Commitments and Contingencies | Commitments and Contingencies Commitments The Partnership is a party to various agreements under which it has rights and obligations to participate in the acquisition and development of undeveloped properties held and to be acquired by Scintilla and New Dominion. These properties will be held by New Dominion for the benefit of the Partnership pending development of the properties. The Partnership is required by its underlying agreements with New Dominion to pay certain acreage fees to reimburse New Dominion for the cost of the acreage attributable to the Partnership’s working interest when invoiced by New Dominion. The Partnership recognizes an asset and corresponding liability as the acreage costs are incurred by New Dominion. See Note 11 "Related Party Transactions." The agreements require us to contribute capital for drilling and completing new wells and related project costs based on our proportionate ownership of each particular new well. There are significant penalties for a party’s election not to participate in a proposed well within the geographical areas covered by the agreements. The agreements also require us to pay New Dominion our proportionate share of maintenance and operating costs of New Dominion’s saltwater disposal wells. New Dominion serves as the operator for all of our properties. The successful operation of our exploration and production business depends on continued utilization of New Dominion’s oil, natural gas, and NGL infrastructure and technical staff as the operator of our properties. Failure of New Dominion to perform its obligations could have a material adverse effect on our operations and our financial results. Contingent Consideration MCE. The former owners of MCE were entitled to receive additional common units in the second quarter of 2015 based on a specified multiple of the annualized EBITDA of MCE, excluding EFS, RPS and MCCS, for the trailing nine-month period ended March 31, 2015, less certain adjustments. The contingent consideration was valued at $6.3 million at the acquisition date and was included in the consideration for the MCE Acquisition. Based on actual results for MCE for the nine-month period ended March 31, 2015, the MCE contingent consideration was deemed to have no value and no additional consideration is due. MCCS. The former owners of MCCS were entitled to receive additional common units in the second quarter of 2015 based on a specified multiple of the annualized EBITDA of MCCS for the trailing nine-month period ended March 31, 2015, less certain adjustments. The contingent consideration was valued at $4.1 million at the acquisition date and was included in the consideration for the MCCS Acquisition. Based on actual results for MCCS for the nine-month period ended March 31, 2015, the MCCS Contingent Consideration was deemed to have no value and no additional consideration is due. EFS/RPS. The former owners of EFS and RPS were entitled to receive additional consideration in the form of cash and common units in the second quarter of 2015 based on a specified multiple of the annualized EBITDA of EFS and RPS for the year ended December 31, 2014 , less certain adjustments. The terms of the contribution agreement provide that the additional consideration is to be paid approximately 50% in cash and approximately 50% in common units, consistent with the initial consideration for the Services Acquisition. However, the former owners can elect to receive up to 100% of the payout in common units. The EFS/RPS Contingent Consideration was valued at $22.0 million as of the acquisition date and was included in the consideration for the Services Acquisition. The fair value of the EFS/RPS Contingent Consideration was approximately $23.3 million as of December 31, 2014. In March 2015, we entered into an agreement with the former owners that allows for the payment of the cash portion of the EFS/RPS Contingent Consideration to be extended to May 2016. Beginning in June 2015, the Partnership is required to make monthly interest payments at an annual rate of 5.50% with principal and any unpaid interest due May 1, 2016. A receivable of approximately $1.0 million due from the former owners has been offset against the contingent consideration obligation. Additionally, the contingent consideration obligation was reduced for certain costs incurred by the Partnership, as provided for in the purchase agreement. In September 2015, the agreement concerning payment of the cash portion was replaced with a promissory note issued by MCLP in the amount of $9.1 million . See Note 3 "Debt" for additional discussion on the promissory note. At September 30, 2015 , the net contingent consideration was approximately $22.0 million . As a result of ongoing discussions with the former owners, we have not yet issued common units to satisfy the equity portion of the contingent consideration obligation. Legal Matters On January 12, 2015, David J. Chernicky, the beneficial owner of approximately 30.6% of our general partner, approximately 15.6% of our common units and all of our subordinated units, and his affiliated entities, Scintilla, LLC, NSEC and New Dominion (collectively, “plaintiffs”) filed a lawsuit against the Partnership, our general partner and certain current officers of our general partner, including Chairman and Chief Executive Officer, Mr. Kos, and former Chief Financial Officer, Richard Finley, and certain of their affiliated entities (collectively, “defendants”) in the District Court of Tulsa County, Oklahoma. The plaintiffs allege various claims against the defendants, including that plaintiffs did not receive fair value for various oil and natural gas working interests acquired from them by the Partnership. The plaintiffs also allege that the Partnership has been unjustly enriched and that the properties acquired from them by the Partnership pursuant to the transactions in question should be held in a constructive trust in favor of the plaintiffs. Additionally, the plaintiffs claim that the defendants have conspired to commit constructive fraud, breach of fiduciary duty, negligence and gross negligence against the plaintiffs. The plaintiffs also allege that the defendants have intentionally interfered with the defendants' current business arrangements with certain working interest owners in the properties the plaintiffs operate as well as future business opportunities. The plaintiffs also claim that the Partnership is wrongfully refusing to remove the restrictive legends on common units issued by the Partnership to the plaintiffs in private transactions in exchange for the oil and natural gas working interests described above. Hearings on certain motions to dismiss filed by the defendants were held on August 5, 2015 and September 11, 2015. On September 15, 2015, the parties agreed to stay this proceeding pending settlement discussions. In addition to the proceeding described above, on January 29, 2015, the Partnership received notice from New Dominion that it had purchased from NSEC certain obligations claimed to be owed by the Partnership to NSEC. The total amount of the purported claims totaled approximately $1.9 million . During 2015, New Dominion has withheld all revenue from the Partnership's sold oil and natural gas production in satisfaction of these claims and other amounts New Dominion and its affiliates claim to be owed by the Partnership. The Partnership disputes New Dominion’s claims and related withholding of revenue, and on June 4, 2015, the Partnership amended a previously filed lawsuit against New Dominion pending in the District Court of Tulsa County, Oklahoma to add certain of New Dominion’s officers as well as David Chernicky as defendants. In the lawsuit, the Partnership seeks a temporary and permanent injunction and declaratory action and asserts breach of contract, negligence, gross negligence, willful misconduct and fraud against the various defendants. On September 15, 2015, the parties agreed to stay this proceeding pending settlement discussions. The Partnership and plaintiffs have engaged in settlement discussions; however, a settlement has not been reached. Under a settlement agreement, it is possible that the Partnership could recognize a gain or loss on the ultimate transaction. Information necessary to determine such a gain or loss is not currently available. If a settlement is not reached, the Partnership plans to continue to vigorously pursue its claims. The Partnership believes that plaintiffs owe it the amounts it has recorded, that plaintiffs have the ability to pay these amounts, and that plaintiffs’ claims against the Partnership are without merit. However, as a result of the ongoing litigation with New Dominion, a reserve of $1.2 million on the outstanding net receivable was recorded and is reflected in the related party receivable, net balance at September 30, 2015. New Dominion is a defendant in a legal proceeding arising in the normal course of its business, which may impact the Partnership as described below. In the case of Mattingly v. Equal Energy, LLC, New Dominion is a named defendant. In this case, the plaintiffs assert claims on behalf of a class of royalty owners in wells operated by New Dominion and others from which natural gas is sold by New Dominion to Scissortail Energy, LLC ("Scissortail"). The plaintiffs assert that royalties to the class should be paid based upon the price received by Scissortail for the natural gas and its components at the tailgate of the plant, rather than the price paid by Scissortail at the wellhead where the natural gas is purchased. The plaintiffs assert a variety of breach of contract and tort claims. A hearing on the matter was held in August 2014 at which Scissortail’s motion to dismiss was granted with prejudice and New Dominion’s motion to dismiss was granted in part. The plaintiffs have appealed the court's granting of the dismissal. Discovery is in process and scheduled to conclude in December 2015 with a class certification hearing to follow. Any liability on the part of New Dominion, as contract operator, would be allocated to the working interest owners to pay their proportionate share of such liability. While the outcome and impact on the Partnership of this proceeding cannot be predicted with certainty, management believes a loss of up to $250,000 may be reasonably possible. Due