EX-99.2

Exhibit 99.2

RELIANCE GATHERING, LLC

Financial Statements

September 30, 2019 and 2018

RELIANCE GATHERING, LLC

Table of Contents


	Page
Financial Statements:

Balance Sheets		1

Statements of Income		2

Statements of Members’ Equity		3

Statements of Cash Flows		4

Notes to Financial Statements		5

RELIANCE GATHERING, LLC

Balance Sheets

September 30, 2019 and December 31, 2018


	As of
	September 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	1,742,221	$	2,309,725
Accounts receivable:
Trade		3,806,158		3,147,112
Related party		2,203		1,166
Prepaid expenses and other current assets		54,682		29,341

Total current assets		5,605,264		5,487,344

Property and equipment, net		143,985,567		100,873,170
Total assets	$	149,590,831	$	106,360,514

Liabilities and Members’ Equity
Current liabilities:
Accounts payable and other accrued expenses	$	6,602,937	$	12,930,929
Accounts payable – related party		473,890		29,214

Total current liabilities		7,076,827		12,960,143

Noncurrent liabilities:
Line of credit facility, net of debt cost		99,488,533		59,524,961
Total noncurrent liabilities		99,488,533		59,524,961

Total liabilities		106,565,360		72,485,104
Members’ equity		43,025,471		33,875,410

Total liabilities and members’ equity	$	149,590,831	$	106,360,514

See accompanying notes to financial statements.

RELIANCE GATHERING, LLC

Statements of Income

Nine Months Ended September 30, 2019 and 2018


	Nine Months Ended September 30,
	2019			2018
Revenues:
Gathering system revenue	$	24,879,512		$	21,591,744
Gain on retirement of asset retirement obligation		—			—

Total revenues		24,879,512			21,591,744
Cost of sales:
Cost of sales		2,751,574			1,599,393
Depreciation expense		7,169,451			11,291,155

Total cost of sales		9,921,025			12,890,548

Gross profit		14,958,487			8,701,196

General and administrative expenses:
Management fees		2,001,960			1,516,411
Office and other general and administrative expenses		572,054			532,193

Total general and administrative expenses		2,574,014			2,048,604

Income from operations		12,384,473			6,652,592

Other income or expenses:
Other income		400			508,916
Interest expense		(3,234,812	)		(1,819,025	)

Total other expenses		(3,234,412	)		(1,310,109	)

Net income	$	9,150,061		$	5,342,483

See accompanying notes to financial statements.

RELIANCE GATHERING, LLC

Statements of Members’ Equity

Nine Months Ended September 30, 2019 and 2018


	Preferred units		Class A common units			Class B common units			Total
Balance, December 31, 2017	$	124,458,841	$	(61,040,121	)	$	(38,251,500	)	$	25,167,220
Net income		5,342,483		—			—			5,342,483

Balance, September 30, 2018	$	129,801,324	$	(61,040,121	)	$	(38,251,500	)	$	30,509,703
Net income October 31, 2018 to December 31, 2018		3,365,707		—			—			3,365,707

Balance, December 31, 2018	$	133,167,031	$	(61,040,121	)	$	(38,251,500	)	$	33,875,410
Net income		9,150,061		—			—			9,150,061

Balance, September 30, 2019	$	142,317,092	$	(61,040,121	)	$	(38,251,500	)	$	43,025,471

See accompanying notes to financial statements.

RELIANCE GATHERING, LLC

Statements of Cash Flows

Nine Months Ended September 30, 2019 and 2018


	Nine Months Ended September 30,
	2019			2018
Cash flow from operating activities:
Net income	$	9,150,061		$	5,342,483
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on retirement of asset retirement obligation		—			—
Depreciation expense		7,169,451			11,291,155
Amortization of debt issue costs		148,572			123,863
Changes in operating assets and liabilities:
Accounts receivable		(659,046	)		(1,517,460	)
Related party accounts receivable/payable		443,639			4,553,686
Prepaid expenses and other current assets		(25,341	)		(3,606	)
Accounts payable and other accrued expenses		4,913,084			615,997

