Note 2. Chapter 11 Proceedings, Ability to Continue as a Going Concern and Covenant Violations

Throughout 2016, the Partnership along with its legal and financial advisors, explored strategic alternatives with a focus on liquidity and financial flexibility. The Partnership specifically evaluated options with the lenders under our revolving credit facility and holders of the Partnership’s senior notes that would improve liquidity and deleverage the Partnership. During this process, we elected to defer an approximately $24.6 million interest payment due on November 1, 2016 with respect to the 7.625% senior notes due May 2021 (“2021 Senior Notes”). The interest payment was subject to a 30-day grace period under the indenture. Failure to pay such interest payment on November 1, 2016 would have resulted in certain defaults and events of default under our revolving credit facility. The lenders under the revolving credit facility, on November 1, 2016, waived such defaults and event of default through November 30, 2016 (such period from November 1, 2016 to November 30, 2016, the “Waiver Period”), in each case, subject to the terms and conditions set forth in the limited waiver and twelfth amendment (the “Waiver and Twelfth Amendment”) to our revolving credit facility.

On November 30, 2016, the Partnership, OLLC, certain subsidiaries of the Partnership, the administrative agent, and the lenders consenting thereto entered into the first amendment to the limited waiver under our revolving credit facility, extending the Waiver Period to December 16, 2016.

On November 30, 2016, the Partnership entered into a forbearance agreement with certain noteholders that held approximately 51.7% of the Partnership’s 2021 Senior Notes and 69% of the Partnership’s 6.875% senior notes due August 2022 (“2022 Senior Notes”). Under the forbearance agreement the noteholders agreed to forbear from exercising any and all remedies available to them as a result of the Partnership’s election not to make an interest payment of $24.6 million due on the 2021 Senior Notes. The forbearance agreements initially extended through December 7, 2016 and were subsequently extended through December 16, 2016.

On December 16, 2016, the Partnership, OLLC, certain subsidiaries of the Partnership, the administrative agent, and the lenders consenting thereto entered into the second amendment to limited waiver under its revolving credit facility, extending the Waiver Period to January 13, 2017. In addition, the forbearance agreements were extended through January 13, 2017.

On December 22, 2016, the Partnership entered into a Plan Support Agreement (the “Noteholder PSA”) with holders of over an aggregate of 50.2% of the aggregate outstanding principal amount of the 2021 Senior Notes and the 2022 Senior Notes (collectively, the “Notes”), as well as reached an agreement-in-principle with the administrative agent under our revolving credit facility on the terms of a financial restructuring. Under the terms of the Noteholder PSA, the financial restructuring would be effected through a prepackaged or prenegotiated plan of reorganization (the “Plan”). Pursuant to the terms of the Plan, which would be subject to approval of the Bankruptcy Court, it is anticipated that, among other things, on the effective date of the Plan (the “Effective Date”):

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A newly formed corporation, as successor to the Partnership (“Reorganized Memorial”) would issue (i) new common shares (the “New Common Shares”) and (ii) five year warrants (the “Warrants”) entitling their holders upon exercise thereof, on a pro rata basis, to 8% of the total issued and outstanding New Common Shares, at a per share exercise price equal to the principal and accrued interest on the Senior Notes as of December 31, 2016, divided by the number of issued and outstanding New Common Shares (including New Common Shares issuable upon exercise of the Warrants), which New Common Shares and Warrants will be distributed as set forth below;

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The Notes would be cancelled and discharged and the holders of those Notes would receive (directly or indirectly) New Common Shares representing, in the aggregate, 98% of the New Common Shares issued on the Effective Date (subject to dilution by the post-emergence management incentive plan and the New Common Shares issuable upon exercise of the Warrants);

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The noteholders, at their election, would be entitled to receive an additional cash payment of up to approximately $24.6 million;

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Each holder of existing equity interests in the Partnership would receive its pro rata share of (i) New Common Shares representing, in the aggregate, 2% of the New Common Shares issued on the Effective Date and (ii) the Warrants (in each case, subject to dilution by the post-emergence management incentive plan and, in the case of the New Common Shares, subject to dilution by the Warrants);

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General unsecured claims, on or after the effective date, would be paid in the ordinary course; and

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Reorganized Memorial would enter into an exit credit facility in the form of an amendment and restatement of the existing revolving credit facility (the “Exit Credit Facility”).

