% of the issued and
outstanding common units, (ii) all of the issued and outstanding Class C
Preferred Units, (iii) the Warrant, (iv) the non-economic general partner
interest in us, and (v) all of our incentive distribution rights. As previously
disclosed, if at any time Stonepeak holds more than 80% of our outstanding
common units and completes the Stonepeak LCR Transfer (as defined below),
Stonepeak will be able to cause our general partner or a controlled affiliate of
our general partner to exercise its right to acquire all, but not less than all,
of our common units held by persons other than our general partner and its
controlled affiliates ("limited call right"). As Stonepeak will hold more than
80% of our outstanding common units following the issuance of the Q322 Stonepeak
Units, Stonepeak will be able to cause our general partner to exercise its
limited call right at any time after Stonepeak transfers all of the common units
held by it to our general partner or a controlled affiliate of our general
partner (the "Stonepeak LCR Transfer"). Notwithstanding the foregoing, Stonepeak
has informed us that they have no current intention to cause our general partner
to exercise its limited call right or take any other actions in furtherance
thereof, such as completion of the Stonepeak LCR Transfer. For
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additional information regarding risks associated with the limited call right please see "Part II, Item 1A. Risk Factors-Certain events may result in our general partner exercising its limited call right, which may require common unitholders to sell their common units at an undesirable time or price."
Results of Operations
Three months ended
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, June 30,
2022 2022 Variance
Revenues:
Gathering and transportation lease
revenues $ 6,969 $ 7,330 $ (361) (5) %
Total revenues 6,969 7,330 (361) (5) %
Expenses
Operating expenses
Transportation operating expenses 2,306 2,530 (224) (9) %
General and administrative expenses 2,078 1,828 250 14 %
Loss on sale of assets - 2,200 (2,200) (100) %
Depreciation and amortization 4,425 4,495 (70) (2) %
Accretion expense 106 104 2 2 %
Total operating expenses 8,915 11,157 (2,242) (20) %
Other (income) expense
Interest expense, net 14,466 14,572 (106) (1) %
Earnings from equity investment (377) (1,920) 1,543 (80) %
Other (income) expense (45) 85 (130) NM (a)
Total other expenses 14,044 12,737 1,307 10 %
Total expenses 22,959 23,894 (935) (4) %
Loss before income taxes (15,990) (16,564) 574 (3) %
Income tax expense 24 6 18 NM (a)
Net loss $ (16,014) $ (16,570) $ 556 (3) %
(a)Variances deemed to be Not Meaningful "NM."
Gathering and transportation lease revenues. Gathering and transportation lease revenues decreased approximately$0.4 million or 5%, to approximately$7.0 million for the three months endedSeptember 30, 2022 , compared to approximately$7.3 million for the three months endedJune 30, 2022 . This decrease was primarily the result of a decrease in throughput. 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$0.2 million , or 9%, to approximately$2.3 million for the three months endedSeptember 30, 2022 compared to approximately$2.5 million for the three months endedJune 30, 2022 . This decrease was due to a decrease in non-recurring maintenance as well as a decrease in throughput. General and administrative expenses. General and administrative expenses include indirect costs billed bySP 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$0.3 million , or 14%, to approximately$2.1 million for the three months endedSeptember 30, 2022 compared to approximately$1.8 million for the three months endedJune 30, 2022 . The increase was primarily the result of the mark-to-market impact on 29
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indirect costs billed in connection with the Shared Services Agreement of
approximately
Loss on sale of assets. The loss on sale of assets decreased by approximately$2.2 million , or (100)%, for the three months endedSeptember 30, 2022 compared to approximately$2.2 million the three months endedJune 30, 2022 . The loss was the result of the sale of certain gathering and transportation equipment during the second quarter of 2022 which was replaced with leased equipment. 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 endedSeptember 30, 2022 compared to the three months endedJune 30, 2022 . Interest expense, net. Interest expense consists of distributions on the ClassC Preferred Units, non-cash accretion of the discount on the ClassC 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 decreased approximately$0.1 million , or 1%, to approximately$14.5 million for the three months endedSeptember 30, 2022 compared to approximately$14.6 million for the three months endedJune 30, 2022 .
