UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March~~June 3130, 2019

o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-38668

~~Legacy~~LEGACY ~~Reserves~~RESERVES ~~Inc~~INC.

(Exact name of registrant as specified in its charter)


Delaware						82-4919553
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

303 W. Wall, Suite 1800 Midland, Texas						79701
(Address of principal executive offices)						(Zip code)

(432) 689-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x☒ Yes o☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x☒ Yes o☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer o

Smaller reporting company o

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company o

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o☐ Yes x☒ No

Securities Registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common stock, par value $.01			LGCY			NASDAQ Stock Market LLC


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

114,810,671 shares of common stock, par value $0.01, were outstanding as of ~~May~~August 87, 2019.

TABLE OF CONTENTS

		Page
	Glossary of Terms	3
	Part I - Financial Information
Item 1.	Financial Statements.
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (Unaudited).	6
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited).	6
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (Unaudited).	8
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (Unaudited).	8
	Condensed Consolidated Statement of Stockholders' Deficit / Partners' Deficit for the three months ended March 31, 2019 and 2018 (Unaudited).	9
	Condensed Consolidated Statement of Stockholders' Deficit / Partners' Deficit for the three and six months ended June 30, 2019 and 2018 (Unaudited).	9
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited).	10
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited).	10
	Notes to Condensed Consolidated Financial Statements (Unaudited).	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	5859
Item 4.	Controls and Procedures.	5960
	Part II - Other Information
Item 1.	Legal Proceedings.	60
Item 1A.	Risk Factors.	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	6063
Item 6.	Exhibits.	6164
	Signatures	6165

Page 2

GLOSSARY OF TERMS

Bbl. One stock tank barrel or 42 U.S. gallons liquid volume.

Bcf. Billion cubic feet.

Boe. One barrel of oil equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

Boe/d. Barrels of oil equivalent per day.

Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production.

Development project. A drilling or other project which may target proven reserves, but which generally has a lower risk than that associated with exploration projects.

Development well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.

Hydrocarbons. Oil, NGL and natural gas are all collectively considered hydrocarbons.

Liquids. Oil and NGLs.

MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.

MBoe. One thousand barrels of crude oil equivalent, using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

Mcf. One thousand cubic feet.

MGal. One thousand gallons of natural gas liquids or other liquid hydrocarbons.

MMBbls. One million barrels of crude oil or other liquid hydrocarbons.

MMBoe. One million barrels of crude oil equivalent, using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

MMBtu. One million British thermal units.

MMcf. One million cubic feet.

Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.

NGL or natural gas liquids. The combination of ethane, propane, butane and natural gasolines that when removed from natural gas become liquid under various levels of higher pressure and lower temperature.

Page 3

NYMEX. New York Mercantile Exchange.

Oil. Crude oil and condensate.

PV-10. PV-10 is a ~~compilation~~computation of the standardized measure on a pre-tax basis.

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Proved developed reserves or PDPs. Reserves that can be expected to be recovered through: (i) existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Proved developed non-producing reserves or PDNPs. Proved oil and natural gas reserves that are developed behind pipe, shut-in or that can be recovered through improved recovery only after the necessary equipment has been installed, or when the costs to do so are relatively minor. Shut-in reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not started producing, (2) wells that were shut-in for market conditions or pipeline connections, or (3) wells not capable of production for mechanical reasons. Behind-pipe reserves are expected to be recovered from zones in existing wells that will require additional completion work or future recompletion prior to the start of production.

Proved reserves. Proved oil and gas reserves are those quantities of oil and gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.

Proved undeveloped drilling location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.

Proved undeveloped reserves or PUDs. Proved undeveloped oil and gas reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

(i) Proved reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

(ii) Proved undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.

(iii) Under no circumstances shall estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology establishing reasonable certainty.

Recompletion. The completion for production of an existing wellbore in another formation from that which the well has been previously completed.

Reserve acquisition cost. The total consideration paid for an oil and natural gas property or set of properties, which includes the cash purchase price and any value ascribed to units issued to a seller adjusted for any post-closing items.

R/P ratio (reserve life). The reserves as of the end of a period divided by the production volumes for the same period.

Reserve replacement. The replacement of oil and natural gas produced with reserve additions from acquisitions, reserve additions and reserve revisions.

Page 4

Reserve replacement cost. An amount per Boe equal to the sum of costs incurred relating to oil and natural gas property acquisition, exploitation, development and exploration activities (as reflected in our year-end financial statements for the relevant year) divided by the sum of all additions and revisions to estimated proved reserves, including reserve purchases. The calculation of reserve additions for each year is based upon the reserve report of our independent engineers. Management uses reserve replacement cost to compare our company to others in terms of our historical ability to increase our reserve base in an economic manner. However, past performance does not necessarily reflect future reserve replacement cost performance. For example, increases in oil and natural gas prices in recent years have increased the economic life of reserves, adding additional reserves with no required capital expenditures. On the other hand, increases in oil and natural gas prices have increased the cost of reserve purchases and reserves added through development projects. The reserve replacement cost may not be indicative of the economic value added of the reserves due to differing lease operating expenses per barrel and differing timing of production.

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Standardized measure. The present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with assumptions required by the Financial Accounting Standards Board and the Securities and Exchange Commission (using the average annual prices based on the unweighted arithmetic average of the first-day-of-the-month price for each month) without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization and discounted using an annual discount rate of 10%. Standardized measure does not give effect to derivative transactions. Standardized measure presented for periods prior to September 20, 2018 does not take into account provision for federal or state income tax because we were a limited partnership that allocated our taxable income to our unitholders and therefore will not be directly comparable to standardized measure presented for future periods.

Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover. Operations on a producing well to restore or increase production.

Page 5

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

LEGACY RESERVES INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS
	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
	(In thousands)
Current assets:
Cash	$	1,~~491~~110	$	1,098
Accounts receivable, net:
Oil and natural gas	6350,~~542~~750		56,615
Joint interest owners	1613,~~142~~375		15,370
Other	~~283~~301		—
Fair value of derivatives (Notes 5 and 6)	9,708		66,662
Fair value of derivatives (Notes 6 and 7)	—		66,662
Prepaid expenses and other current assets (Note 1)	1315,~~335~~640		11,347
Total current assets	~~104~~81,~~501~~176		151,092
Oil and natural gas properties at cost:
Proved properties using the successful efforts method of accounting	3,~~507~~517,~~534~~153		3,471,456
Unproved properties	19,~~680~~824		19,863
Accumulated depletion, depreciation, amortization and impairment	(2,~~221~~261,~~624~~453)		(2,177,006)
Total oil and natural gas properties, net	1,~~305~~275,~~590~~524		1,314,313
Other property and equipment, net of accumulated depreciation and amortization of $2,432 and $2,464, respectively (Note 11)	6,743		2,456
Other property and equipment, net of accumulated depreciation and amortization of $12,611 and $11,971, respectively (Note 12)	6,918		2,456
Fair value of derivatives (Notes 5 and 6)	—		3,135
Fair value of derivatives (Notes 6 and 7)	—		3,135
Other assets	32,~~304~~081		3,935
Total assets	$	1,~~420~~365,~~138~~699	$	1,474,931

See accompanying notes to condensed consolidated financial statements.

Page 6

LEGACY RESERVES INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' DEFICIT
	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
	(In thousands)
Current liabilities:
Current debt, net (Notes 1 and 2)	$	883,092	$	856,646
Current debt, net (Notes 2 and 3)	$	569,677	$	856,646
Accounts payable	282,~~658~~695		11,227
Accrued oil and natural gas liabilities (Note 1)	7658,~~284~~790		98,886
Fair value of derivatives (Notes 5 and 6)	2,207		—
Fair value of derivatives (Notes 6 and 7)	—		—
Asset retirement obligation (Note 8)	3,938		3,938
Other (Note 11)	18,455		13,953
Other (Note 12)	8,538		13,953
Total current liabilities	1643,~~012,634~~638		984,650
Long-term debt (Notes 1 and 2)	416,328		432,923
Long-term liabilities:
Asset retirement obligation (Note 7)	250,867		248,796
Long-term debt (Notes 2 and 3)	—		432,923
Fair value of derivatives (Notes 5 and 6)	—		550
Asset retirement obligation (Note 8)	253,197		248,796
Other long-term liabilities (Note 11)	3,190		643
Fair value of derivatives (Notes 6 and 7)	—		550
Total liabilities	1,683,019		1,667,562
Other long-term liabilities (Note 12)	3,193		643
Commitments and contingencies (Note 4 and 11)
Total long-term liabilities	256,390		682,912
Liabilities subject to compromise (Notes 1 and 2)	787,204		—
Total liabilities	1,687,232		1,667,562
Commitments and contingencies (Notes 5 and 12)
Stockholders' equity (deficit):
Common stock, $0.01 par value; 945,000,000 shares authorized, 114,810,671 and 109,442,278 shares outstanding at March 31, 2019 and December 31, 2018, respectively	1,148		1,094
Common stock, $0.01 par value; 945,000,000 shares authorized, 114,810,671 and 109,442,278 shares outstanding at June 30, 2019 and December 31, 2018, respectively	1,148		1,094
Additional paid-in capital	3236,~~571~~689		24,752
Accumulated deficit	(~~296~~359,~~600~~370)		(218,477)
Total stockholders' deficit	(~~262~~321,~~881~~533)		(192,631)
Total liabilities and stockholders' deficit	$	1,~~420~~365,~~138~~699	$	1,474,931

See accompanying notes to condensed consolidated financial statements.

Page 7

LEGACY RESERVES INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	March 31,
	June 30,						June 30,
	2019		2018		2019		2018
	(In thousands, except per share data)
Revenues:
Oil sales	$	7788,~~761~~375	$	9399,~~411~~799	$	166,136	$	193,210
Natural gas liquids (NGL) sales	43,~~515~~994		75,~~396~~735		8,509		13,131
Natural gas sales	3625,~~221~~410		3633,~~672~~747		61,631		70,419
Total revenues	~~118~~117,~~497~~779		~~137~~139,~~479~~281		236,276		276,760
Expenses:
Oil and natural gas production	4746,~~477~~079		4749,~~967~~431		93,556		97,398
Production and other taxes	6,~~149~~381		7,~~326~~658		12,530		14,984
General and administrative	1637,~~530~~773		2422,~~090~~496		54,303		46,586
Depletion, depreciation, amortization and accretion	4241,~~549~~868		3638,~~547~~139		84,417		74,686
Impairment of long-lived assets	71,~~398~~434		—35,381		8,832		35,381
(Gains) losses on disposal of assets	1,034		(20,395)
Gains on disposal of assets	(2,045)		(1,145)		(1,011)		(21,540)
Total expenses	~~121~~131,~~137~~490		95151,~~535~~960		252,627		247,495
Operating (loss) income	(213,~~640~~711)		41(12,~~944~~679)		(16,351)		29,265
Other income (expense):
Interest income	614		123		20		15
Interest expense (Notes 2, 5 and 6)	(37,119)		(27,368)
Interest expense (Notes 2, 3, 5 and 6)	(52,933)		(28,589)		(90,052)		(55,957)
Gain on extinguishment of debt (Note 2)	13,105		51,693
Gain on extinguishment of debt (Note 3)	—		—		13,105		51,693
Equity in income of equity method investees	—4		173		4		20
Net (losses) on commodity derivatives (Notes 5 and 6)	(51,460)		(1,704)
Net gains (losses) on commodity derivatives (Notes 6 and 7)	5,713		(9,315)		(45,747)		(11,019)
Other	(270)		275
Reorganization items, net (Note 2)	(1,960)		—		(1,960)		—
Income (Loss) before income taxes	(78,378)		64,869
Other	103		(2)		(167)		273
Income tax expense	—		(487)
Income (Loss) before income taxes	$	(62,770)	$	(50,579)	$	(141,148)	$	14,290
Net (Loss) Income	$	(78,378)	$	64,382
Income tax expense	—		(130)		—		(617)
(Loss) Income per share / unit - basic and diluted (Note 8)	$	(0.70)	$	0.62
Net (Loss) Income	$	(62,770)	$	(50,709)	$	(141,148)	$	13,673
(Loss) Income per share / unit - basic and diluted (Note 9)	$	(0.55)	$	(0.49)	$	(1.25)	$	0.13
Weighted average number of shares / units used in computing net loss per share / unit
Basic	~~111~~114,~~225~~811		~~103~~104,~~994~~369		113,028		104,183
Diluted	~~111~~114,~~225~~811		104,~~301~~369		113,028		105,077

See accompanying notes to condensed consolidated financial statements.