Net cash provided by operating activities		21,140,420			20,406,118

Cash flows from investing activities:
Purchase of property and equipment		(61,522,924	)		(42,311,451	)

Net cash used in investing activities		(61,522,924	)		(42,311,451	)

Cash flow from financing activities:
Proceeds from long-term debt		40,000,000			24,000,000
Debt issue costs		(185,000	)		(354,460	)

Net cash provided by financing activities		39,815,000			23,645,540

Increase in cash and cash equivalents		(567,504	)		1,740,207
Cash and cash equivalents, beginning of year		2,309,725			1,183,485

Cash and cash equivalents, end of year	$	1,742,221		$	2,923,692

Cash paid during the period for:
Interest	$	2,946,223		$	1,692,291
Supplemental schedule of noncash investing activities:
Accrued capital expenditures		782,426			2,013,028

See accompanying notes to financial statements.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

(1)

Nature of Operations

Reliance Gathering, LLC (the Company), a Texas limited liability company, was incorporated on June 22, 2011 and was 100% owned by its sole member, Reliance Midstream, LLC. The Company was formed to own and operate a gathering system that services the oil and gas industry in Andrews, Ector and Martin counties in Texas.

Effective August 1, 2014, the Company amended and restated their limited liability company agreement. The agreement was amended to admit new members into the Company and to allow for certain incentive interest award grants to be issued to key members of management and others. Under the new agreement, Reliance Midstream, LLC (managing member) controlled 64% of the membership interests in the Company with the remaining 36% allocated to new members as allowed under the amended and restated agreement at December 31, 2014. During 2015, certain members forfeited their membership interests and at December 31, 2015 Reliance Midstream controlled 64.4% of the membership interests in the Company with the remaining 35.6% allocated to other members.

On May 13, 2016, the Company closed a transaction with MetalMark Funds and each of the Monarch investment entities defined within the Investment Agreement (collectively, MetalMark), whereby MetalMark invested $112,100,000 in the Company in exchange for a 38.6% membership interest in the Company in the form of preferred units. The Company immediately distributed the proceeds to the existing members. At September 30, 2019 and December 31, 2018, Reliance Midstream controls 39.6% of the membership interests in the Company, MetalMark controls 38.6% and the remaining 21.8% is allocated to other members. See further discussion of the MetalMark transaction at note 7.

(2)

Summary of Significant Accounting Policies

(a)

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with original maturities of three months or less as cash and cash equivalents and maintains its excess cash in various financial institutions, where deposits may exceed federally insured amounts at times. The Company has not experienced any losses in such accounts and does not believe its related risk to be more than normal.

(b)

Accounts Receivable and Accounts Receivable – Related Party

Accounts receivable includes amounts due from oil and gas operators and various related parties. Accounts receivable, trade, consists of accrued gathering fees due under normal trade terms, generally requiring payment within 30 days of production. Accounts receivable, related parties consists of amounts paid by the Company on behalf of various related parties for goods and services rendered, as well as trade receivables due from related parties and reclassified to related party receivables for financial statement presentation.

Accounts receivable are stated at the amounts management expects to collect from outstanding balances. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amount that will not be collected. Management individually reviews all receivable balances and based on an assessment of current creditworthiness, past experience, historical losses, and evaluation of other pertinent factors, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment.

Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to the respective receivable account. At September 30, 2019 and December 31, 2018, there was no allowance for doubtful accounts recognized in the balance sheets, as accounts receivable were believed to be fully collectible. The Company has not had historical collection issues.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

(c)

Accounts Payable and Accounts Payable – Related Party

Accounts payable and accounts payable – related party consist primarily of vendor obligations due under normal trade terms for services rendered or products received by the Company during ongoing operations. These amounts are recorded as obligations as incurred. Accounts payable totaled $4,663,924 and $5,066 at September 30, 2019 and December 31, 2018, respectively. Accounts payable – related party totaled $473,890 and $29,214 at September 30, 2019 and December 31, 2018, respectively. See note 5 for more information related to the nature of related party activities.

(d)

Accrued Expenses

Accrued expenses consist of other operating and capital costs that were accrued at period end. Accrued expenses totaled $1,939,013 and $12,739,124 at September 30, 2019 and December 31, 2018, respectively.