The Partnership expects to emerge from the Chapter 11 proceedings as a corporation, including for U.S. federal income tax purposes.

On January 13, 2017, the Partnership entered into the third amendment to limited waiver, which extended the outside date of the Waiver Period from January 13, 2017 to January 16, 2017. In addition, the Partnership entered into a Plan Support Agreement (the “RBL PSA”) with lenders holding 100% of the loans under our revolving credit facility. The RBL PSA was entered into on terms substantially similar to those of the Noteholder PSA. In addition, among other things, the RBL PSA provided that (i) the consenting lenders (as defined in the RBL PSA) may terminate the RBL PSA upon the termination of the Noteholder PSA or if there is an amendment to the Noteholder PSA that is, or would reasonably be expected to be, adverse to the administrative agent under our revolving credit facility or the consenting lenders and (ii) each of the Debtors agreed to not file a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (“Bankruptcy Code”) until the Debtors terminated certain swap agreements identified in the RBL PSA and used the net proceeds thereof to repay outstanding amounts under the revolving credit facility.

An indicative summary of the expected terms and conditions of the Exit Credit Facility is set forth in an annex to the RBL PSA filed with our Current Report on Form 8-K filed with the SEC on January 17, 2017, which terms and conditions may include (but are not limited to) the following:

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senior secured revolving credit facility with maximum aggregate commitments of $1 billion, subject to a borrowing base;

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an expected initial borrowing base of approximately $474.0 to $492.5 million based on a April emergence date to be effective upon consummation of the restructuring transactions, subject to an amortization schedule thereafter until November 1, 2017;

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the first scheduled borrowing base redetermination will occur on November 1, 2017 and thereafter, each April 1st and October 1st;

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a maturity date of March 19, 2021;

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an ongoing covenant requiring that we grant a security interest in substantially all of our personal and real property that we mortgage, in each case as collateral for the obligations under the Exit Credit Facility, oil and gas properties representing not less than 95% of the total value of our oil and gas properties evaluated in the most recently completed reserve report;

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the loans under the Exit Credit Facility shall bear interest at a rate per annum equal to the base rate or LIBOR/Eurodollar rate plus an applicable margin that ranges from 2.00% to 3.00% per annum (based on borrowing base usage) on alternate base rate loans and from 3.00% to 4.00% per annum (based on borrowing base usage) on LIBOR/Eurodollar loans;

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the loan commitments under the Exit Credit Facility are subject to a commitment fee on the unused portion of the borrowing base at a rate per annum equal to 0.50%;

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customary mandatory prepayments as well as a requirement that, in the event that as of the close of any business day the aggregate amount of our unrestricted cash and cash equivalents exceeds $35.0 million in the aggregate, we must prepay the loans under the Exit Credit Facility (without a corresponding reduction in the available commitments under the Exit Credit Facility) and cash-collateralize any letter of credit exposure in an amount equal to such excess; provided that, we may elect to increase such the excess cash threshold from $35.0 million to $50.0 million at such time as the aggregate amount of net cash proceeds received from asset sales exceeds the borrowing base value attributable to such assets (if any) equals or exceeds $15.0 million; provided further, however, that in the event that we issue certain unsecured debt in an aggregate amount of $10.0 million or greater, we will no longer have the ability to increase such threshold above $35.0 million and, if such threshold is greater than $35.0 million at such time, such threshold will be immediately reduced to $35.0 million;

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financial covenants, requiring that we maintain a ratio of (i) consolidated EBITDAX (to be defined in the Exit Credit Facility) for the four fiscal quarter period then ending to consolidated net interest expense for such period of not less than 2.50 to 1.00, which we refer to as the interest coverage ratio, (ii) consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0; and (iii) consolidated total debt as of such time to consolidated EBITDAX for the four fiscal quarter period then ending on such day of not greater than 4.0 to 1.0;