Page 8

LEGACY RESERVES INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT / PARTNERS' DEFICIT

FOR THE ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2019 and 2018

(UNAUDITED)

March 31, 2019
June 30, 2019
		Stockholders' Deficit
		Shares	Par Value		APIC		Acc. Deficit		Total Deficit
	(In thousands)
Balance, December 31, 2018		109,442	$	1,094	$	24,752	$	(218,477)	$	(192,631)
Stock-based compensation		—	—		4,156		—		4,156
Debt exchange		5,368	54		3,663		—		3,717
ASC 842 Adoption		—	—		—		255		255
Net loss		—	—		—		(78,378)		(78,378)
Balance, March 31, 2019		114,810	$	1,148	$	32,571	$	(296,600)	$	(262,881)
Stock-based compensation		—	—		4,118		—		4,118
Net loss		—	—		—		(62,770)		(62,770)
Balance, June 30, 2019		114,810	$	1,148	$	36,689	$	(359,370)	$	(321,533)

March 31, 2018
June 30, 2018
	Partners' Deficit
	Series A Preferred Equity				Series B Preferred Equity					Incentive Distribution Equity					Partner's Deficit
	Units	Amount		Units	Amount		Units	Amount		LP Units	Limited Partner Amount		General Partner Amount		Total Partner's Deficit
	(In thousands)
Balance, December 31, 2017	2,300	$	55,192	7,200	$	174,261	100	$	30,814	72,595	$	(531,794)	$	(160)	$	(271,687)
Unit-based compensation	—	—		—	—		—	—		—	263		—		263
Vesting of restricted and phantom units	—	—		—	—		—	—		264	—		—		—
Units issued in exchange for Standstill Agreement	—	—		—	—		—	—		3,800	5,928		—		5,928
Net Income	—	—		—	—		—	—		—	64,367		15		64,382
Balance, March 31, 2018	2,300	$	55,192	7,200	$	174,261	100	$	30,814	76,659	$	(461,236)	$	(145)	$	(201,114)
Units issued to Legacy Board of Directors for Services	—	—		—	—		—	—		60	522		—		522
Unit-based compensation	—	—		—	—		—	—		—	316		—		316
Vesting of restricted and phantom units	—	—		—	—		—	—		75	—		—		—
Units issued in exchange for Standstill Agreement	—	—		—	—		—	—		—	—		—		—
Net Income	—	—		—	—		—	—		—	(50,697)		(12)		(50,709)
Balance, June 30, 2018	2,300	$	55,192	7,200	$	174,261	100	$	30,814	76,794	$	(511,095)	$	(157)	$	(250,985)

See accompanying notes to condensed consolidated financial statements.

Page 9

LEGACY RESERVES INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2019		2018
	(In thousands)
Cash flows from operating activities:
Net loss	$	(78141,~~378~~148)	$	6413,~~382~~673
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depletion, depreciation, amortization and accretion	4284,~~549~~417		3674,~~547~~686
Amortization of debt discount and issuance costs	828,~~526~~775		710,~~509~~752
Gain on extinguishment of debt	(13,105)		(51,693)
Impairment of long-lived assets	78,~~398~~832		—35,381
(Gain) loss on derivatives	52,168		837
Loss on derivatives	47,790		10,052
Equity in (income) loss of equity method investees	—		(17)
Distribution from equity method investee	652		—
Stock/unit-based compensation	48,~~156~~274		1224,~~324~~994
(Gains) losses on disposal of assets	1,034		(20,395)
Gains on disposal of assets	(1,011)		(21,540)
Changes in assets and liabilities:
Increase in accounts receivable, oil and natural gas	(6,927)		(3,499)
Decrease in accounts receivable, oil and natural gas	5,865		5,079
(Increase) decrease in accounts receivable, joint interest owners	(772)		6,346
Decrease in accounts receivable, joint interest owners	2,005		10,905
Increase in accounts receivable, other	(~~283~~311)		—(4)
(Increase) decrease in other assets	(712)		843
Increase in other assets	(4,228)		(880)
Increase (decrease) in accounts payable	17,431		(9,730)
Decrease in accounts payable	(8,254)		(6,467)
(Decrease) increase in accrued oil and natural gas liabilities	(48,~~230~~053)		312,~~787~~035
Increase in other liabilities	6,572		6,776
Increase (Decrease) in other liabilities	26,866		(1,989)
Total adjustments	~~113~~178,~~805~~514		~~(10~~101,~~365)~~311
Net cash provided by operating activities	3537,~~427~~366		54114,~~017~~984
Cash flows from investing activities:
Investment in oil and natural gas properties	(5781,~~761~~166)		(73118,~~870~~324)
Proceeds associated with sale of assets	~~160~~2,361		2729,~~100~~235
Investment in other equipment	(4,~~424~~750)		(57130)
Net cash settlements (paid) received on commodity derivatives	921,~~579~~458		(25,~~795~~209)
Net cash used in investing activities	(5262,~~446~~097)		(4994,~~622~~428)
Cash flows from financing activities:
Proceeds from long-term debt	71108,~~000~~677		~~265~~382,626
Payments of long-term debt	(5080,000)		(~~248~~375,384)
Payments of debt issuance costs	(23,~~855~~073)		(2223,~~875~~096)
Net cash provided by (used in) financing activities	1825,~~145~~604		(515,~~633~~854)
Net increase in cash and cash equivalents	~~1,126~~873		(14,~~238)~~702
Cash, beginning of period (1)	4,361		4,~~438~~450
Cash, end of period (1)	$	5,~~487~~234	$	39,~~200~~152
Non-cash investing and financing activities:
Asset retirement obligations associated with properties sold	$	(243)	$	(15,708)
Asset retirement obligation costs and liabilities	$	30	$	39
Debt exchange	$	3,716	$	—
Asset retirement obligations associated with properties sold	$	(243)	$	(16,107)
Change in accrued capital expenditures	$	(18,372)	$	(12,503)
Asset retirement obligations associate with property acquisitions	$	—	$	156
Units issued in exchange for Standstill Agreement	$	—	$	5,928
Change in accrued capital expenditures	$	(32,043)	$	25,733
Debt exchange	$	3,717	$	—

See accompanying notes to condensed consolidated financial statements.

(1) Inclusive of $4.01 million and $3.~~3 million~~2 million of restricted cash as of ~~March~~June 3130, 2019 and 2018. See "—Footnote 1—Summary of Significant Accounting Policies" for further discussion.

Page 10

LEGACY RESERVES INC. (DEBTOR-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Summary of Significant Accounting Policies

(a) Organization, Basis of Presentation and Description of Business

Unless the context requires otherwise or unless otherwise noted, all references to “Legacy Reserves,” “Legacy Inc.,” “Legacy,” the “Company,” “we,” “us,” “our” or like terms are to Legacy Reserves Inc. and its subsidiaries for the periods after September 19, 2018, the date the Corporate Reorganization was consummated (as defined below). For the periods prior to September 20, 2018, unless the context requires otherwise or unless otherwise noted, all references to “Legacy Reserves,” “Legacy LP,” “Legacy,” the “Company,” “we,” “us,” “our” or like terms are to Legacy Reserves LP and its subsidiaries.

Legacy is an independent energy company engaged in the development, production and acquisition of oil and natural gas properties in the United States. Its current operations are focused on the horizontal development of unconventional plays in the Permian Basin and the cost-efficient management of shallow-decline oil and natural gas wells in the Permian Basin, East Texas, Rocky Mountain and Mid-Continent regions.

The accompanying financial statements have been prepared on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recognized when incurred. These condensed consolidated financial statements as of ~~March~~June 3130, 2019 and for the three and six months ended ~~March~~June 3130, 2019 and 2018 are unaudited. In the opinion of management, such financial statements include the adjustments and accruals, all of which are of a normal recurring nature, that are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Legacy's Annual Report on Form 10-K for the year ended December 31, 2018.

(b) ~~Going~~Voluntary ~~Concern~~Reorganization Under Chapter 11

~~Legacy~~As ~~has~~discussed ~~significant~~further ~~obligations and commitments coming due~~ in ~~the near term. The Credit Agreement (as defined in~~ Note 2), ~~matures~~ on ~~May~~June 3118, 2019 ~~and as of March 31, 2019, Legacy had borrowings of $562 million and availability under~~ (the ~~Credit~~“Petition ~~Agreement of $13.0 million. In addition~~Date”), ~~Legacy received a temporary waiver under~~ the ~~Term~~Company ~~Loan~~and ~~Credit~~certain ~~Agreement (as defined in Note 2)~~ of its ~~requirement~~subsidiaries to(collectively ~~deliver~~with ~~fiscal~~the ~~year 2018 audited financial statements without a "going concern" or like qualification or exception through May 31~~Company, ~~2019. Due to~~ the ~~short-term~~“Debtors”), ~~nature~~filed ofvoluntary ~~this~~petitions ~~waiver and~~ (the ~~anticipation~~“Bankruptcy ~~that~~Petitions”) wefor ~~will~~relief ~~be in~~under ~~violation~~Chapter of11 ~~this covenant upon expiry~~ of the ~~waiver,~~U.S. ~~Legacy~~Bankruptcy ~~has~~Code ~~determined that~~ (the ~~total~~“Bankruptcy ~~borrowings~~Code”) ~~outstanding~~in ~~under~~ the ~~Term~~ ~~Loan Credit Agreement of $339~~U.8S. ~~million are~~Bankruptcy ~~due~~Court infor the ~~near~~Southern ~~term~~District ~~and~~of ~~have~~Texas ~~thus~~(the ~~recorded~~“Bankruptcy ~~these as a current liability~~Court”). ~~Without additional~~During ~~sources of capital or a significant restructuring of its balance sheet,~~ the ~~maturity~~pendency of the ~~Credit~~Chapter ~~Agreement~~11 ~~raises~~proceedings, ~~substantial doubt~~the ~~about~~Debtors ~~Legacy's~~will ~~ability~~operate totheir ~~continue~~businesses as a“debtors-in-possession” ~~going~~under ~~concern,~~the ~~which~~jurisdiction ~~means~~of ~~that Legacy may be unable to continue operations for~~ the ~~foreseeable~~Bankruptcy ~~future~~Court ~~or realize assets~~ and ~~discharge~~in ~~liabilities~~accordance inwith the ~~ordinary~~applicable ~~course~~provisions of ~~operation.The consolidated financial statements do not include any adjustments that might result from~~ the ~~outcome~~Bankruptcy ~~of the going concern uncertainty~~Code.

InThe ~~order~~condensed toconsolidated ~~improve~~financial ~~its~~statements ~~liquidity~~have ~~position~~been prepared as if the Company is a going concern and ~~address~~reflect ~~its~~the ~~near-term~~application ~~debt~~of ~~maturities,~~Accounting ~~Legacy~~Standards isCodification ~~currently~~852 ~~evaluating~~“Reorganizations” (“ASC 852”). ASC 852 requires that the financial statements, ~~transactional~~for ~~and~~periods ~~other~~subsequent ~~strategic~~to ~~alternatives. There~~the ~~can~~Chapter be11 nofiling, ~~assurance~~distinguish transactions and events that ~~sufficient~~are ~~liquidity~~directly ~~can~~associated bewith ~~raised~~the orreorganization ~~that~~from ~~debt~~the ~~maturities~~ongoing ~~can~~operations beof ~~extended~~the ~~from~~business. ~~any~~Accordingly, ~~one~~certain orexpenses, ~~more~~gains ofand ~~these~~losses ~~transactions~~that are realized or ~~that~~incurred ~~these~~in ~~transactions can~~the bebankruptcy ~~consummated~~proceedings ~~within~~are recorded in “reorganization items, net” on the ~~period~~Company’s ~~needed~~condensed toconsolidated ~~meet~~statements ~~our~~of ~~obligations~~operations. ~~Should~~In ~~Legacy~~addition, beprepetition ~~unable~~unsecured toand ~~extend~~under-secured ~~the~~obligations ~~debt~~that ~~maturities~~may orbe ~~consummate~~impacted aby ~~transaction,~~the ~~Legacy~~bankruptcy ~~will~~reorganization ~~not~~process have ~~sufficient~~been ~~liquidity~~classified as “liabilities subject to ~~repay~~compromise” ~~its~~on ~~Credit~~the ~~Agreement~~Company’s condensed consolidated balance sheet at ~~maturity~~June ~~and~~30, ~~may~~2019. ~~need~~These toliabilities ~~seek~~are ~~relief~~reported ~~under~~at the ~~U.S.~~amounts expected to be allowed as claims by the Bankruptcy ~~code~~Court, although they may be settled for less.

