COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

Legal Proceedings

From time to time, the Company is involved in various commercial and regulatory claims, litigation, and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. In accordance with authoritative accounting guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. No claims have been made, nor is the Company aware of any material uninsured liability which the Company may have, as it relates to any environmental cleanup, restoration, or the violation of any rules or regulations. As of the filing date of this report, there were no probable, material pending, or overtly threatened legal actions against the Company of which it was aware.

Upon closing of the HighPoint Merger, the Company assumed all obligations, whether asserted or unasserted, of HighPoint Resources Corporation. As of the filing date of this report, there were no probable, material pending, or overtly threatened legal actions against the Company that were associated with HighPoint of which it was aware, other than the following:

On June 15, 2020, Sterling Energy Investments LLC (“Sterling”) filed a complaint against HighPoint OpCo, a subsidiary of HighPoint Resources Corporation, for breach of contract related to a Gas Purchase Agreement, effective November 1, 2017. Sterling alleges that HighPoint OpCo breached the contract by failing to use reasonable commercial efforts to deliver to Sterling at Sterling’s receipt points all quantities of gas not otherwise dedicated to other gas purchase agreements. HighPoint Resources OpCo filed a counterclaim against Sterling for breach of Sterling’s obligations under the Gas Purchase Agreement. The case was adjudicated in July 2021, and a decision was issued on October 25, 2021, finding in favor of HighPoint and awarding approximately $2.4 million in damages with respect to HighPoint’s counterclaim.

Disclosure of certain environmental matters is required when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that the Company believes could exceed $0.3 million. HighPoint Resources Corporation received Notices of Alleged Violations (“NOAV”) from the Colorado Oil and Gas Conservation Commission (“COGCC”) alleging violations of various Colorado statutes and COGCC regulations governing oil and gas operations. The Company continues to engage in discussions regarding resolution of the alleged violations. There were approximately $0.9 million worth of NOAVs dismissed by the COGCC during the quarter ended September 30, 2021. As of September 30, 2021, the Company has recognized approximately $0.9 million associated with the NOAVs, as they are probable and reasonably estimable.

Commitments

Firm Transportation Agreements. As part of the HighPoint Merger, the Company became party to two firm transportation contracts. Both firm transportation contracts required the pipeline to provide a guaranteed outlet for production through July 2021. The Company did not utilize the firm capacity on the natural gas pipelines and incurred deficiency payments totaling $3.4 million and $7.7 million for the three and nine months ended September 30, 2021, respectively, which are included in unused commitments expense in the statements of operations.

Additionally, the Company is party to one firm pipeline transportation contract to provide a guaranteed outlet for production on an oil pipeline system. The contract requires the Company to pay minimum volume transportation charges on 8,500 gross barrels per day through April 2022 and 12,500 barrels per day thereafter through April 2025, regardless of the amount of pipeline capacity utilized by the Company. The aggregate financial commitment fee over the remaining term was $49.6 million as of September 30, 2021. The Company expects to utilize most, if not all, of the firm capacity on the oil pipeline system.

Minimum Volume Agreements. The Company is party to a purchase agreement to deliver fixed determinable quantities of crude oil to NGL Crude. The NGL Crude agreement includes defined volume commitments over a term ending in 2023. Under the terms of the NGL Crude agreement, the Company is required to make periodic deficiency payments for any shortfalls in delivering minimum gross volume commitments, which are set in six-month periods. The minimum gross volume commitment will increase approximately 3% each year for the remainder of the contract, to a maximum of approximately

16,000 gross barrels per day. The aggregate financial commitment fee over the remaining term was $41.7 million as of September 30, 2021. Upon notifying NGL Crude at least twelve months prior to the expiration date of the NGL Crude agreement, the Company may elect to extend the term of the NGL Crude agreement for up to three additional years. Since the commencement of the NGL Crude agreement and through the remainder of the term of the agreement, the Company has not and does not expect to incur any deficiency payments.

The Company is also party to minimum volume commitments to purchase fresh water from water suppliers as well as one minimum volume commitment for the delivery of natural gas volumes to a midstream entity for gathering and processing. These commitments require the Company to pay a fee associated with the minimum volumes regardless of the amount delivered. The aggregate financial commitment fee over the remaining term for these contracts was $3.0 million as of September 30, 2021.

The minimum annual payments under the these agreements for the next five years as of September 30, 2021 are presented below (in thousands):


	Firm Transportation		Minimum Volume(1)
Remainder of 2021	$	2,502	$	6,209
2022	13,064		29,207
2023	14,600		9,314
2024	14,640		—
2025	4,800		—
2026 and thereafter	—		—
Total	$	49,606	$	44,730

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(1) The above calculation is based on the minimum volume commitment schedule (as defined in the relevant agreements) and applicable differential fees.

There have been no other material changes from the commitments disclosed in the notes to the Company's consolidated financial statements included in our 2020 Form 10-K. Refer to Note 4 - Leases, for lease commitments.