Earnings from equity investment. Earnings from equity investments decreased
approximately
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 income for the three months endedSeptember 30, 2022 , was approximately$45.0 thousand compared to other expense of approximately$85.0 thousand during the three months endedJune 30, 2022 . The increase in income was primarily the result of the reduction in deficiency fees between the periods. Income tax expense. Income tax expense was approximately$24.1 thousand for the three months endedSeptember 30, 2022 , compared to an expense of approximately$6.2 thousand for the three months endedJune 30, 2022 . The increase in income tax expense resulted from an increase in taxable margin over the comparable periods. 30
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Results of Operations
Nine months ended
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,
2022 2021 Variance
Revenues:
Gathering and transportation lease
revenues $ 29,399 $ 35,304 $ (5,905) (17) %
Total revenues 29,399 35,304 (5,905) (17) %
Expenses
Operating expenses
Transportation operating expenses 6,943 6,421 522 8 %
General and administrative expenses 6,286 13,964 (7,678) (55) %
Unit-based compensation expense 53 749 (696) (93) %
Loss on sale of assets 4,408 - 4,408 100 %
Depreciation and amortization 14,059 15,430 (1,371) (9) %
Accretion expense 312 287 25 9 %
Total operating expenses 32,061 36,851 (4,790) (13) %
Other (income) expense
Interest expense, net 44,550 89,525 (44,975) (50) %
Loss (earnings) from equity investment (5,688) 1,406 (7,094) NM (a)
Other (income) expense 697 (114) 811 NM (a)
Total other expenses 39,559 90,817 (51,258) (56) %
Total expenses 71,620 127,668 (56,048) (44) %
Loss before income taxes (42,221) (92,364) 50,143 (54) %
Income tax (benefit) expense 96 (17) 113 NM (a)
Loss from continuing operations (42,317) (92,347) 50,030 (54) %
Income (loss) from discontinued
operations - 1,289 (1,289) (100) %
Net loss $ (42,317) $ (91,058) $ 48,741 (54) %
(a)Variances deemed to be Not Meaningful "NM."
Gathering and transportation lease revenues. Gathering and transportation lease revenues decreased approximately$5.9 million , or 17%, to approximately$29.4 million for the nine months endedSeptember 30, 2022 , compared to approximately$35.3 million for the same period in 2021. This decrease was primarily the result of a decrease in the tariff charged for hydrocarbons transported on Eastern Catarina under the A&R Gathering Agreement, effective as ofApril 1, 2022 , as well as a decrease in throughput. 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 increased by approximately$0.5 million , or 8%, to approximately$6.9 million for the nine months endedSeptember 30, 2022 compared to approximately$6.4 million for the same period in 2021. This increase was primarily due to non-recurring maintenance as well as replacing previously owned equipment with leased equipment and rising costs for chemicals, labor, maintenance, tools and supplies as a result of recent inflation and ongoing supply chain constraints. This increase was slightly offset by a decrease in throughput. General and administrative expenses. General and administrative expenses include indirect costs billed bySP Holdings in connection with the Shared Services Agreement, field office expenses, professional fees and other costs not directly associated with field operations. General and administrative expenses decreased by approximately$7.7 million , or 31
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55%, to approximately$6.3 million for the nine months endedSeptember 30, 2022 , compared to approximately$14.0 million for the same period in 2021. The decrease was primarily the result of the mark-to-market impact on indirect costs billed in connection with the Shared Services Agreement of approximately$7.3 million due to the volatility in the market price of our common units during the period. Additionally, we recorded approximately$1.9 million of bad debt expense during the nine months endedSeptember 30, 2021 . These decreases were partially offset by additional professional fees surrounding the disputed rate charged on Western Catarina Midstream and the A&R Gathering Agreement. Unit-based compensation expense. Unit-based compensation expense decreased approximately$0.7 million , or 93%, to approximately$0.1 million for the nine months endedSeptember 30, 2022 , compared to approximately$0.7 million for the same period in 2021. Loss on sale of assets. The loss on sale of assets during the nine months endedSeptember 30, 2022 , was approximately$4.4 million . The loss was the result of the sale of certain gathering and transportation equipment which was replaced with leased equipment. 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. Depreciation and amortization expense decreased by approximately$1.4 million , or 9% to approximately$14.1 million for the nine months endedSeptember 30, 2022 , compared to approximately$15.4 million for the nine months endedSeptember 30, 2021 . This decrease was the result of the Kodiak Sale. Additionally, the A&R Gathering Agreement extended the expected life of the customer contract intangible asset which reduced the amortization amount recognized by period. Interest expense, net. Interest expense consists of distributions on the ClassC Preferred Units, non-cash accretion of the discount on the ClassC 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 decreased approximately$45.0 million , or 50%, to approximately$44.6 million for the nine months endedSeptember 30, 2022 compared to approximately$89.5 million for the same period in 2021. This decrease was the result of the ClassC Preferred Units discount becoming fully accreted atDecember 31, 2021 . Cash interest expense for the nine months endedSeptember 30, 2022 was approximately$1.1 million compared to approximately$2.2 million for the same period in 2021. The decrease in cash interest expense was primarily the result of the decrease in the outstanding Credit Agreement debt balance between the periods.