The accompanying condensed consolidated financial statements do not purport to reflect or provide for the consequences of the Chapter 11 proceedings. In particular, the condensed consolidated financial statements do not purport to show: (ci) ~~Recent~~the ~~Developments~~realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) the amount of prepetition liabilities that may be allowed for claims or contingencies, or the status and priority thereof; (iii) the effect on stockholders' deficit/partners’ deficit accounts of any changes that may be made to the Company’s capitalization; or (iv) the effect on operations of any changes that may be made to the Company’s business. While operating as debtor-in-possession under Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities in amounts other than those reflected on its condensed consolidated financial statements, subject to the approval of the Bankruptcy Court or otherwise

On March 21, 2019, we entered into the Twelfth Amendment (the “Twelfth Amendment”) to our Credit Agreement. The

Twelfth Amendment provides for, among other things, (i) an extension of the maturity of the Credit Agreement to May 31, 2019, (ii) an increase in the applicable interest rate by 2.25%, (iii) the payment of a fee equal to 0.35% of the amount of the

Page 11

as ~~current~~permitted ~~borrowing~~in ~~base under~~ the ~~Credit~~ordinary ~~Agreement,~~course ~~payable on the effective date~~ of ~~the~~business. ~~Twelfth Amendment~~Further, ~~(iv)~~a ~~the~~plan ~~mandatory termination~~ of ~~certain~~reorganization ~~derivative~~could ~~contracts~~materially ~~three~~change ~~days prior to~~ the ~~maturity~~amounts of the Credit Agreement, (vi) the reduction in the borrowing base from $575 million to $570 million, effective May 22, 2019, (vii) the reduction in the maximum consolidated cash balance we can maintain to $15 million, effective April 1, 2019 and ~~(viii)~~classifications ~~the payment of a fee equal to 0.15% of the amount of the current borrowing base under the Credit Agreement, payable~~ on the ~~earliest~~Company’s tohistorical ~~occur~~condensed ofconsolidated (x) May 31, 2019 or (y) an acceleration of the outstanding indebtedness under the Credit Agreement. Additionally, the Twelfth Amendment waives certain deviations from the requirements of the Credit Agreement, including the delivery of fiscal year 2018 audited financial statements ~~with a “going concern” or like qualification or exception and non-compliance with the current ratio covenant for the fourth quarter of 2018~~.

~~On March 21, 2019, we entered into the Seventh Amendment~~ (~~the “Seventh Amendment”~~c) toAccrued ~~our~~Oil Term Loan Credit Agreement. The Seventh Amendment waives, through May 31, 2019, the requirement of the Term Loan Credit Agreement that the delivery of fiscal year 2018 audited financial statements not include a “going concern” or like qualification or exception. The Seventh Amendment also provides for, among other things, (i) an increase in the applicable interest rate by2.25%, (ii) a fee equal to 0.35% of the aggregate amount of term loans currently outstanding under the Term Loan Credit Agreement, to be paid in kind by increasing the aggregate amount of term loans outstanding as of the effective date of the Seventh Amendment and ~~(iii)~~ aNatural ~~fee~~Gas equal to 0.15% of the aggregate amount of term loans currently outstanding under the Term Loan Credit Agreement, to be paid in kind by increasing the aggregate amount of term loans outstanding on the earliest to occur of (x) May 31, 2019 or (y) an acceleration of the outstanding indebtedness under the Term Loan Credit Agreement.Liabilities

OnBelow ~~September~~are ~~20, 2018, we completed~~ the ~~previously~~components ~~announced transactions contemplated by the Amended and Restated Agreement and Plan~~ of ~~Merger~~accrued ~~(the~~oil ~~“Merger Agreement”), dated July 9, 2018, by~~ and ~~among~~natural ~~Legacy~~gas ~~Inc.,~~liabilities ~~Legacy~~as ~~LP, Legacy Reserves GP, LLC (the “General Partner”) and Legacy Reserves Merger Sub LLC, a wholly owned subsidiary~~ of ~~Legacy Inc. (“Merger Sub”)~~June 30, ~~and~~2019 ~~the GP Purchase Agreement, dated March 23, 2018, by~~ and ~~among Legacy Inc.~~December 31, the General Partner, Legacy LP, Lion GP Interests, LLC, Moriah Properties Limited, and Brothers Production Properties, Ltd., Brothers Production Company, Inc., Brothers Operating Company, Inc., J&W McGraw Properties, Ltd., DAB Resources, Ltd. and H2K Holdings, Ltd. (such transactions referred to herein collectively as the “Corporate Reorganization”). Upon the consummation of the Corporate Reorganization2018:

•Legacy Inc., which prior to the Corporate Reorganization, was a wholly owned subsidiary of the General Partner, acquired all of the issued and outstanding limited liability company interests in the General Partner and became the sole member of the General Partner with the General Partner becoming a subsidiary of Legacy Inc.; and


	June 30, 2019		December 31, 2018
	(In thousands)
Accrued lease operating expense	$	19,726	$	22,750
Accrued capital expenditutres	9,184		41,227
Revenue payable to joint interest owners	18,050		24,690
Accrued ad valorem tax	7,363		5,255
Other	4,467		4,964
	$	58,790	$	98,886

~~•Legacy LP merged with Merger Sub, with Legacy LP continuing as the surviving entity and as a subsidiary of Legacy Inc.~~ (~~the “Merger”~~d), Restricted the limited partner interests of Legacy LP, other than the incentive distribution units in Legacy LP, were exchanged for shares of Legacy Inc.’s common stock, par value $0.01 (“common stock”) and the general partner interest remained outstanding.Cash

Restricted cash on our Consolidated Balance Sheet as of June 30, 2019 and December 31, 2018 is $4.1 million and $3.3 million respectively, and is included in the "Prepaid expenses and other current assets" line. The ~~Corporate~~restricted ~~Reorganization~~cash ~~was~~amounts ~~accounted~~represent ~~for~~various ~~under~~deposits ~~ASC~~to ~~805~~secure asthe aperformance ~~combination~~of contracts, surety bonds and other obligations incurred in the ordinary course of ~~entities~~business. ~~under~~Legacy ~~common~~adopted ~~control~~Accounting Standards Update ("ASU") No. As2016-18, "Restricted Cash" as of January 1, 2018.

~~such,~~(e) Recent ~~the~~Accounting ~~assets and liabilities of the Partnership were recognized at their carrying values in Legacy Inc.~~Pronouncements

~~(d)~~None. ~~Accrued Oil and Natural Gas Liabilities~~

~~Below~~(f) ~~are~~Income ~~the components of accrued oil and natural gas liabilities as of March 31, 2019 and December 31, 2018:~~Taxes

	March 31, 2019		December 31, 2018
	(In thousands)
Revenue payable to joint interest owners	$	18,972	$	24,690
Accrued lease operating expense	23,050		22,750
Accrued Capital Expenditures	22,855		41,227
Accrued ad valorem tax	6,623		5,255
Other	4,784		4,964
	$	76,284	$	98,886

Legacy’s provision for income taxes for the three and six months ended June 30, 2019 and 2018 is based on the estimated annual effective tax rate plus discrete items. The effective income tax rates were 0.00% and 0.26% for the three months ended June 30, 2019 and 2018, respectively. The effective income tax rates were 0.00% and 4.30% for the six months ended June 30, 2019 and 2018, respectively.

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(e) Restricted Cash

Restricted cash on our Consolidated Balance Sheet as of March 31, 2019 and December 31, 2018 is $4.0 million and $3.3 million respectively, and is included in the "Prepaid expenses and other current assets" line. The restricted cash amounts represent various deposits to secure the performance of contracts, surety bonds and other obligations incurred in the ordinary course of business. Legacy adopted Accounting Standards Update ("ASU") No. 2016-18, "Restricted Cash" as of January 1, 2018.

(f) Recent Accounting Pronouncements

None

(g) Income Taxes

Legacy’s provision for income taxes for the three months ended March 31, 2019 and 2018 is based on the estimated annual effective tax rate plus discrete items. The effective income tax rates were —% and 0.1% for the three months ended March 31, 2019 and 2018, respectively.

Effective September 20, 2018, pursuant to the Merger Agreement, Legacy Inc. became subject to federal and state income taxes. Prior to consummation of the Corporate Reorganization, Legacy LP was treated as a partnership for federal and state income tax purposes, in which the taxable income or loss was passed through to its unitholders. With the exception of the state of Texas and certain subsidiaries, Legacy LP did not directly pay federal and state income taxes and recognition was not given to federal and state income taxes for its operations.

On December 22, 2017, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The provisions of the Tax Act that impact Legacy include, but are not limited to, (1) reducing the U.S. federal corporate income tax rate from 35% to 21%, (2) full expensing of certain qualified property acquired after September 27, 2017, (3) limitations on the maximum deduction for net operating loss (NOL) as well as indefinite life carryforwards for tax years beginning after December 31, 2017 and (4) limitations on the maximum deduction for net business interest expense in tax years beginning after December 31, 2017. Legacy has previously recorded all amounts for the income effects of the Tax Act as of December 31, 2017.

All of Legacy's income is sourced within the United States.

(hg) Leases

The new standard was effective for us in the first quarter of 2019, and we adopted the new standard using a modified retrospective approach, with the date of initial application on January 1, 2019. Consequently, upon transition, we recognized an ROU asset and a lease liability, with the cumulative-effect of adoption in retained earnings as of January 1, 2019. We further utilized the package of practical expedients at transition to not reassess the following:

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•Whether any expired or existing contracts were or contained leases;

•The lease classification for any expired or existing leases; and

•Initial direct costs for any existing leases.

In addition, we elected the practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under superseded guidance are or contain a lease under the new leases guidance.

We determine if an arrangement is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we classify that lease as an operating lease or a finance lease. We capitalize operating and finance leases on our consolidated balance sheets through a right-of-use (“ROU”) asset and a corresponding lease liability. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating leases are included in other property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

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Finance leases are included in other property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets. Finance lease ROU assets (that is, amounts capitalized in other property and equipment) and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The finance lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. We generally amortize that ROU asset on a straight-line basis, while interest on the lease liability is calculated using the effective interest method. Lease expense recognized under our finance leases is, therefore, comprised of amortization on the finance lease ROU asset and interest on the finance lease liability.

Nature of Leases

In support of our operations, we lease certain corporate office space, field offices, compressors, drilling rigs, other production equipment, fleet vehicles and storage space under cancelable and non-cancelable contracts. A more detailed description of our material lease types is included below.

Corporate and Field Offices

We enter into long-term contracts to lease corporate and field office space in support of company operations. These contracts are generally structured with an initial non-cancelable term of two to ten years. To the extent that our corporate and field office contracts include renewal options, we evaluate whether we are reasonably certain to exercise those options on a contract by contract basis based on expected future office space needs, market rental rates, drilling plans and other factors. We have further determined that our current corporate and field office leases represent operating leases.

Compressors

We rent compressors from third parties in order to facilitate the downstream movement of our production to market. Our compressor arrangements are typically structured with a non-cancelable primary term of one to twenty four months and often continue thereafter on a month-to-month basis subject to termination by either party with thirty days’ notice. We have concluded that our compressor rental agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease without incurring a significant penalty. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term.

To the extent that our compressor rental arrangements have a primary term of twelve months or less, we have elected to apply the practical expedient for short-term leases. For those short-term compressor contracts, we do not apply the lease recognition requirements, and we recognize lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail.

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Drilling Rigs

We enter into daywork contracts for drilling rigs with third party service contractors to support the development and exploitation of undeveloped reserves and acreage. Our drilling rig arrangements are typically structured with a term that is in effect until drilling operations are completed on a contractually specified well or well pad. Upon mutual agreement with the contractor, we typically have the option to extend the contract term for additional wells or well pads by providing thirty days’ notice prior to the end of the original contract term. We have concluded that our drilling rig arrangements represent short-term operating leases with a lease term that equals the period of time required to complete drilling operations on the contractually specified well or well pad (that is, generally one to a few months from commencement of drilling). We do not include the option to extend the drilling rig contract in the lease term due to the continuously evolving nature of our drilling schedules, which requires significant flexibility in the structure of the term of these arrangements, and the potential volatility in commodity prices in an annual period.

We have further elected to apply the practical expedient for short-term leases to our drilling rig leases. Accordingly, we do not apply the lease recognition requirements to our drilling rig contracts, and we recognize lease payments related to these arrangements in capital expenditures on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail.

Other Production Equipment

We rent other production equipment, primarily electric submersible pumps, from third party vendors to be used in our production operations. These arrangements are typically structured with a non-cancelable term of 1 to 3 months and often continue thereafter on a month-to-month basis subject to termination by either party with thirty days’ notice. We have concluded that we are not reasonably certain of executing the month-to-month renewal options beyond a twelve month period based on the historical term for which we have used other production equipment, and, therefore, our other equipment agreements represent operating leases with a lease term up to twelve months.

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historical term for which we have used other production equipment, and, therefore, our other equipment agreements represent operating leases with a lease term up to twelve months.

We have further elected to apply the practical expedient for short-term leases to our other production equipment contracts. Accordingly, we do not apply the lease recognition requirements to these contracts, and we recognize lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to “Practical Expedients & Accounting Policy Elections” below for additional detail.

