16. MEMBERS’ EQUITY/PARTNERS’ CAPITAL

Outstanding Units

As of December 31, 2016, we had no Class A Preferred Units outstanding, 29,296,441 Class B Preferred Units outstanding, and 13,447,749 common units outstanding, which included 219,144 unvested restricted common units issued under the Plan.

Conversion

The board of managers of Sanchez Production Partners LLC (“SPP LLC”) approved a Plan of Conversion (the “Conversion”) providing for the conversion of the company from a limited liability company formed under the laws of the State of Delaware into a limited partnership formed under the laws of the State of Delaware. This plan was approved by the vote of the unitholders of SPP LLC on March 6, 2015. After the Conversion, all of the rights, privileges and obligations of the Company prior to the Conversion were transferred and are now held by the Partnership. The Conversion converted each outstanding common unit of the Company into one common unit of the Partnership. The outstanding Class A units of the Company were converted into common units of the Partnership in a number equal to 2% of the Partnership’s common units outstanding immediately after the Conversion (after taking into account the conversion of such Class A units), and the outstanding Class Z unit of the Company was cancelled. In addition, a non-economic general partner interest in the Partnership was issued to our general partner, and the incentive distribution rights of the Partnership were issued to Manager.

Common Unit Issuances

In April 2015, we entered into an at-the-market sales agreement with MLV & Co. LLC to sell from time to time up to $100 million of common units, with any proceeds from such sales to be used for general limited partnership purposes. As of December 31, 2015, we had sold 67,230 common units (6,723 common units after adjusting for reverse unit split discussed below) for total gross proceeds of less than $0.1 million. During 2015, we paid de minimis commissions and other fees to the sales agent in connection with the at-the-market facility. No common units were sold under the agreement in 2016.

On August 3, 2015, the Partnership effected a 1-for-10 reverse split on its common units, pursuant to which common unitholders received one common unit for every ten common units held at the close of trading on August 3, 2015. All fractional units created by the reverse split were rounded to the nearest whole unit. Each unitholder received at least one unit. Post-split units of the Partnership began trading on August 4, 2015. Immediately prior to the reverse unit split, there were 31,495,506 common units of the Partnership issued and outstanding, with a per unit closing trading price on the NYSE MKT on August 3, 2015 of $1.55. Immediately after the reverse unit split, the number of issued and outstanding common units of the Partnership decreased to 3,149,551, not inclusive of shares required by DTCC due to the rounding up of fractional shares at the beneficial level, and the per unit opening trading price on the NYSE MKT was $15.50.

On March 31, 2016, the Partnership converted all remaining outstanding Class A Preferred Units into common units of the Partnership on a one-for-one basis, adjusted for the 1-for-10 unit split in August 2015.

In November 2016, we completed a public offering and private placement of common units. The public offering consisted of 6,745,107 common units (which includes partial exercise of the underwriters’ overallotment of 194,305 common units) for net proceeds of approximately $69.7 million, after deducting customary offering expenses. The private placement consisted of 2,272,727 common units issued to the Purchaser for net proceeds of approximately $25.0 million.

Preferred Unit Issuance

Class A Preferred Unit Offerings: On March 31, 2015, the Partnership entered into a Class A Preferred Unit Purchase Agreement with the purchasers named on Schedule A thereto (collectively, the “Purchasers”), pursuant to which the Partnership sold, and the Purchasers purchased, 10,625,000 of the Partnership’s newly created Class A Preferred Units (the “Class A Preferred Units”) in a privately negotiated transaction (the “Private Placement”) for an aggregate cash purchase price of $1.60 per Class A Preferred Unit resulting in gross proceeds to the Partnership of $17.0 million. The Partnership used the net proceeds of $17.0 million from this transaction, together with common units issued to Sanchez Energy, borrowings under the Credit Agreement, and available cash on hand, to pay the consideration in the Eagle Ford Acquisition.

Additionally, on April 15, 2015, the Partnership entered into a Class A Preferred Unit Purchase Agreement with the purchasers named on Schedule A thereto (collectively, the “April Purchasers”), pursuant to which the Partnership sold, and the April Purchasers purchased, 234,375 of the Partnership’s Class A Preferred Units in a privately negotiated transaction for an aggregate cash purchase price of $1.60 per Class A Preferred Unit resulting in gross and net proceeds to the Partnership of $375,000. The Partnership used the proceeds for general working capital purposes.

On March 31, 2016, the Partnership converted all remaining outstanding Class A Preferred Units into common units of the Partnership on a one-for-one basis, adjusted for 1-for-10 unit split in August 2015.

Class B Preferred Unit Offering: On October 14, 2015, pursuant to that certain Class B Preferred Unit Purchase Agreement dated September 25, 2015 (the “Preferred Unit Purchase Agreement”) between the Partnership and Stonepeak Catarina Holdings LLC (“Stonepeak”), the Partnership sold and Stonepeak purchased 19,444,445 of the Partnership’s newly created Class B Preferred Units (the “Class B Preferred Units”) in a privately negotiated transaction (the “Private Placement”) for an aggregate cash purchase price of $18.00 per Class B Preferred Unit, which resulted in gross proceeds to the Partnership of $350.0 million. The Partnership used the net proceeds to pay a portion of the consideration for the Western Catarina Gathering Acquisition, along with the payment to Stonepeak of a fee equal to 2.25% of the consideration paid for the Class B Preferred Units.