Loss (earnings) from equity investment. Earnings from equity investments
increased approximately
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 nine months endedSeptember 30, 2022 , was approximately$0.7 million compared to other income of approximately$0.1 million during the nine months endedSeptember 30, 2021 . The primary reason for the change relates to the mark-to-market impact of the Nuvve Holding Warrants from a decrease in the Nuvve Holding stock price compared to an increase in the Nuvve Holding stock price during the nine months endedSeptember 30, 2021 . Income tax (benefit) expense. Income tax expense was approximately$96.2 thousand for the nine months endedSeptember 30, 2022 , compared to a benefit of approximately$16.6 thousand for the same period in 2021. The increase in income tax expense resulted from an increase in taxable margin over the comparable periods.
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had approximately$2.8 million in cash and cash equivalents and$5.0 million available for borrowing under the Credit Agreement, as discussed further below. Adjusted Available Cash (as defined in our partnership agreement) will be distributed to holders of the ClassC Preferred Units to redeem a number of ClassC Preferred Units to be determined based on the amount of Adjusted Available Cash. During the three and nine months endedSeptember 30, 2022 , we paid approximately$0.3 million and approximately$1.1 million , respectively, in cash for interest on borrowings under our Credit Agreement. During the three and nine months endedSeptember 30, 2022 , we recorded interest expense related to the ClassC Preferred Units of approximately 32
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Our capital expenditures during the nine months endedSeptember 30, 2022 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, sale of certain non-commercial assets 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 and 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. While we cannot predict the duration or complete financial impact of the COVID-19 pandemic and volatile market conditions, we believe that our balances of cash, cash equivalents, cash generated from operations, borrowings under the Credit Agreement and potential issuances of securities will be sufficient to satisfy cash requirements over the next twelve months, including relating to working capital, amortizing debt payments on the Term Loan, and maintenance and expansion capital expenditures. 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, or operating expenses. 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 ofSeptember 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. The Partnership's inability to generate sufficient liquidity to meet future debt obligations raises substantial doubt regarding our ability to continue as a going concern. The Credit Agreement maturesSeptember 30, 2023 and our ability to continue as a going concern is contingent upon our ability to either (i) refinance or extend the maturity of the Credit Agreement, or (ii) obtain adequate new debt or equity financing to repay the Credit Agreement in full at maturity. 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 ofSeptember 30, 2022 , we had approximately$22.2 million of debt outstanding, comprised solely of the term 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 endingDecember 31, 2021 , and (ii)$2.0 million per fiscal quarter commencing with the quarter endingMarch 31, 2023 . As ofSeptember 30, 2022 , we have met our mandatory amortizing payments of outstanding principal on the Term Loan throughDecember 31, 2022 . The maximum revolving credit amount is$5.0 million leaving us with approximately$5.0 million in unused borrowing capacity. There were no letters of credit outstanding under our Credit Agreement as ofSeptember 30, 2022 . 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 0.50% 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. 33
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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.
Our partnership agreement prohibits us from paying any distributions on our
common units until we have redeemed all of the Class
AtSeptember 30, 2022 , 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 ofSeptember 30, 2022 , we had approximately$22.2 million of debt outstanding under the Term Loan and no debt outstanding under the Revolving Loan, leaving us with approximately$5.0 million in unused borrowing capacity. There were no letters of credit outstanding under our Credit Agreement as ofSeptember 30, 2022 . Our Credit Agreement matures onSeptember 30, 2023 .
Operating Cash Flows
We had net cash flows provided by operating activities for the nine months endedSeptember 30, 2022 of approximately$29.5 million , compared to net cash flows provided by operating activities of approximately$24.8 million for the same period in 2021. 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 used in investing activities for the nine months endedSeptember 30, 2022 , of approximately$1.3 million , which related to indirect costs of right of use assets offset by the proceeds from the Kodiak Sale. We also had net cash flows provided by investing activities for the nine months endedSeptember 30, 2021 , of approximately$15.4 million , substantially all of which were proceeds from the sale of oil and natural gas properties.
Financing Activities
Net cash flows used in financing activities was approximately
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Net cash flows used in financing activities was approximately
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. As ofSeptember 30, 2022 , there were no changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 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 Note 2 "Basis of Presentation and Summary of Significant Accounting Policies" to our condensed consolidated financial statements included in this report for information on new accounting pronouncements.
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