Fleet Vehicles

We execute fleet vehicle leases with a third party vendor in support of our day-to-day drilling and production operations. Our vehicle leases are typically structured with a term of 18 to 48 months. We have concluded that the majority of our vehicle leases represent operating leases.

Significant Judgments

Discount Rate

Our leases typically do not provide an implicit rate, and thus, we are required to use our incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. Our incremental borrowing rate reflects the rate of interest that we would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to determine our incremental borrowing rate, we utilized our current credit rating as well as best available market data, which includes public bond information for publicly traded upstream energy companies with similar credit ratings, to estimate our unsecured borrowing rate and applied adjustments to that rate to account for the effect of collateral.

Legacy has determined the discount rate as of January 1, 2019 using end of day December 31, 2018 market data. This discount rate was used in the transition to ASC 842 as well as all new leases executed within 2019. Legacy intends to update the discount rate annually thereafter on January 1 to be used for all new leases within the year (for example, the discount rate will be updated as of January 1, 2020 to be applied to all new leases in 2020). In the event a material lease is executed within a fiscal year or there have been material changes in the market that would impact Legacy’s discount rate, Legacy will evaluate whether an intra-year update of the discount rate is required.

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Variable Lease Cost

Practical Expedients & Accounting Policy Elections

Certain of our lease agreements include lease and non-lease components. For all current asset classes with multiple component types, we have utilized the practical expedient that exempts us from separating lease components from non-lease components. Accordingly, we account for the lease and non-lease components in an arrangement as a single lease component.

In addition, for all of our asset classes, we have made an accounting policy election not to apply the lease recognition requirements to our short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that we are reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in profit or loss on a straight-line basis over the lease term. To the extent that there are variable lease payments, we recognize those payments in profit or loss in the period in which the obligation for those payments is incurred. Refer to “Nature of Leases” above for further information regarding those asset classes that include material short-term leases.

(2) Chapter 11 Proceedings, Ability to Continue as a Going Concern and Covenant Violations

Chapter 11 Proceedings

On the Petition Date, the Debtors filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors’ Chapter 11 cases are being administered jointly under the caption In re Legacy Reserves Inc. et al. (the “Chapter 11 cases” or “Chapter 11 proceedings”).

The Debtors are operating their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined or stayed the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising or that could have arisen prior to the filing of the Bankruptcy Petitions. The Bankruptcy Court has granted certain relief requested by the Debtors enabling the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay certain taxes and governmental fees and charges, to continue to operate our cash management system in the ordinary course, to secure debtor-in-possession financing, to remit funds we hold from time to time for the benefit of third parties (such as royalty owners), and to pay the prepetition claims of certain of our vendors that hold liens under applicable non-bankruptcy law. For goods and services provided following the Petition Date, the Company intends to pay vendors in full in the ordinary course of business. In connection with the Chapter 11 cases, Legacy LP entered into a senior secured superpriority debtor-in-possession credit agreement, dated as of June 21, 2019, among itself as debtor, debtor-in-possession and borrower, the other loan parties party thereto, as debtors, debtors-in-possession and guarantors, Wells Fargo Bank, National Association, as administrative agent and collateral agent, and the other lenders party thereto (the “DIP Credit Agreement”). See Note 3 for a discussion of the DIP Credit Agreement.

Restructuring Support Agreement

On June 10, 2019, the Debtors entered into a restructuring support and lock-up agreement (the “Restructuring Support Agreement”) with (i) the lenders (the “Supporting Term Lenders”) under the Term Loan Credit Agreement dated as of October 25, 2016 among Legacy LP, as borrower, the guarantors party thereto, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (as amended, the “Term Loan Credit Agreement”) and (ii) certain lenders (the “Supporting RBL Lenders” and, together with the Supporting Term Lenders, the “Supporting Lenders”) under the Third Amended and Restated Credit Agreement dated as of April 1, 2014 among Legacy LP, as borrower, the guarantors party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (as amended, the “Credit Agreement”).

Subsequent to entering into the Restructuring Support Agreement, on June 13, 2019, the Company entered into the First Amended and Restated Restructuring Support and Lock-Up Agreement (together with all exhibits and schedules thereto, including the term sheet attached as Exhibit A thereto, the “Amended Restructuring Support Agreement”) with (i) the Supporting Term Lenders, (ii) the Supporting RBL Lenders and (iii) certain (a) holders of 6.625% Senior Notes due 2021 (the “2021 Note Holders”) issued under the indenture dated as of May 28, 2013, by and among Legacy LP, Legacy Reserves Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association (as successor to Wells Fargo Bank, National Association), as indenture trustee (as supplemented, the “2021 Notes Indenture”), (b) holders of 8% Senior Notes due 2020 (the “2020 Note Holders”) issued under the indenture dated as of December 4, 2012, by and among Legacy LP,

Page 15

Legacy Reserves Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association (2as successor to Wells Fargo Bank, National Association) ~~Debt~~, as indenture trustee (as supplemented, the “2020 Notes Indenture”) and (c) holders of 8% Convertible Senior Notes due 2023 (together with the 2021 Note Holders and the 2020 Note Holders, the “Supporting Noteholders,” and the Supporting Lenders and the Supporting Noteholders, collectively, the “Supporting Creditors”) issued under the indenture dated as of September 20, 2018, by and among Legacy LP, Legacy Reserves Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association, as indenture trustee and conversion agent (as supplemented, the “2023 Notes Indenture”).

~~Debt~~The ~~consists~~Amended ofRestructuring Support Agreement contemplates, among other things, that the ~~following~~Company aswill: (i) file the Chapter 11 proceedings to effect a restructuring transaction through a pre-negotiated Chapter 11 plan of ~~March 31,~~reorganization ~~2019~~(the “Plan”) to be filed with the Bankruptcy Court; (ii) enter into the DIP Credit Agreement; (iii) consummate certain equity investments through a rights offering and ~~December~~committed equity backstops; and (iv) enter into a new senior-secured revolving asset-based lending credit facility in a maximum amount of $500 ~~31,~~million ~~2018:~~(the “Exit Facility”) funded by certain of the lenders under the Credit Agreement.

	March 31,		December 31,
	2019		2018
	(In thousands)
Current debt
Credit Facility due 2019	$	562,000	$	541,000
Second Lien Term Loans due 2020	339,812		338,626
Unamortized debt issuance costs	(15,612)		(17,332)
Unamortized discount on Second Lien Term Loans	(3,108)		(5,648)
Total current debt, net	$	883,092	856,646
Long-term debt
8% Senior Notes due 2020	208,885		208,885
6.625% Senior Notes due 2021	129,529		131,279
8% Convertible Senior Notes due 2023	107,527		128,103
	$	445,941	$	468,267
Unamortized discount on Senior Notes	(26,059)		(31,517)
Unamortized debt issuance costs	(3,554)		(3,827)
Total long-term debt, net	$	416,328	$	432,923
Total debt, net	$	1,299,420	$	1,289,569

The Amended Restructuring Support Agreement contains certain covenants on the part of each of the Company and the Supporting Creditors, including that the Supporting Creditors vote in favor of the Plan and otherwise use good faith efforts to negotiate, execute and implement the restructuring transactions contemplated by the Amended Restructuring Support Agreement and the Plan. Additionally, the Amended Restructuring Support Agreement provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches and/or other actions by the parties under the Amended Restructuring Support Agreement.

~~Credit~~Proposed ~~Facility~~Plan of Reorganization

OnIn ~~April~~order 1,to ~~2014,~~successfully ~~Legacy~~emerge LPfrom ~~entered~~Chapter ~~into a 5 year $1.5 billion secured revolving credit facility with Wells Fargo Bank~~11, ~~National Association, as administrative agent, Compass Bank, as syndication agent, UBS Securities LLC and U.S. Bank National Association, as co-documentation agents and~~ the ~~lenders~~Debtors ~~party~~will ~~thereto~~need ~~(as amended, the “Credit Agreement”). On March 21, 2019, Legacy entered into the Twelfth Amendment~~ to ~~the~~obtain ~~Credit~~confirmation ~~Agreement which, among other things, extended the maturity of the Credit Agreement~~ from ~~April 1, 2019 to May 31, 2019. Legacy's obligations under~~ the ~~Credit~~Bankruptcy ~~Agreement~~Court ~~are secured by mortgages on over 95%~~ of ~~the total value of its oil and natural gas properties as well as~~ a ~~pledge~~Plan ofthat ~~all~~satisfies ~~of its ownership interests in its operating subsidiaries and Legacy's ownership interests in~~ the ~~General~~requirements ~~Partner. Concurrently with the Corporate Reorganization, the General Partner and Legacy Inc. provided guarantees~~ of ~~Legacy LP's obligations under~~ the ~~Credit~~Bankruptcy ~~Agreement~~Code. The ~~amount~~Amended ~~available~~Restructuring ~~for~~Support ~~borrowing~~Agreement atcontemplates ~~any~~that ~~one time is limited to the borrowing base and contains~~ a $2Plan ~~million~~supported ~~sub-limit~~by ~~for letters of credit. The borrowing base was reaffirmed at $575 million as part of~~ the ~~Twelfth~~Supporting ~~Amendment.~~Creditors ~~Under~~ (the ~~terms~~“Supporting ofCreditors ~~the~~Plan”) ~~Credit~~will ~~Agreement,~~be ~~the~~filed ~~borrowing~~with base reduces to $570 million on May 22, 2019. The borrowing base is subject to semi-annual redeterminations on or about April 1 and October 1 of each year, but no redeterminations are scheduled between now and maturity on May 31, 2019. Additionally, either Legacy or the ~~lenders~~Bankruptcy ~~may~~Court, ~~once during each calendar year~~provided, ~~elect to redetermine the borrowing base between scheduled redeterminations. Legacy also has the right~~however, ~~once~~if ~~during each calendar year, to request~~ the ~~redetermination~~Supporting ofNoteholders ~~the~~terminate ~~borrowing base upon~~ the ~~proposed~~Amended ~~acquisition~~Restructuring ofSupport ~~certain~~Agreement ~~oil and natural gas properties where the purchase price is greater than 10% of the borrowing base then~~ in ~~effect.~~accordance ~~Any~~with ~~increase in~~ the ~~borrowing~~terms ~~base requires the consent~~ of ~~all~~ the ~~lenders~~Amended ~~and~~Restructuring ~~any~~Support ~~decrease~~Agreement in(a or“Noteholder ~~maintenance~~Termination”), ofa ~~the~~Plan, ~~borrowing~~supported ~~base must be approved~~ by ~~the~~only ~~lenders holding at least 66-2/3% of~~ the ~~outstanding~~Supporting ~~aggregate~~Lenders ~~principal amounts of~~ (the ~~loans~~“Supporting orLenders ~~participation~~Plan”) ~~interests in letters of credit issued under the Credit Agreement. If the requisite lenders do not agree on an increase or decrease, then the borrowing base~~ will be ~~the~~filed ~~highest~~with ~~borrowing base acceptable to~~ the ~~lenders~~Bankruptcy holding 66-2/3% of the outstanding aggregate principal amounts of the loans or participation interests in letters of credit issued under the Credit Agreement so long as it does not increase the borrowing base then in effectCourt.