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a requirement that we hedge no less than 50% of our forecasted proved developed producing production through 2019 on or prior to December 31, 2017; and

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representation and warranties, affirmative covenants, negative covenants, events of default and other restrictive provisions substantially consistent with our current revolving credit facility, subject to certain exceptions and a provision permitting us, under specified and limited circumstances, to incur additional unsecured indebtedness in an original aggregate principal amount not to exceed $80.0 million.

On January 16, 2017, the Partnership and certain of its subsidiaries (collectively with the Partnership, the “Debtors”) filed voluntary petitions (the cases commenced thereby, the “Chapter 11 proceedings”) under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) to pursue a Joint Chapter 11 Plan of Reorganization for the Debtors. The Debtors’ Chapter 11 proceedings are being jointly administered under the caption In re Memorial Production Partners LP, et al. (Case No. 17-30262). The Bankruptcy Court has granted all of the first day motions filed by the Debtors that were designed primarily to minimize the impact of the Chapter 11 proceedings on the Partnership’s operations, customers and employees. The Debtors will continue to operate their businesses as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Partnership expects to continue its operations without interruption during the pendency of the Chapter 11 proceedings.

For the duration of the Chapter 11 proceedings, our operations and our ability to develop and execute our business plan are subject to risks and uncertainties associated with Chapter 11 proceedings described in Item 1A, “Risk Factors.” As a result of these risks and uncertainties, our assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 proceedings, and the description of our operations, properties and capital plans included in this annual report may not accurately reflect our operations, properties and capital plans following the Chapter 11 proceedings.

Ability to Continue as a Going Concern

Continued low commodity prices have resulted in significantly lower levels of cash flow from operating activities and have limited the Partnership’s ability to access the capital markets. In addition, the borrowing base under our revolving credit facility is subject to redetermination on at least a semi-annual basis primarily based on an engineering report with respect to our estimated oil, NGL and natural gas reserves, which will take into account the prevailing oil, NGL and natural gas prices at such time, as adjusted for the impact of our commodity derivative contracts. Continued low commodity prices have adversely impacted our redeterminations. During the second semi-annual redetermination in October, the lenders under our revolving credit facility decreased our borrowing base from $925.0 million to $740.0 million with a further reduction to $720.0 million in December 2016. The borrowing base was further reduced in December 2016 to $530.7 million due to the monetization of certain derivative instruments, as discussed in Note 6. The reduced borrowing base has had a significant negative impact on the Partnership’s liquidity and ability to remain in compliance with certain financial covenants. On January 16, 2017, the Debtors’ Chapter 11 proceedings accelerated the Partnership’s obligations under its revolving credit facility, 2021 Senior Notes and 2022 Senior Notes.

The significant risks and uncertainties related to the Partnership’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Partnership’s ability to continue as a going concern. The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Partnership cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.

In order to decrease the Partnership’s level of indebtedness and maintain the Partnership’s liquidity at levels sufficient to meet its commitments, the Partnership undertook a number of actions, including divesting certain non-core assets, minimizing capital expenditures and further reducing its recurring operating expenses. Despite taking these actions, the Partnership did not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code.

Notice of Delisting

On January 17, 2017, the Partnership received a letter from the Listing Qualifications Department of The NASDAQ Stock Market LLC (“NASDAQ”) notifying the Partnership that (1) as a result of the Chapter 11 proceedings, and in accordance with NASDAQ Listing Rules 5101, 5110(b) and IM-5101-1, NASDAQ had determined that the Partnership’s common units would be delisted from NASDAQ and (2) accordingly, unless the Partnership requested an appeal of this determination, trading of the common units would have been suspended at the opening of business on January 26, 2017 and the Partnership’s securities would have been removed from listing and registration on NASDAQ. The Partnership has appealed this determination.