(e)

Debt Issuance Costs

The Company capitalizes certain costs in connection with issuing debt, which are recorded on the balance sheet as a reduction of debt. These costs are amortized to interest expense using a method consistent with the interest method over the term of the related debt.

The Company had additional direct costs related to financing of $185,000 and $354,460 for the nine months ended September 30, 2019 and 2018, respectively. Accumulated amortization related to debt issuance costs was $616,052 and $467,480 at September 30, 2019 and December 31, 2018, respectively. The Company reported amortization expense of $148,572 and $123,863 for the nine months ended September 30, 2019 and 2018, respectively., which is recorded as a component of interest expense.

(f)

Revenue Recognition

Revenue is recognized when earned, written evidence of an arrangement exists, pricing is fixed and determinable and collectability of the revenue is reasonably assured. The critical terms that embody the Company’s sales arrangements are included in executed contracts with related parties and third party customers.

The Company gathers hydrocarbons and various byproducts produced by operators. The commodities produced are then transported through the gathering system to be processed and sold to third party purchasers. Fees are charged to the operators for gathering, transportation and storage based on a fee structure defined in executed sales contracts.

On August 28, 2014, the Company amended key terms of its gathering and throughput contracts. These include (i) reducing the gathering fee commencing January 1, 2017 and adding a FERC indexing mechanism, (ii) changing the maturity date to March 1, 2030, (iii) deleting the Minimum Monthly Volume and Deficiency Charge mechanism, and (iv) adding explicit acreage dedication language. There was an immaterial effect on the Company’s financial statements for the nine months ended September 30, 2019 and 2018.

Effective May 20, 2016, the Company executed a Minimum Volume Commitment Letter Agreement (MVC Agreement) with Reliance Exploration, Ltd. (REL), an entity under common control. Under the MVC Agreement, REL agreed to ship certain aggregate minimum volumes of crude oil on the Company’s gathering system through December 31, 2017. A deficiency in volumes made available for shipment on the Company’s gathering system caused a deficiency payment from REL to the Company. The MVC agreement expired on January 31, 2018.

(g)

Concentrations of Risk

Major customers are defined as those individually comprising more than 10% of the Company’s revenue.

As of September 30, 2019, the Company had five major customers representing 87% of the Company’s revenue. These five customers also comprised 64% of the Company’s accounts receivable at September 30, 2019.

As of December 31, 2018, the Company had three major customers representing 79% of the Company’s revenue. These three customers also comprised 73% of the Company’s accounts receivable at December 31, 2018.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

This concentration of customers may impact the Company’s overall business risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions in the oil and gas industry. The Company believes this risk is mitigated by the size, reputation and nature of its purchasers and operators.

The Company’s sales were entirely comprised of revenue earned in the Permian Basin area. For the nine months ended September 30, 2019 and 2018, the Company had no sales from related parties.

(h)

Income Taxes

The Company is organized as a Texas limited liability company and is treated as a flow-through entity for income tax purposes. As a result, the net taxable income of the Company and any related tax credits, for federal income tax purposes, are deemed to pass to the members of the Company even though such net taxable income or tax credits may not have actually been distributed. Accordingly, no federal income tax provision has been made in the financial statements of the Company since the federal income tax is an obligation of the members.

In 2006, the State of Texas enacted the Texas Margin Tax Bill effective January 1, 2008 for the tax year ended December 31, 2007. The Company has not recorded a tax provision for the nine months ended September 30, 2019 and 2018, as management does not believe the amount owed, if any, will be material to the Company.

The Company follows the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 (ASC Topic 740), Income Taxes, related to accounting for uncertainties in income taxes. ASC Topic 740 clarifies the accounting for uncertainties in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC Topic 740 requires that the Company recognize in its financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position.

ASC Topic 740 also provides guidance on measurement, classification, interest and penalties and disclosure. Tax positions taken related to the Company’s pass-through status and those taken in determining state income tax liability, including deductibility of expenses, have been reviewed and management is of the opinion that material positions taken by the Company would more likely than not be sustained by examination.