~~Prior~~On toAugust ~~the Corporate Reorganization~~2, ~~the Credit Agreement contained a covenant that prohibited Legacy from paying distributions to its limited partners~~2019, ~~including holders of its preferred units, if (i) Total Debt to EBITDA for~~ the ~~four~~Debtors ~~fiscal~~filed ~~quarters ending on~~ the ~~last~~Supporting ~~day~~Creditors ofPlan, ~~the fiscal quarter immediately preceding the date of determination for~~ which ~~financial~~is ~~statements~~subject ~~were available was greater than 4.00~~ to ~~1.00~~approval orby ~~(ii) Legacy had unused lender commitments of less than or equal to 15% of~~ the ~~total~~Bankruptcy ~~lender commitments then in effect~~Court. ~~Following~~The ~~the~~Supporting ~~consummation~~Creditors ofPlan ~~the~~provides ~~Corporate~~for ~~Reorganization,~~ the ~~Credit Agreement contains a covenant that prohibits Legacy from paying dividends to its stockholders~~following, ifamong ~~(i)~~other ~~Total Debt to EBITDA for~~things:

•all holders of claims arising under the DIP Facility (as defined below) will receive, in full satisfaction of their respective claims: (i) if the Exit Facility is consummated, (a) on account of claims under the New Money Facility (as defined below), payment in full in cash, (b) on account of claims under the Refinancing Facility (as defined below), distribution of cash and commitments under the Exit Facility; or (ii) if the Exit Facility is not consummated, payment in full in cash;

•all holders of claims arising under the Credit Agreement will receive, in full satisfaction of their respective claims, (i) if the Exit Facility is consummated, distribution of their pro rata share of commitments under the Exit Facility in exchange for the claims arising under the Credit Agreement or (ii) if the Exit Facility is not consummated, payment in full in cash;

•all holders of claims arising under the Term Loan Credit Agreement will receive their pro rata share of approximately 51.40%, subject to increase, of the new common stock (the “New Common Stock”) to be issued by Legacy, as reorganized pursuant to and under the Plan (“Reorganized Legacy");

•holders of claims arising under the 2020 Notes Indenture, the 2021 Notes Indenture and the 2023 Notes Indenture (the “Noteholders”) will receive their respective pro rata share of (i) 2.50% of the New Common Stock, subject to decrease, (ii) subscription rights to participate in a $66.50 million rights offering (the “Supporting Creditor Plan Rights Offering”), which can be exercised to the extent that such Noteholders are “accredited investors” as defined under Regulation D promulgated under the Securities Act of 1933, as amended (“Securities Act”), and (iii) a share premium of 1.50% of the New Common Stock, available to accredited investors that participate in the Supporting Creditor Plan Rights Offering and non-accredited investors;

•all existing equity interests in the Company will receive no recovery under the Plan and will be extinguished;

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•a ~~the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination for which financial statements are available is greater than 3~~$189.008 million tocommitted ~~1.00~~equity orinvestment ~~(ii)~~by ~~Legacy has unused lender commitments of less than or equal to 20% of~~ the ~~total~~Supporting ~~lender~~Term ~~commitments then in effect.~~Lenders;

•at the option of the Supporting Term Lenders, an offering of up to $125.0 million of New Common Stock to third parties, the Supporting Term Lenders or the Noteholders; and

•the establishment of a customary management incentive plan at Reorganized Legacy under which 10% of the New Common Stock will be reserved for grants made from time to time to employees of Reorganized Legacy.

If a Noteholder Termination occurs, the Supporting Lenders Plan would provide for the following, among other things:

•all holders of claims arising under the DIP Facility will receive, in full satisfaction of their respective claims: (i) if the Exit Facility is consummated, (a) on account of claims under the New Money Facility, payment in full in cash, (b) on account of claims under the Refinancing Facility, distribution of cash and commitments under the Exit Facility; or (ii) if the Exit Facility is not consummated, payment in full in cash;

•all holders of claims arising under the Prepetition RBL Credit Agreement will receive, in full satisfaction of their respective claims, (i) if the Exit Facility is consummated, distribution of their pro rata share of commitments under the Exit Facility in exchange for the claims arising under the Prepetition RBL Credit Agreement or (ii) if the Exit Facility is not consummated, payment in full in cash;

•all holders of claims arising under the Prepetition Term Loan Credit Agreement will receive their pro rata share of 98.00% of the New Common Stock, subject to dilution by the Supporting Lenders Plan Rights Offering and committed equity investment;

•the Noteholders will receive their respective pro rata share of (i) 2.00% of the New Common Stock and (ii) subscription rights to participate in a $100.0 million rights offering (the “Supporting Lenders Plan Rights Offering” and, together with the Supporting Creditors Plan Rights Offering, the “Rights Offering”) to the extent that such Noteholders are “accredited investors” as defined under Regulation D promulgated under the Securities Act;

•all existing equity interests in the Company will receive no recovery under the Plan and will be extinguished;

•a $200.0 million committed equity investment by the Supporting Term Lenders; and

•the establishment of a customary management incentive plan at Reorganized Legacy under which 10% of the New Common Stock will be reserved for grants made from time to time to management employees of Reorganized Legacy.

Magnitude of Potential Claims

On July 15, 2019, the Debtors filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. The schedules and statements may be subject to further amendment or modification after filing. Holders of prepetition claims will be required to file proofs of claims by the applicable deadline for filing certain proofs of claims in the Debtors’ Chapter 11 cases. The Bankruptcy Court has not yet confirmed the claims deadlines. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process.

Liabilities Subject to Compromise

The Company’s condensed consolidated balance sheet includes amounts classified as “liabilities subject to compromise,” which represent prepetition liabilities that have been allowed, or that the Company anticipates will be allowed, as claims in its Chapter 11 cases. The amounts represent the Company’s current estimate of known or potential obligations to be resolved in connection with the Chapter 11 proceedings. The differences between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.

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The following table summarizes the components of liabilities subject to compromise included on the condensed consolidated balance sheet:


	June 30,
	2019
	(In thousands)

Debt, net	$	757,449
Accrued interest payable	29,478
Accounts payable	277
Liabilities subject to compromise	$	787,204

The Company has discontinued recording interest on debt classified as liabilities subject to compromise on the Petition Date. Contractual interest on liabilities subject to compromise not reflected in the consolidated statements of operations was approximately $2.7 million, representing interest expense from the Petition Date through June 30, 2019.

Reorganization Items, Net

The Company has incurred and is expected to continue to incur significant costs associated with the reorganization. These costs, which are expensed as incurred, are expected to significantly affect the Company’s results of operations. Reorganization items represent costs and income directly associated with the Chapter 11 proceedings since the Petition Date, and also include adjustments to reflect the carrying value of certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are determined.

The following table summarizes the components of reorganization items included on the condensed consolidated statements of operations:


	Three Months and Six Months Ended
	June 30,
	2019
	(In thousands)

Professional advisory fees	$	1,960




Reorganization, items net	$	1,960

Appointment of Unsecured Creditors Committee

On July 3, 2019, the United States Trustee appointed the official committee for unsecured creditors (the “Creditors Committee”). The Creditors Committee and its legal representatives have a right to be heard on all matters affecting unsecured creditors that come before the Bankruptcy Court with respect to the Debtors.

Ability to Continue as a Going Concern

The Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q 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 reflect any adjustments that might result from the outcome of the Chapter 11 proceedings. We have significant indebtedness and our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. Our financial condition including operating results, the defaults under our debt agreements and the risks and uncertainties associated with the Chapter 11 proceedings raise doubt as to the Company’s ability to continue as a going concern.

Page 18

(3) Debt

The Company’s filing of the Chapter 11 proceedings resulted in the acceleration of the Debtors’ obligations under the Term Loan Credit Agreement and the indentures governing the Senior Notes (as defined below). Additionally, other events of default under the Company's debt agreements, including cross-defaults, are present, including violations of certain financial ratio covenants, the failure to make principal and interest payments on certain of the Company’s indebtedness, as well as the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2018. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default.

Debt consists of the following as of June 30, 2019 and December 31, 2018:


	June 30,		December 31,
	2019		2018
	(In thousands)
Current debt
Credit Facility due 2019	$	475,500	$	541,000
Second Lien Term Loans due 2020	—		338,626
Debtor in Possession (DIP)	94,177		—
Unamortized debt issuance costs	—		(17,332)
Unamortized discount on Second Lien Term Loans	—		(5,648)
Total current debt, net	$	569,677	856,646

Second Lien Term Loans due 2020	339,812		—
8% Senior Notes due 2020	208,885		208,885
6.625% Senior Notes due 2021	129,529		131,279
8% Convertible Senior Notes due 2023	107,527		128,103
Unamortized debt issuance costs	(24,930)		(31,517)
Unamortized discount on Senior Notes	(3,374)		(3,827)
Total	$	757,449	$	432,923
Less liabilities subject to compromise	(757,449)		—
Total long-term debt, net	$	—	$	432,923
Total debt	$	569,677	$	1,289,569

DIP Credit Agreement

In connection with the Chapter 11 cases, Legacy LP entered into the DIP Credit Agreement, which provides for, among other things, the following:

•senior secured superpriority debtor-in-possession credit agreement in an aggregate principal amount of up to $350.0 million (the “DIP Facility”), consisting of (i) a new money revolving loan facility in an aggregate amount of up to $100.0 million (the “New Money Facility”), $35.0 million of which is available on an interim basis and which includes a sub-facility of up to $1.0 million for the issuance of letters of credit, and (ii) a refinancing term loan in the amount of $250.0 million (the “Refinancing Facility”);

•borrowings under the (i) New Money Facility bear interest, at the option of the Company, at a rate per annum equal to the alternate base rate (the “ABR”) plus 4.25% or LIBOR plus 5.25% and (ii) the Refinancing Facility bear interest at a rate per annum equal to the ABR plus 3.50%;

•the Company is required to pay an unused commitment fee equal to 1.00% per annum to the lenders under the New Money Facility in respect of the unused commitments thereunder;

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•the maturity of the DIP Facility to be the earliest to occur of (i) eight months after the petition date, (ii) upon the Bankruptcy Court’s approval of a plan of reorganization and the Company’s exit from Chapter 11, (iii) upon the sale of substantially all of the equity or assets of the Company and (iv) the termination of the DIP Facility during the continuation of an event of default under the DIP Credit Agreement or otherwise pursuant to the terms of the DIP Credit Agreement or by order of the Bankruptcy Court;

•proceeds of the DIP Credit Agreement may be used for (i) transaction costs, fees and expenses, (ii) working capital and general corporate purposes in accordance with a budget approved by the lenders, (iii) bankruptcy-related costs and expenses (including restructuring fees and adequate protection payments) and (iv) in the case of the Refinancing Facility, to refinance amounts existing under the Company’s existing credit agreements;

•the obligations under the DIP Credit Agreement are secured by a first priority lien on substantially all of the assets of the Company, subject to limited exceptions provided for in the DIP Motion;

•the DIP Credit Agreement provides for certain customary covenants applicable to the Company, including covenants requiring delivery of a rolling 13-week operating budget and cash flow forecast, together with a variance report setting forth material variances from the budget; and

•the DIP Credit Agreement provides for certain customary events of default, including the failure to achieve certain milestones set forth in the DIP Credit Agreement.

As of August 7, 2019, the Company had no money drawn under the New Money Facility leaving $100 million of availability under the New Money Facility and $250 million drawn under the Refinancing Facility at a weighted-average interest rate of 10.38%, leaving no availability under the Refinancing Facility.

Credit Facility

On April 1, 2014, Legacy LP entered into the Credit Agreement. On March 21, 2019, Legacy entered into the Twelfth Amendment to the Credit Agreement which, among other things, extended the maturity of the Credit Agreement from April 1, 2019 to May 31, 2019. Legacy's obligations under the Credit Agreement are secured by mortgages on over 95% of the total value of its oil and natural gas properties as well as a pledge of all of its ownership interests in its operating subsidiaries and Legacy's ownership interests in the General Partner. Concurrently with the Corporate Reorganization, the General Partner and Legacy Inc. provided guarantees of Legacy LP's obligations under the Credit Agreement. The amount available for borrowing at any one time is limited to the borrowing base and contains a $2 million sub-limit for letters of credit. The borrowing base was reaffirmed at $575 million as part of the Twelfth Amendment. Under the terms of the Credit Agreement, the borrowing base was reduced to $570 million on May 22, 2019.

Prior to the Corporate Reorganization, the Credit Agreement contained a covenant that prohibited Legacy from paying distributions to its limited partners, including holders of its preferred units, if (i) Total Debt to EBITDA for the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination for which financial statements were available was greater than 4.00 to 1.00 or (ii) Legacy had unused lender commitments of less than or equal to 15% of the total lender commitments then in effect. Following the consummation of the Corporate Reorganization, the Credit Agreement contains a covenant that prohibits Legacy from paying dividends to its stockholders, if (i) Total Debt to EBITDA for the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination for which financial statements are available is greater than 3.00 to 1.00 or (ii) Legacy has unused lender commitments of less than or equal to 20% of the total lender commitments then in effect.

The Credit Agreement also contains covenants that, among other things, require us to maintain specified ratios or conditions as follows:

•as of any day, first lien debt to EBITDA for the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination for which financial statements are available to not be greater than 2.50 to 1.00;

•as of the last day of any fiscal quarter, secured debt to EBITDA as of the last day of any fiscal quarter for the four fiscal quarters then ending of not more than 4.5 to 1.0;

Page 20

•as of the last day of any fiscal quarter, total EBITDA over the last four quarters to total interest expense over the last four quarters to be greater than 2.0 to 1.0;

•consolidated current assets, as of the last day of the most recent quarter and including the unused amount of the total commitments, to consolidated current liabilities as of the last day of the most recent quarter of not less than 1.0 to 1.0, excluding non-cash assets and liabilities under FASB Accounting Standards Codification 815, which includes the current portion of oil, natural gas and interest rate derivatives; and

•as of the last day of any fiscal quarter, the ratio of (a) the sum of (i) the net present value using NYMEX forward pricing, discounted at 10 percent per annum, of Legacy’s proved developed producing oil and gas properties as reflected in the most recent reserve report delivered either July 1 or December 31 of each year, as the case may be (giving pro forma effect to material acquisitions or dispositions since the date of such reports) (“PDP PV-10”), (ii) the net mark to market value of Legacy’s commodity derivative agreements and (iii) Legacy’s cash and cash equivalents, in each case as of such date to (b) Secured Debt as of such day to be equal to or less than 1.00 to 1.00.