to the uncertainty, no reserve has been established for this matter. Fair Labor Standards Act Litigation . EFS and RPS are involved in two separate, yet similar lawsuits in which the plaintiff claims he and other similarly situated flow hands or “flow backs” were misclassified as independent contractors, as opposed to employees with overtime entitlement, in violation of the Fair Labor Standards Act (“FLSA”) and in violation of various state laws. Both cases are brought by the same individual plaintiff and are against EFS and RPS, respectively. The same law firm represents the plaintiffs in both cases. The Partnership has not been added as a named party in either of these cases, but it could potentially be added in the future. Specifically, these matters are: • Jeremy Saenz, on Behalf of Himself and All Others Similarly Situated v. Rod’s Production Services, LLC : This is a purported collective action and class action filed on June 2, 2015 in the United States District Court for the District of New Mexico. The plaintiff claims that RPS misclassified him as an independent contractor under the FLSA and New Mexico state law. The plaintiff also filed a motion to amend to add state law claims under Pennsylvania and Ohio wage laws. The plaintiff seeks unpaid overtime for the time he worked as a misclassified independent contractor. The court conditionally certified the collective action under the FLSA and the opt-in period closed on July 15, 2015. The parties dispute how many proper opt-ins have been filed, but the class will range between 64 and 80 opt-in plaintiffs, including the named plaintiff. The parties are beginning discovery. The parties have a scheduling order from the court. Discovery cutoff is May 16, 2016 and trial is scheduled for February 2017. • Jeremy Saenz, on Behalf of Himself and All Others Similarly Situated v. Erick Flowback Services, LLC : This is a purported collective action and class action filed on June 10, 2015 in the United States District Court for the Western District of Oklahoma. The plaintiff claims that EFS misclassified him as an independent contractor under the FLSA, and Ohio and Pennsylvania state laws. The plaintiff seeks unpaid overtime for the time he worked as a misclassified independent contractor. The court conditionally certified the collective action and the opt-in period closed on August 11, 2015. The parties dispute the number of proper opt-in plaintiffs, but the class will be between 76 and 100 plaintiffs, including the named plaintiff. The parties had a scheduling conference on September 16, 2015. Currently, the parties are briefing the scope of discovery. The court has not yet entered a scheduling order. The Partnership recorded a reserve for the above Fair Labor Standards Act Litigation of $1.5 million , reflective of the facts and circumstances as currently known. The actual loss may differ from the established reserve. On October 28, 2015, the parties entered into an Agreement to Stay Proceedings that stays the current litigation and provides the parties with a 60-day mediation period, unless extended by the parties. On October 21, 2015, a class action complaint was filed in the Supreme Court of the State of New York against the Partnership, certain current and former directors of the Partnership’s general partner and certain investment banking firms in the case styled Enrico Vaccaro vs. New Source Energy Partners L.P., Kristian B. Kos, Terry L. Toole, Dikran Tourian, Richard D. Finley, V. Bruce Thompson, John A. Raber, Stifel, Nicholas & Company, Inc., Robert W. Baird & Co. Inc., Janney Montgomery Scott LLC, Oppenheimer & Co. Inc., and Wunderlich Securities, Inc. The complaint asserts a state securities class action on behalf of a putative class consisting of persons or entities who purchased or otherwise acquired the Partnership's Series A Preferred Units pursuant to the related prospectus and prospectus supplement, seeking to recover damages allegedly caused by the defendants’ violations of the federal securities laws under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act"). The complaint alleges that the defendants made materially false and misleading statements regarding the Partnership’s business and operations because such statements failed to properly reflect the impact of certain actions by the Partnership’s contract operator on the Partnership’s financial condition. The Partnership and the other defendants associated with the Partnership intend to defend this lawsuit vigorously. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiff’s claims and the defendants’ defenses are fully disclosed and analyzed. The Partnership has not established any reserves relating to this action. The Partnership may be involved in other various routine legal proceedings incidental to its business from time to time. While the results of litigation and claims cannot be predicted with certainty, the Partnership believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Partnership believes the probable final outcome of such matters will not have a material adverse effect on the Partnership's consolidated financial position, results of operations, cash flow or liquidity. |