Accordingly, the Company has not recorded an income tax liability for uncertain tax positions. As of September 30, 2019, the Company’s tax years 2013 through 2018 remain open to examination.

(i)

Asset Retirement Obligation

The Company follows the provisions of FASB ASC Topic 410, Accounting for Asset Retirement Obligations (ASC Topic 410), which requires the fair value of a liability related to the retirement of long-lived assets be recorded at the time a legal obligation is incurred, if the liability can be reasonably estimated. The liability is based on future retirement cost estimates and incorporates many assumptions, such as time to permanent removal, future inflation rates and the credit adjusted risk-free rate of interest. The retirement obligation is recorded at its estimated present value with an offsetting increase to the related asset on the balance sheets. Over time, the liability is accreted to its future value, with the accretion recorded to expense.

Furthermore, where there is an obligation to perform an asset retirement activity, even though uncertainties exist about the timing or method of settlement, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be determined.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

In connection with the Company’s gathering pipeline and related assets, there is an obligation to perform limited procedures around the abandonment of such assets. Our gathering pipelines have an indeterminate life, if properly maintained. Accordingly, we are not able to make a reasonable estimate of when future dismantlement and removal dates of our pipelines will occur. It has been determined by our operational management team that abandoning all other ancillary equipment, outside of the assets stated above, would require minimal costs. For the reasons stated above, no asset retirement obligation related to general operations was recorded by the Company at September 30, 2019 as management does not believe that any such retirement obligation to be material to the Company’s financial statements. As of September 30, 2019 and December 31, 2018, the Company had no asset retirement obligation related to the Texas Railroad Commission pipe replacement obligation. See further discussion at note 3.

(j)

Management Use of Estimates

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(k)

Other Significant Accounting Policies

See the respective footnotes for the Company’s accounting policies regarding property and equipment, impairment of long-lived assets and related party transactions.

(l)

Recently Issued Pronouncements

New Accounting Pronouncement adopted in 2019

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which provides guidance on eight specific cash flow issues, including cash payments associated with debt and debt modification, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, distributions made from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amended guidance is effective for the Company for annual periods beginning after December 15, 2018. The amendments should be applied using a retrospective transition method to each period presented. Early adoption is permitted for any entity in any interim or annual period. The Company adopted the new standard during the first quarter of 2019 and there will be no effect on its ongoing financial reporting.

New Accounting Pronouncements not adopted as of September 30, 2019

On May 28, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new ASU is effective for annual reporting periods beginning after December 31, 2018 and early adoption is permitted in certain circumstances. Entities have the option of using either the retrospective or modified approach to adopt the new standards. The Company has not yet selected a transition method. The company has not adopted this new ASU at September 30, 2019. The Company evaluated the ASU and determined the effect of the standard on its ongoing financial reporting is not material.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) - Amendments to the FASB Accounting Standards Codification (“ASU 2016-02”) which established ASC Topic 842, Leases. This ASU will change the way the Company accounts for leases. The main difference between the current requirement under GAAP and the new ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. The new ASU requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The new ASU is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. This ASU must be adopted using a modified retrospective transition, and provides for certain practical expedients. The Company is evaluating the ASU and has not determined the effect of the standard on its ongoing financial reporting.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

In July 2018, the FASB issued additional guidance on the accounting for leases in ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2016-02 was initially required to be adopted using a modified retrospective transition, which would require application of the new guidance at the beginning of the earliest comparative period presented. The guidance in ASU 2018-11 provides companies with another transition method that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings as of the date of adoption. Under this method, previously presented years’ financial positions and results would not be adjusted. The Company is evaluating the ASU and has not determined the effect of the standard on its ongoing financial reporting.

(3)

Property and Equipment

(a)

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense as incurred. Improvements or betterments of a permanent nature are capitalized. The cost of assets disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposals are credited or charged to operations currently. The cost basis of property and equipment, including estimated asset retirement obligation, was $169,885,780 and $119,603,931 at September 30, 2019 and December 31, 2018, respectively. Depreciation expense for property and equipment totaled $7,169,451 and $11,291,155 for the nine months ended September 30, 2019 and 2018 respectively. Depreciation is computed using the straight-line method over the estimated useful lives.