On September 14, 2018 and September 20, 2018, Legacy entered into the Tenth Amendment and Eleventh Amendment, respectively, to the Credit Agreement (the “Credit Agreement Amendments”). The Credit Agreement Amendments amend certain provisions set forth in the Credit Agreement to, among other items:

•permit the issuance of the 2023 Convertible Notes;

•provide that the 2023 Convertible Notes constitute debt that is permitted refinancing debt;

•allow for the payment of a cash conversion incentive in connection with the early cashless conversion of the 2023 Convertible Notes into common stock; and

•permit the redemption of certain senior notes or permitted refinancing debt of such senior notes with any combination of the following: (i) proceeds of certain permitted refinancing debt; (ii) net cash proceeds of any sale of equity interests (other than disqualified capital stock) of Legacy Inc.; and/or (iii) in exchange for equity interests (other than disqualified capital stock) of Legacy Inc.

All capitalized terms not defined in the foregoing description have the meaning assigned to them in the Credit Agreement.

AsThe ~~of March 31, 2019, Legacy’s ratio of consolidated current assets to consolidated current liabilities was less than 0.7 to 1.0, in violation of a covenant contained in the~~ Credit Agreement. Onmatured on May ~~9, 2019, Legacy received a waiver with respect to compliance with such covenant for the fiscal quarter ended March~~ 31, 2019. Except with respect to compliance with the financial covenant that has been waived, as of March 31, 2019, Legacy was in compliance with all covenants of the Credit Agreement. If Legacy is unable to extend its debt maturities or consummate a transaction, Legacy anticipates breaching certain covenants under its Credit Agreement, which would constitute a default under its Credit Agreement. Defaults, if not remedied, would require a waiver from Legacy’s lenders in order for it to avoid an event of default and subsequent acceleration of all amounts outstanding under its Credit Agreement and potential foreclosure on its oil and natural gas properties. Furthermore, the failure to repay outstanding indebtedness when due under its Credit Agreement and certain other payment defaults or acceleration under its Credit Agreement could cause a cross-default or cross-acceleration of all of Legacy’s indebtedness.

~~Page~~As 17of June 30, 2019, Legacy had approximately $475.5 million drawn under the Credit Agreement at a weighted-average interest rate of 9.63%, leaving no availability under the Credit Agreement. For the six-month period ended June 30, 2019, Legacy paid in cash $21.9 million of interest expense on the Credit Agreement.

As of March 31, 2019, Legacy had approximately $562 million drawn under the Credit Agreement at a weighted-average interest rate of 7.79%, leaving approximately $13.0 million of availability under the Credit Agreement. For the three-month period ended March 31, 2019, Legacy paid in cash $7.9 million of interest expense on the Credit Agreement.

Second Lien Term Loan Credit Agreement

On October 25, 2016, Legacy entered into ~~a Second Lien Term Loan Credit Agreement (as amended,~~ the "Term Loan Credit Agreement~~") among Legacy~~, ~~as borrower, Cortland Capital Market Services LLC ("Cortland"), as administrative agent and second lien collateral agent, and the lenders party thereto,~~ providing for term loans up to an aggregate principal amount of $300.0 million (the “Second Lien Term Loans”). On March 21, 2019, Legacy entered into the Seventh Amendment to the Term Loan Credit Agreement (as defined below). The Second Lien Term Loans under the Term Loan Credit Agreement are issued with an upfront fee of 2% and bear interest at a rate of 12.00% per annum payable quarterly in cash. Effective March 21, 2019, the Seventh Amendment to the Term Loan Credit Agreement provides an increase of 2.25% to the interest rate paid on all term loans. GSO Capital Partners L.P. (“GSO”) and certain funds and accounts managed, advised or sub-advised, by GSO are the initial lenders thereunder. The Term Loan Credit Agreement matures on August 31, 2021; provided that, if on July 1, 2020, Legacy has greater than or equal to a face amount of $15.0 million of Senior Notes that were outstanding on the date the Term Loan Credit Agreement was entered into or any other senior notes with a maturity date that is earlier than August 31, 2021, the Term Loan Credit Agreement will mature on August 1, 2020. The Second Lien Term Loans are secured on a second lien priority basis by the same collateral that secures Legacy's Credit Agreement and are unconditionally guaranteed on a joint and several basis by the same wholly owned subsidiaries of Legacy that are guarantors under the Credit Agreement. In addition, upon consummation of the Corporate Reorganization, the General Partner and Legacy Inc. became guarantors. As of ~~March~~June 3130, 2019, Legacy had approximately $339.8 million drawn under the Term Loan Credit Agreement. On December 31, 2017, Legacy entered into the Third Amendment to the Term Loan Credit Agreement among Legacy, as borrower, Cortland, as administrative agent and second lien collateral agent, and the lenders party thereto, including GSO and certain funds and accounts managed, advised or sub-advised by GSO, which, among other things, increased the maximum amount available for borrowing under the Second Lien Term Loans to $400.0 million, extended the availability of undrawn principal ($60.2 million of availability as of ~~March~~June 3130, 2019) to October 25, 2019 and relaxed the asset coverage ratio to 0.85 to 1.00 until the fiscal quarter ended December 31, 2018.

Prior to the Corporate Reorganization, the Term Loan Credit Agreement contained a covenant that prohibited Legacy from paying distributions to its limited partners, including holders of its preferred units, if (i) Total Debt to EBITDA for the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination for which financial statements were available was greater than 4.00 to 1.00 or (ii) Legacy had unused lender commitments of less than or equal to 15% of the total lender commitments then in effect. Following consummation of the Corporate Reorganization, the Term Loan Credit Agreement contains a covenant that prohibits Legacy from paying dividends to the stockholders, if (i) Total Debt to EBITDA for the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination for which financial statements are available is greater than 3.00 to 1.00 or (ii) Legacy has unused lender commitments of less than or equal to 20% of the total lender commitments then in effect.

Page 21

The Term Loan Credit Agreement also contains covenants that, among other things, requires Legacy to:

•not permit, as of the last day of any fiscal quarter, the ratio of the sum of (i) the net present value using NYMEX forward pricing of Legacy’s PDP PV-10, (ii) the net mark to market value of Legacy’s commodity derivative agreements and (iii) Legacy’s cash and cash equivalents to Secured Debt to be less than 0.85 to 1.00 until the fiscal quarter ended December 31, 2018 and 1.00 to 1.00 thereafter; and

•not permit, as of the last day of any fiscal quarter, Legacy’s ratio of Secured Debt as of such day to EBITDA for the four fiscal quarters then ending to be greater than 4.50 to 1.00.

On September 14, 2018 and September 20, 2018, Legacy entered into the Fifth Amendment and Sixth Amendment, respectively, to the Term Loan Credit Agreement (the “Term Loan Amendments”). The Term Loan Amendments amend certain provisions set forth in the Term Loan Credit Agreement to, among other items:

•permit the issuance of the 2023 Convertible Notes;

•provide that the 2023 Convertible Notes constitute debt that is permitted refinancing debt;

Page 18

•allow for the payment of a cash conversion incentive in connection with the early cashless conversion of the 2023 Convertible Notes into common stock; and

On March 21, 2019, we entered into the Seventh Amendment (the “Seventh Amendment”) to our Term Loan Credit Agreement. The Seventh Amendment waives, through May 31, 2019, the requirement of the Term Loan Credit Agreement that the delivery of fiscal year 2018 audited financial statements not include a “going concern” or like qualification or exception. The Seventh Amendment also provides for, among other things, (i) an increase in the applicable interest rate by 2.25%, (ii) a fee equal to 0.35% of the aggregate amount of term loans currently outstanding under the Term Loan Credit Agreement, to be paid in kind by increasing the aggregate amount of term loans outstanding as of the effective date of the Seventh Amendment and (iii) a fee equal to 0.15% of the aggregate amount of term loans currently outstanding under the Term Loan Credit Agreement, to be paid in kind by increasing the aggregate amount of term loans outstanding on the earliest to occur of (x) May 31, 2019 or (y) an acceleration of the outstanding indebtedness under the Term Loan Credit Agreement. Further, while we received a waiver of the covenant under our Term Loan Credit Agreement that requires us to deliver audited financial statements without a “going concern” or like qualification or exception, such waiver expires on May 31, 2019 and such default cannot be remedied. We will be in breach of that covenant if we do not receive another waiver on May 31, 2019. There can be no assurances that we will be able to obtain an additional waiver.

All capitalized terms used but not defined in the foregoing description have the meaning assigned to them in the Term Loan Credit Agreement.

As of March 31, 2019, Legacy was in compliance with all financial and other covenants of the Term Loan Credit Agreement.

8% Senior Notes Due 2020 ("2020 Senior Notes")

On December 4, 2012, Legacy and its 100% owned subsidiary Legacy Reserves Finance Corporation (together, the "Issuers") completed a private placement offering to eligible purchasers of an aggregate principal amount of $300 million of its 2020 Senior Notes, which were subsequently registered through a public exchange offer that closed on January 8, 2014. The 2020 Senior Notes were issued at 97.848% of par.

Legacy has the option to redeem the 2020 Senior Notes, in whole or in part, at any time at the specified redemption prices set forth below together with any accrued and unpaid interest, if any, to the date of redemption.

Legacy may be required to offer to repurchase the 2020 Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, in the event of a change of control as defined by the indenture. Legacy and Legacy Reserves Finance Corporation's obligations under the 2020 Senior Notes are guaranteed by its 100% owned subsidiaries Legacy Reserves Operating GP LLC, Legacy Reserves Operating LP, Legacy Reserves Services LLC., Legacy Reserves Energy Services LLC, Legacy Reserves Marketing LLC., Dew Gathering LLC and Pinnacle Gas Treating LLC, which constitute all of Legacy's wholly-owned subsidiaries other than Legacy Reserves Finance Corporation. In the future, the guarantees may be released or terminated under the following circumstances: (i) in connection with any sale or other disposition of all or substantially all of the properties of the guarantor; (ii) in connection with any sale or other disposition of sufficient capital stock of the guarantor so that it no longer qualifies as Legacy's Restricted Subsidiary (as defined in the indenture); (iii) if designated to be an unrestricted subsidiary; (iv) upon legal defeasance, covenant defeasance or satisfaction and discharge of the indenture; (v) upon the liquidation or dissolution of the guarantor provided no default or event of default has occurred or is occurring; (vi) at such time the guarantor does not have outstanding guarantees of its, or any other guarantor's, other debt; or (vii) upon merging into, or transferring all of its properties to Legacy or another guarantor and ceasing to exist. Refer to "Note 13 - Guarantors -" for further details on Legacy's guarantors.

The indenture governing the 2020 Senior Notes (as supplemented, the "2020 Notes Indenture") limits Legacy's ability and the ability of certain of its subsidiaries to (i) sell assets; (ii) pay distributions or dividends on, repurchase or redeem equity interests or purchase or redeem Legacy's subordinated debt, provided that such subsidiaries may pay dividends to the holders of their equity interests (including Legacy) and Legacy may pay distributions to the holders of its equity interests subject to the absence of certain defaults, the satisfaction of a fixed charge coverage ratio test and certain other conditions; (iii) make certain investments; (iv) incur or guarantee additional indebtedness or issue preferred securities; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from certain of its subsidiaries to Legacy; (vii) consolidate, merge or transfer all or substantially all of Legacy's assets; (viii) engage in certain transactions with affiliates; (ix) create unrestricted subsidiaries; and (x) engage in certain business activities. These covenants are subject to a number of important exceptions and qualifications. If at any time when the 2020 Senior Notes are rated investment grade by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services and no Default (as defined in the indenture) has occurred and is continuing, many of such covenants will terminate and Legacy and its subsidiaries will cease to be subject to such covenants. The 2020 Notes Indenture also includes customary events of default. Legacy is in compliance with all financial and other covenants of the 2020 Senior Notes. However, if the lenders under Legacy's Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under Legacy’s Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2020 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

~~Page~~In 19connection with the exchange of approximately $21.0 million aggregate principal amount of 2020 Senior Notes for the same aggregate principal of the 2023 Convertible Notes and the issuance of 105,020 shares of Common Stock in September

Page enter into agreements that restrict distributions or other payments from certain of its subsidiaries to Legacy; (vii) consolidate, merge or transfer all or substantially all of Legacy's assets; (viii) engage in certain transactions with affiliates; (ix) create unrestricted subsidiaries; and (x) engage in certain business activities. These covenants are subject to a number of important exceptions and qualifications. If at any time when the 2020 Senior Notes are rated investment grade by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services and no Default (as defined in the indenture) has occurred and is continuing, many of such covenants will terminate and Legacy and its subsidiaries will cease to be subject to such covenants. The 2020 Notes Indenture also includes customary events of default. Legacy is in compliance with all financial and other covenants of the 2020 Senior Notes. However, if the lenders under Legacy's Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under Legacy’s Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2020 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.22

In connection with the exchange of approximately $21.0 million aggregate principal amount of 2020 Senior Notes for the same aggregate principal of the 2023 Convertible Notes and the issuance of 105,020 shares of Common Stock in September 2018, Legacy recognized a $1.4 million gain on extinguishment of debt, which consisted of the difference between (1) the face amount of the exchanged 2020 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the new 2023 Convertible Notes.