Under the terms of the Amended Partnership Agreement, commencing with the quarter ended on December 31, 2015, the holders of the Class B Preferred Units will receive a quarterly distribution, at the election of the Board, of 10.0% per annum if paid in full in cash or 12.0% per annum if paid in part cash (8.0% per annum) and in part paid-in-kind units (4.0% per annum). In the event the Partnership did not raise at least $75,000,000 through the issuance of additional common units prior to September 30, 2016 (with the conversion of the Class A Preferred Units of the Partnership counting toward such amount), the cash portion of the distribution rate was to have increased by 4.0% per annum until consummation of such issuance, as applicable. The Partnership did not raise at least $75,000,000 through the issuance of additional common units prior to September 30, 2016 and an aggregate 14% per annum cash distribution was paid related to the three months ended September 30, 2016. As a result of the common unit issuance in November 2016, and in accordance with the Partnership Agreement, on December 6, 2016, we issued an additional 9,851,996 Class B preferred units to Stonepeak. Distributions are to be paid on or about the last day of each of February, May, August and November after the end of each quarter.

The holders of Class B Preferred Units have the right at any time to request conversion in whole or in part of their Class B Preferred Units at the Conversion Rate, subject to the requirement to convert a minimum of $17,500,000 of Class B Preferred Units. The “Conversion Rate” is equal to the quotient of (i) the aggregate purchase price for the Class B Preferred Units plus accrued and unpaid distributions thereon, divided by (ii) the lesser of (a) the purchase price for the Class B Preferred Units and (b) the volume weighted average price for which common units are issued by the Partnership during the period beginning on the private placement closing date and ending on the date on which the Partnership has issued common units (other than issuances pursuant to the Plan) in exchange for cash in an aggregate amount equal to at least $75 million. The Conversion Rate was determined to be $11.29 per Class B Preferred Unit. See further discussion of the Conversion Rate in Note 20 “Subsequent Events.”

The Class B Preferred Units are accounted for as mezzanine equity in the consolidated balance sheet consisting of the following (in thousands):


	December 31,
	2016		2015
Mezzanine equity beginning balance	$	172,111	$	—
Private placement of Class B Preferred Units		—		350,000
Discount		(87)		(191,901)
Amortization of discount		23,477		6,594
Distributions		39,375		7,418
Distributions paid		(37,168)		—
Transfer embedded derivative to Class B		145,283		—
Total mezzanine equity	$	342,991	$	172,111

Earnings per Unit

For the period prior to our conversion, the basic net income (loss) per unit was computed from the two-class method by dividing net income (loss) attributable to unitholders by the weighted average number of units outstanding during each period. To determine net income (loss) allocated to each class of ownership (Class A and Class B), we first allocated net income (loss) in accordance with the amount of distributions made for the period by each class, if any. The remaining net income (loss) was allocated to each class in proportion to the class weighted average number of units outstanding for the period, as compared to the weighted average number of units for all classes for the period.

Post conversion, 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), 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). 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 (loss) 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. 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.

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

The following table presents the weighted average basic and diluted units outstanding for the periods indicated:


	Year Ended
	December 31,	March 6 - December 31	January 1 - March 6
	2016	2015	2015
Class A units - Basic and Diluted	—	—	48,451
Class B Common units - Basic and Diluted	—	—	2,879,163
Common units - Basic and Diluted	4,658,970	3,071,587	—
Weighted Common units - Basic and Diluted	4,658,970	3,071,587	2,927,614

At December 31, 2016, we had 219,144 common units that were restricted unvested common units granted and outstanding. No losses were allocated to participating restricted unvested units because such securities do not have a contractual obligation to share in the Partnership’s losses. At December 31, 2015, we had 361,357 common units that were restricted unvested common units granted and outstanding. No losses were allocated to participating restricted unvested units because such securities do not have a contractual obligation to share in the Partnership’s losses.

The following table presents our basic and diluted loss per unit for the year ended December 31, 2016 (in thousands, except for per unit amounts):


	Total		Common Units
Assumed net loss to be allocated	$	(44,484)	$	(44,484)

Basic and diluted loss per unit			$	(9.55)

The following table presents our basic and diluted loss per unit for the period from January 1, 2015 to March 6, 2015 (the date of conversion to a limited partnership) (in thousands, except for per unit amounts):


	Total		Class A Units		Class B Units
Assumed net loss to be allocated January 1 - March 6	$	(923)	$	(18)	$	(905)

Basic and diluted loss per unit			$	(0.38)	$	(0.31)

The following table presents our basic and diluted loss per unit for the period from March 6, 2015 through December 31, 2015 (the period after conversion to a limited partnership) (in thousands, except for per unit amounts):


	Total		Common Units
Assumed net loss attributable to common unitholders to be allocated March 6 - December 31	$	(153,895)	$	(153,895)

Basic and diluted loss per unit			$	(50.10)

Net loss per unit increased significantly for the period from March 6, 2015 through December 31, 2015 as compared to the period from January 1, 2015 through March 5, 2015 as it included non-cash impairment charges of $123.8 million. There was no impairment charge recorded for the period from January 1, 2015 through March 5, 2015.