Components and useful lives of property plant and equipment were as follows as of September 30, 2019 and December 31, 2018:


	2019		2018
Gathering system (20 years)	$	128,309,914	$	85,960,857
Tank batteries (20 years)		22,070,923		14,139,163
Measurement equipment and other (5 years)		6,239,709		5,186,720
Pipeline easements (10 years if amortized)		13,265,234		14,317,191
Asset retirement obligation (Accelerated based on reclamation date)		—		—

		169,885,780		119,603,931
Less accumulated depreciation		25,900,213		18,730,761

Total property and equipment, net	$	143,985,567	$	100,873,170

(b)

Texas Railroad Commission Pipe Replacement Obligation

In conjunction with assessing the Company’s compliance with the Texas Railroad Commission’s (TRRC) regulations for pipelines, the Company identified and self-reported to the TRRC non-compliance with certain regulations. On December 4, 2017, the Company agreed to a pipe replacement plan with the (TRRC), whereby the Company is required to replace certain SDR 9 poly pipe with steel pipe in order to be in compliance with the TRRC requirements for pipelines. The plan calls for completion of the pipe replacement in two stages. The first section was completed in 2018. The second section was completed in June 2019. At September 30, 2019, costs incurred to date related to the replacement of the first and second sections were $4,665,931 and $41,159,620, respectively. At December 31, 2018, costs incurred to date related to the replacement of the first and second sections were $4,665,931 and $8,332,420, respectively.

The costs for pipeline and right-of-ways related to the replacement will be capitalized as they are paid and will be subject to depreciation when placed in service.

(c)

Impairment of Long-lived Assets

In accordance with FASB ASC Topic 360, Property, Plant and Equipment (ASC Topic 360), long-lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstance indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held or used, the Company bases the evaluation on impairment indicators such as nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

If such impairment indicators are present or other factors exist that indicate the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of a undiscounted cash flow analysis of the asset at the lowest level for which identifiable cash flows exist.

If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset. The Company determined there were no indicators of impairment for the nine months ended September 30, 2019 and 2018.

(4)

Commitments and Contingencies

Environmental Issues

The Company’s operations are subject to risks normally incidental to the oil and gas well operating and servicing environment, including fires and other environmental risks such as oil spills or gas leaks that could expose the Company to liabilities associated with these risks. The Company maintains comprehensive insurance coverage that it believes is adequate to mitigate the risk of any adverse financial effects associated with these risks.

However, should it be determined that a liability exists with respect to any environmental cleanup or restoration, the liability to cure such a violation could still fall upon the Company. No claim has been made, nor is the Company aware of the assertion of any liability which the Company may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations relating thereto.

(5)

Related Party Transactions

Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC Topic 850, Related Party Disclosures (ASC Topic 850), requires that transactions with related parties that would make a difference in decision making be disclosed so that users of the consolidated financial statements can evaluate their significance. Related party transactions occurred within the context of the following relationships:

The Company has a receivable from Reliance Energy MW, LLC, a company under common control. The receivable is comprised of amounts due for costs paid by the Company. The balance at September 30, 2019 and December 31, 2018 was $2,203 and $0, respectively.

The Company has a payable due to Reliance Energy, Inc, a company under common control. The balance at September 30, 2019 and December 31, 2018 was $473,890 and $29,214, respectively, and has been classified as a current liability in the balance sheets. The payable is comprised of amounts due for costs paid by Reliance Energy, Inc. on behalf of the Company.

The Company entered into a Service Agreement with Reliance Energy, Inc. for executive and administrative services (Service Agreement) effective May 20, 2016. Under the Service Agreement, fees are earned through Dedicated Services and Support Services. Support services are determined in the Company’s annual budget and allocated pro-rata on a monthly basis.

Fees charged under the Service Agreement for the nine months ended September 30, 2019 and 2018 totaled $2,001,960 and $1,516,411, respectively.