During the year ended December 31, 2018, Legacy exchanged 1,000,000 shares of Common Stock for $3.1 million of face amount of its outstanding 2020 Senior Notes. Legacy treated the exchange as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2020 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the units issued in the exchange based on the closing price on the date of exchange.

During the year ended December 31, 2016, Legacy repurchased a face amount of $52.0 million of its 2020 Senior Notes on the open market. Legacy treated these repurchases as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2020 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price.

On June 1, 2016, Legacy exchanged 2,719,124 units representing limited partner interests in the Partnership for $15.0 million of face amount of its outstanding 2020 Senior Notes. Legacy treated this exchange as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2020 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the units issued in the exchange based on the closing price on June 1, 2016.

~~The~~Interest ~~indenture~~is ~~also~~payable ~~includes~~on ~~customary~~June ~~events~~1 and December 1 of ~~default~~each year. AsLegacy offailed ~~the~~to ~~March 31,~~make ~~2019~~an ~~period~~interest ~~end,~~payment ~~Legacy~~of ~~was~~approximately in$8.4 ~~compliance~~million ~~with~~due ~~all~~June ~~covenants~~1, of2019, on the ~~2020~~8% Senior Notes due 2020.

~~Interest~~As isof ~~payable on~~ June 30, 12019, ~~and~~there ~~December~~was 1$208.9 million of ~~each~~2020 ~~year~~Senior Notes outstanding.

As of March 31, 2019, there was $208.9 million of 2020 Senior Notes outstanding.

6.625% Senior Notes Due 2021 ("2021 Senior Notes")

On May 28, 2013, the Issuers completed a private placement offering to eligible purchasers of an aggregate principal amount of $250 million of its 2021 Senior Notes, which were subsequently registered through a public exchange offer that closed on March 18, 2014. The 2021 Senior Notes were issued at 98.405% of par.

On May 13, 2014, the Issuers completed a private placement offering to eligible purchasers of an aggregate principal amount of an additional $300 million of the 2021 Senior Notes, which were subsequently registered through a public exchange offer that closed on February 10, 2015. These 2021 Senior Notes were issued at 99.0% of par.

Page 20

The terms of the 2021 Senior Notes, including the Guarantors, are substantially identical to the terms of the 2020 Senior Notes with the exception of the interest rate and redemption provisions noted below. Legacy will have the option to redeem the 2021 Senior Notes, in whole or in part, at the specified redemption prices set forth below together with any accrued and unpaid interest, if any, to the date of redemption.

Legacy may be required to offer to repurchase the 2021 Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, in the event of a change of control as defined by the indenture, as supplemented. Legacy is in compliance with all financial and other covenants of the 2021 Senior Notes. However, if the lenders under Legacy's Current Credit Agreement were to accelerate the indebtedness under Legacy's Current Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2021 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

As of March 31, 2019, Legacy was in compliance with all covenants of the 2021 Senior Notes.

During the three months ended March 31, 2019, $1.75 million of 2021 Senior Notes were exchanged for 593,367 shares of common stock. Legacy treated the exchange as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the shares issued in the exchange based on the closing price on the date of exchange. As of March 31, 2019, there were $129.5 million of 2021 Senior Notes outstanding.

During the year ended December 31, 2018, Legacy exchanged 2,000,000 shares of Common Stock for $5 million of face amount of its outstanding 2020 Senior Notes. Legacy treated the exchange as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the units issued in the exchange based on the closing price on the date of exchange.

On September 20, 2018, in connection with the exchange of approximately $109.0 million aggregate principal amount of 2021 Senior Notes for the same aggregate principal of the 2023 Convertible Notes, Legacy recognized a $10.7 million gain on extinguishment of debt, which consisted of the difference between (1) the face amount of the exchanged 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the new 2023 Convertible Notes.

On April 2, 2018, following receipt of the requisite consents of the holders of the 2021 Senior Notes, Legacy entered into the Second Supplemental Indenture (the “2021 Notes Supplemental Indenture”) to the initial indenture governing the 2021 Notes (the "2021 Notes Indenture").

On December 31, 2017, Legacy entered into a definitive agreement with certain funds managed by Fir Tree Partners pursuant to which Legacy acquired $187.0 million of the 6.625% Notes for a price of approximately $132 million inclusive of accrued but unpaid interest with a settlement date of January 5, 2018. Legacy treated these repurchases for accounting purposes as an extinguishment of debt. Additionally, Legacy recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price.

Page 23

During the year ended December 31, 2016, Legacy repurchased a face amount of $117.3 million of its 2021 Senior Notes on the open market. Legacy treated these repurchases as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price.

Interest is payable on June 1 and December 1 of each year. Legacy failed to make an interest payment of approximately $4.3 million due June 1, 2019, on the 6.625% Senior Notes due 2021.

As of June 30, 2019, there was $129.5 million of 2021 Senior Notes outstanding.

8% Convertible Senior Notes Due 2023 ("2023 Convertible Notes")

On September 20, 2018, the Issuers, completed private exchanges with certain holders of senior notes, pursuant to which the Issuers exchanged (i) $21.~~004~~0 million aggregate principal amount of 2020 Senior Notes for $21.~~004~~0 million aggregate principal amount of 2023 Convertible Notes and 105,020 shares of common stock and (ii) $109.~~000~~0 million aggregate principal amount of 2021 Senior Notes for $109.~~000~~0 million aggregate principal amount of 2023 Convertible Notes. The 2023 Convertible Notes were issued pursuant to an Indenture, dated as of September 20, 2018 (the “2023 Convertible Note Indenture”).

Page 21

Upon issuance, Legacy separately accounted for the liability and equity components in accordance with Accounting Standards Codification 470-20. The initial fair value of the 2023 Convertible Notes in its entirety (inclusive of the equity component related to the conversion option) was estimated using observable inputs such as trades that occurred on the day of the transaction. The liability component was recorded at the estimated fair value of a similar debt instrument without the conversion feature. The difference between the aggregate principal amount of the 2023 Convertible Notes and the fair value of the liability component was recorded as a debt discount and is being amortized to interest expense over the term of the notes using the effective interest method. The fair value of the liability component of the 2023 Convertible Notes was estimated at $101 million, resulting in a debt discount of $29 million. The equity component, representing the value of the conversion option, was computed by deducting the fair value of the liability component from the initial fair value of the 2023 Convertible Notes. The equity component was recorded in additional paid-in capital within stockholders’ equity and will not be remeasured as long as it continues to meet the conditions for equity classification.

The 2023 Convertible Notes mature on September 20, 2023, unless earlier repurchased or redeemed by the Issuers or converted. The 2023 Convertible Notes are subject to redemption for cash, in whole or in part, at the Issuers’ option at a redemption price equal to 100% of the 2023 Convertible Notes to be redeemed, plus any accrued and unpaid interest. In addition, the Issuers are required to make an offer to holders of the 2023 Convertible Notes upon a change of control at a price equal to 101%, plus any accrued and unpaid interest, and an offer to holders of the 2023 Convertible Notes upon consummation by the Issuers or any restricted subsidiaries of certain asset sales at a price equal to 100%, plus any accrued and unpaid interest.

The 2023 Convertible Notes are convertible into shares of common stock at an initial conversion rate of 166.6667 shares per $1,000 principal amount of 2023 Convertible Notes, which is equal to an initial conversion price of $6.00 per share of common stock (the "Conversion Price").

The 2023 Convertible Notes are convertible, at the option of the holders, into shares of common stock at any time from the date of issuance up until the close of business on the earlier of (i) the business day prior to the date of a mandatory conversion notice, (ii) with respect to a 2023 Convertible Note called for redemption, the business day immediately preceding the redemption date or (iii) the business day immediately preceding the maturity date. In addition, if a holder exercises its right to convert on or prior to September 19, 2019, such holder will receive an early conversion payment, in cash, per $1,000 principal amount as follows:


Early Conversion Date						Early Conversion Payment
December 1, 2018 through May 31, 2019						$64.22
June 1, 2019 through September 19, 2019						$24.22

Subject to compliance with certain conditions, the Issuers have the right to mandatorily convert all of the 2023 Convertible Notes if the volume weighted average price of the common stock equals or exceeds the conversion price for at least 20 trading days (whether or not consecutive) during any period of 30 consecutive trading days commencing on or after the initial issuance date.

Page 24

The 2023 Convertible Notes are guaranteed by Legacy Inc., the General Partner, Legacy Reserves Operating GP LLC, Legacy Reserves Operating LP, Legacy Reserves Services LLC, Legacy Reserves Energy Services LLC, Legacy Reserves Marketing LLC, Dew Gathering LLC and Pinnacle Gas Treating LLC.

The terms of the 2023 Convertible Notes, including the Guarantors, are substantially identical to the terms of the 2020 Senior Notes and 2021 Senior Notes with the exception of the interest rate, conversion and redemption provisions noted above. ~~Additionally,~~ if the lenders under Legacy's Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under Legacy's Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2023 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

~~During~~As ~~the~~of ~~three months ended March 31~~June 30, 2019, $6107.5 ~~million~~ ~~of 2023 Convertible Notes were exchanged for 2,429,026 shares of common stock and $14.1~~ million of 2023 Convertible Notes were ~~converted for 2,346,000 shares of common stock~~outstanding. ~~Legacy recognized $1.6 million and $10.7 million of gain on extinguishment of debt on these transactions respectively.~~

AsInterest is payable on June 1 and December 1 of ~~March 31,~~each ~~2019,~~year. ~~there~~Legacy ~~was~~failed to make an interest payment of approximately $~~107~~4.53 million ofdue ~~2023~~June ~~Convertible~~1, 2019, on the 8% Senior Notes ~~were~~due ~~outstanding~~2023.

~~Interest~~(4) Revenue isfrom ~~payable~~Contracts onwith ~~June 1 and December 1 of each year.~~Customers

Page 22

(3) Revenue from Contracts with Customers

Oil, NGL and natural gas sales revenues are generally recognized at the point in time that control of the product is transferred to the customer and collectability is reasonably assured. This generally occurs when oil or natural gas has been delivered to a pipeline or truck. A more detailed summary of the sale of each product type is included below.

Oil Sales

Legacy's oil sales contracts are generally structured such that Legacy sells its oil production to the purchaser at a contractually specified delivery point at or near the wellhead. The crude oil production is priced on the delivery date based upon prevailing index prices less certain deductions related to oil quality and physical location. Legacy recognizes revenue when control transfers to the purchaser upon delivery at the net price received from purchaser.

NGL and Natural Gas Sales

Under Legacy's gas processing contracts, Legacy delivers wet gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity processes the natural gas and remits proceeds to Legacy for the resulting sales of NGLs and residue gas. In these scenarios, Legacy evaluates whether it is the principal or the agent in the transaction. In virtually all of Legacy's gas processing contracts, Legacy has concluded that it is the agent, and the midstream processing entity is Legacy's customer. Accordingly, Legacy recognizes revenue upon delivery based on the net amount of the proceeds received from the midstream processing entity. Proceeds are generally tied to the prevailing index prices for residue gas and NGLs less deductions for gathering, processing, transportation and other expenses.

Under Legacy's dry gas sales that do not require processing, Legacy sells its natural gas production to third party purchasers at a contractually specified delivery point at or near the wellhead. Pricing provisions are tied to a market index, with certain deductions based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas supplies. Legacy recognizes revenue upon delivery of the natural gas to third party purchasers based on the relevant index price net of deductions.

Imbalances

Natural gas imbalances occur when Legacy sells more or less than its entitled ownership percentage of total natural gas production. Any amount received in excess of its share is treated as a liability. If Legacy receives less than its entitled share, the underproduction is recorded as a receivable. Legacy did not have any significant natural gas imbalance positions as of ~~December~~June 3130, ~~2017~~2019 and ~~2016~~December 31, 2018.

Disaggregation of Revenue

Legacy has identified three material revenue streams in its business: oil sales, NGL sales, and natural gas sales. Revenue attributable to each of Legacy's identified revenue streams is disaggregated in the table below.