(6)

Long-Term Debt

On May 20, 2016, the Company entered into a Revolving Credit Facility (Revolver) with a lender with a borrowing capacity of up to $30,000,000, set to mature on May 20, 2019. The Revolver bears interest at either the Adjusted Base Rate or the Eurodollar Rate. The base rate is the higher of the Federal Funds rate plus 0.5%, the administrative agent’s prime rate or the Eurodollar Rate plus 1%. The Eurodollar Rate is equal to the ICE Benchmark Administration LIBOR Rate as published by Reuters at approximately 11:00 a.m. (London Time) two business days prior to the first day of an interest period.

On November 10, 2017, the Revolver was amended increasing the borrowing capacity to $40,000,000. On April 3, 2018, the Revolver was amended increasing the borrowing capacity to $75,000,000.

RELIANCE GATHERING, LLC

Notes to Financial Statements

September 30, 2019 and 2018

On February 5, 2019, the Revolver was amended increasing the borrowing capacity to $100,000,000. The Company must comply with various covenants under the terms of the amended agreement, including compliance with a minimum interest coverage ratio and a maximum leverage and liquidity ratio, as defined in the agreement. At September 30, 2019, the Company was in compliance with its debt covenants.

The outstanding balance on the Revolver was $100,000,000 as of September 30, 2019. The interest rate for 2019 was 3.74%, with interest expense of $2,423,393 for the nine months ended September 30, 2019. The Company has $326,755 in accrued interest at September 30, 2019.

The outstanding balance on the Revolver was $60,000,000 as of December 31, 2018. The interest rate for 2018 was 4.81%, with interest expense of $2,423,393 for the nine months ended September 30, 2018. The Company has $186,739 in accrued interest at December 31, 2018.

(7)

Equity

(a)

MetalMark Transaction

On May 20, 2016, MetalMark invested $112,100,000 in the Company in exchange for a 38.60% membership interest in the Company in the form of 100% of the Preferred Units in the Company. With the transaction, the Company amended and restated its LLC agreement to allow for the issuance of the Preferred Units and to grant previous members of the Company Common Units in the Company. Reliance Midstream, LLC was granted Class A Common Units and the remaining previous members, comprised of members of management of Reliance Midstream, LLC, were granted Class B Common Units.

The Preferred Units are entitled to a Preferred Return of 10% of their original invested amount and preferential rights in any distributions from the Company. Distributions after the MetalMark transaction will be first allocated to the Preferred Unit holders for any unpaid portion of the Preferred Return, then to the Preferred Unit Holders for any Unpaid Preferred investment amount, then to an amount equal to 20% of the hurdle amount to the Preferred Units, and then to the respective percentages of each Common Unit Holder.

Preferred Units and Class A Common Units have unrestricted voting rights in the Company. Class B Common Units have restricted voting rights as they cannot participate in the election or appointment of board members.

At September 30, 2019 and December 31, 2018, the Company had the following equity accounts:


	% Ownership			2019			2018
Preferred Units		38.60	%	$	142,317,092		$	133,167,031
Class A Common Units		39.60			(61,040,121	)		(61,040,121	)
Class B Common Units		21.80			(38,251,500	)		(38,251,500	)

Total equity		100.00	%	$	43,025,471		$	33,875,410

(b)

Distributions

Distributions are made at the direction of the Board of Managers. The member’s capital accounts will be adjusted as distributions are paid to the members and the members make additional contributions. There were no recorded cash distributions during 2019 and 2018.

The Preferred Unit holders are entitled to a Preferred Return of 10% of their original investment amount per annum, with compounding interest, which totals $11,210,000 for 2019 and 2018. The balance was not declared and remained unpaid at September 30, 2019 and December 31, 2018. The cumulative unpaid amount at September 30, 2019 and December 31, 2018 was $37,638,459 and $29,230,959, respectively.

(8)

Subsequent Events

On November 7, 2019, OMOG JV LLC completed the acquisition of all of the membership interests in the Company, pursuant to a securities purchase agreement dated as of October 1, 2019. In connection with this acquisition, on November 7, 2019, all outstanding amounts under the Revolver were repaid, and the Revolver was terminated.