	Three Months Ended
	March 31,
	2019
	(In thousands)
Revenues:
Oil sales	$	77,761
Natural gas liquids (NGL) sales	4,515
Natural gas sales	36,221
Total revenues	$	118,497

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Page 23


	Three Months Ended		Six Months Ended
	June 30,
	2019		2019
	(In thousands)
Revenues:
Oil sales	$	88,375	$	166,136
Natural gas liquids (NGL) sales	3,994		8,509
Natural gas sales	25,410		61,631
Total revenues	$	117,779	$	236,276

Significant Judgments

Principal versus agent

Legacy engages in various types of transactions in which midstream entities process its gas and subsequently market resulting NGLs and residue gas to third-party customers on Legacy's behalf, such as Legacy's percentage-of-proceeds and gas purchase contracts. These types of transactions require judgment to determine whether Legacy is the principal or the agent in the contract and, as a result, whether revenues are recorded gross or net.

Transaction price allocated to remaining performance obligations

A significant number of Legacy's product sales are short-term in nature with a contract term of one year or less. For those contracts, Legacy has utilized the practical expedient in ASC 606 that exempts it from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For Legacy's product sales that have a contract term greater than one year, Legacy has utilized the practical expedient in ASC 606 that states that it is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product represents a separate performance obligation; therefore future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

Contract balances

Under Legacy's product sales contracts, it is entitled to payment from purchasers once its performance obligations have been satisfied upon delivery of the product, at which point payment is unconditional, and record invoiced amounts as “Accounts receivable - oil and natural gas” in its consolidated balance sheet.

To the extent actual volumes and prices of oil and natural gas are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and also recorded as “Accounts receivable - oil and natural gas” in the accompanying consolidated balance sheets. In this scenario, payment is also unconditional, as Legacy has satisfied its performance obligations through delivery of the relevant product. As a result, Legacy has concluded that its product sales do not give rise to contract assets or liabilities under ASC 606.

Prior-period performance obligations

Legacy records revenue in the month production is delivered to the purchaser. However, settlement statements for certain oil, natural gas and NGL sales may not be received for 30 to 60 days after the ~~date~~month ~~production~~of ~~is delivered~~production, and as a result, Legacy is required to estimate the amount of production that was delivered to the midstream purchaser and the price that will be received for the sale of the product. Additionally, to the extent actual volumes and prices of oil are unavailable for a given reporting period because of timing or information not received from third party purchasers, the expected sales volumes and prices for those barrels of oil are also estimated.

Legacy records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Legacy has existing internal controls in place for its estimation process, and any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the ~~three months ended March 31, 2019, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.~~

~~(4) Commitments~~Page ~~and Contingencies~~26

three months ended June 30, 2019, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.

(5) Commitments and Contingencies

From time to time, Legacy is a party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, Legacy is not currently a party to any proceeding that it believes could have a potential material adverse effect on its financial condition, results of operations or cash flows.

Legacy is subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of Legacy could be adversely affected.

Page 24

restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of Legacy could be adversely affected.

Legacy has employment agreements with its executive officers. The employment agreements with its executive officers specify that if the executive officer is terminated by Legacy for other than cause or following a change in control or by the executive officer for good reason, the executive officer shall receive severance pay ranging from 12 to 36 months’ salary plus bonus and COBRA benefits, respectively.

(56) Fair Value Measurements

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:


Level 1:			Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Legacy considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:			Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that Legacy values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange traded derivatives such as over-the-counter commodity price swaps and collars and interest rate swaps as well as long-term incentive plan liabilities calculated using the Black-Scholes model to estimate the fair value as of the measurement date.
Level 3:			Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). Legacy’s valuation models are primarily industry standard models that consider various inputs including: (a) quoted forward prices for commodities, (b) time value, and (c) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 3 instruments currently are limited to Midland-Cushing crude oil differential swaps. Although Legacy utilizes third party broker quotes to assess the reasonableness of its prices and valuation techniques, Legacy does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 2.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Legacy’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

Page 2527

Fair Value on a Recurring Basis

~~The~~As ~~following~~required ~~tables~~by ~~sets~~the ~~forth~~Twelth byAmendment ~~level~~to ~~within~~ the ~~fair~~Credit ~~value~~Agreement, ~~hierarchy~~all of Legacy'’s ~~Financial~~derivative ~~assets~~positions ~~and liabilities that~~ were ~~accounted~~unwound ~~for at fair value~~ on aMay ~~recurring basis as of March 31~~28, 2019 ~~and December 31, 2018:~~.

	March 31, 2019
	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets(Level 1)		Significant Other Observable Inputs(Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Assets:
Current
Commodity derivatives	$	—	$	19,250	$	—	$	19,250	$	(10,877)	$	8,373
Interest rate derivatives	—		1,335		—		1,335		—		1,335
Noncurrent
Commodity derivatives	—		—		—		—		—		—
Interest rate derivatives	—		—		—		—		—		—
Liabilities:
Current
Commodity derivatives	—		(13,084)		—		(13,084)		10,877		(2,207)
LTIP liability(a)	—		—		—		—		—		—
Noncurrent
Commodity derivatives	—		—		—		—		—		—
Net fair value instruments	$	—	$	7,501	$	—	$	7,501	$	—	$	7,501

The following tables sets forth by level within the fair value hierarchy Legacy's Financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2018:

Page 26


	December 31, 2018
	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Assets:
Current
Commodity derivatives	$	—	$	69,288	$	—	$	69,288	$	(4,670)	$	64,618
Interest rate derivatives	—		2,044		—		2,044		—		2,044
Noncurrent
Commodity derivatives	—		3,473		—		3,473		(338)		3,135
Interest rate derivatives	—		—		—		—		—		—

Liabilities:
Current
Commodity derivatives	—		(4,670)		—		(4,670)		4,670		—
Noncurrent
Commodity derivatives	—		(888)		—		(888)		338		(550)
Net fair value instruments	$	—	$	69,247	$	—	$	69,247	$	—	$	69,247

Legacy estimates the fair values of the commodity derivatives based on published forward commodity price curves for the underlying commodities as of the date of the estimate for those commodities for which published forward pricing is readily available. For those commodity derivatives for which forward commodity price curves are not readily available, Legacy estimates, with the assistance of third-party pricing experts, the forward curves as of the date of the estimate. Legacy validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming, where applicable, that those securities trade in active markets. Legacy estimates the option value of puts and calls combined into hedges, including three-way collars and enhanced swaps, using an option pricing model which takes into account market volatility, market prices, contract parameters and discount rates based on published London interbank offered rates ("LIBOR") and interest rate swaps. Due to the lack of an active market for periods beyond one-month from the balance sheet date for its oil price differential swaps, Legacy has reviewed historical differential prices and known economic influences to estimate a reasonable forward curve of future pricing scenarios based upon these factors. In order to estimate the fair value of our interest rate swaps, Legacy uses a yield curve based on money market rates and interest rate swaps, extrapolates a forecast of future interest rates, estimates each future cash flow, derives discount factors to value the fixed and floating rate cash flows of each swap, and then discounts to present value all known (fixed) and forecasted (floating) swap cash flows. Curve building and discounting techniques used to establish the theoretical market value of interest bearing securities are based on readily available money market rates and interest swap market data. The determination of the fair values above incorporates various factors including the impact of our non-performance risk and the credit standing of the counterparties involved in Legacy’s derivative contracts. The risk of nonperformance by Legacy’s counterparties is mitigated by the fact that most of our current counterparties (or their affiliates) are also current or former bank lenders under the Legacy’s revolving credit facility. In addition, Legacy routinely monitors the creditworthiness of its counterparties. As the factors described above are based on significant assumptions made by management, these assumptions are the most sensitive to change.

Page 2728

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:

	Significant Unobservable Inputs
	(Level 3)
	Three Months EndedMarch 31,
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2019		2018		2019		2018
	(In thousands)
Beginning balance	$	—	$	(59,~~088)~~909	$	—	$	(5,088)
Total gains	—		1426,~~060~~356		—		40,416
Settlements, net	—		~~937~~(4,649)		—		(3,712)
Ending balance	$	—	$	931,~~909~~616	$	—	$	31,616
Gains (losses) included in earnings relating to derivatives still held as of March 31, 2019 and 2018	$	—	$	13,939
Gains (losses) included in earnings relating to derivatives still held as of June 30, 2019 and 2018	$	—	$	23,158	$	—	$	34,232

During periods of market disruption, including periods of volatile oil and natural gas prices, rapid credit contraction or

illiquidity, it may be difficult to value certain of Legacy's derivative instruments if trading becomes less frequent and/or

market data becomes less observable. There may be certain asset classes that were previously in active markets with observable data that become illiquid due to changes in the financial environment. In such cases, more derivative instruments may fall to Level 3 and thus require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated or require greater estimation thereby resulting in valuations with less certainty. Further, rapidly changing commodity and unprecedented credit and equity market conditions could materially impact the valuation of derivative instruments as reported within Legacy's consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on Legacy's results of operations or financial condition.

Page 2829

Fair Value on a Non-Recurring Basis

Nonfinancial assets and liabilities measured at fair value on a non-recurring basis include certain nonfinancial assets and liabilities as may be acquired in a business combination and thereby measured at fair value; measurements of oil and natural gas property impairments; and the initial recognition of asset retirement obligations ("ARO") for which fair value is used. These ARO estimates are derived from historical costs as well as management’s expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, Legacy has designated these liabilities as Level 3. A reconciliation of the beginning and ending balances of Legacy’s asset retirement obligation is presented in Note 8.

Nonrecurring fair value measurements of proved oil and natural gas properties during the ~~three~~six months ended ~~March~~June 3130, 2019 consist of adjustments of the carrying value oil and natural gas properties to their fair value of $45.74 million. Legacy incurred impairment charges of $78.48 million as oil and natural gas properties with a net cost basis of $1214.13 million were written down to their fair value of $45.74 million. Legacy periodically reviews oil and natural gas properties for impairment when facts and circumstances indicate that their carrying value may not be recoverable. In order to determine whether the carrying value of an asset is recoverable, Legacy compares net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net cash flows using management’s expectations of future oil and natural gas prices. These future price scenarios reflect Legacy’s estimation of future price volatility. If the net capitalized cost exceeds the undiscounted future net cash flows, Legacy writes the net cost basis down to the discounted future net cash flows, which is management's estimate of fair value. Significant inputs used to determine the fair value include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company's estimated cash flows are the product of a process that begins with NYMEX forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Legacy's management believes will impact realizable prices. The inputs used by management for the fair value measurements utilized in this review include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3 for these types of assets.

The carrying amount of the revolving debt of $~~562~~475.5 million as of ~~March~~June 3130, 2019 approximates fair value because Legacy's current borrowing rate does not materially differ from market rates for similar bank borrowings. Legacy has classified the revolving debt as a Level 2 item within the fair value hierarchy. The carrying amount of the second lien term loan debt under Legacy’s Second Lien Term Loan Credit Agreement approximates fair value because Legacy’s current borrowing rate does not materially differ from market rates for similar borrowings. Legacy has classified the Second Lien Term Loans as a Level 2 item within the fair value hierarchy. As of ~~March~~June 3130, 2019, the fair values of the 2020 Senior Notes, the 2021 Senior Notes and the 2023 Convertible Notes were $609.68 million, $375.69 million and $353.58 million, respectively. As these valuations are based on unadjusted quoted prices in an active market, the fair values are classified as Level 1 items within the fair value hierarchy.

Page 2930

(67) Derivative Financial Instruments

Commodity derivative transactions

Due to the volatility of oil and natural gas prices, Legacy periodically enters into price-risk management transactions (e.g., swaps, enhanced swaps or collars) for a portion of its oil and natural gas production to achieve a more predictable cash flow, as well as to reduce exposure from price fluctuations. While the use of these arrangements limits Legacy’s ability to benefit from increases in the prices of oil and natural gas, it also reduces Legacy’s potential exposure to adverse price movements. Legacy’s arrangements, to the extent it enters into any, apply to only a portion of its production, provide only partial price protection against declines in oil and natural gas prices and limit Legacy’s potential gains from future increases in prices. None of these instruments are used for trading or speculative purposes.

These derivative instruments are intended to mitigate a portion of Legacy’s price-risk and may be considered hedges for

economic purposes, but Legacy has chosen not to designate them as cash flow hedges for accounting purposes. Therefore, all

derivative instruments are recorded on the balance sheet at fair value with changes in fair value being recorded in current period

earnings.

By using derivative instruments to mitigate exposures to changes in commodity prices, Legacy exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes Legacy, which creates credit risk. Legacy minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties.

The following table sets forth a reconciliation of the changes in fair value of Legacy's commodity derivatives for the three and six months ended ~~March~~June 3130, 2019 and 2018:

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands)
Beginning fair value of commodity derivatives	$	676,~~205~~166	$	67,~~318~~409	$	67,205	$	6,318
Total gain (loss) - oil derivatives	~~(49~~7,~~572)~~971		(~~742~~7,082)		(41,600)		(7,824)
Total gain (loss) - natural gas derivatives	(12,~~888~~258)		(~~962~~2,233)		(4,147)		(3,195)
Crude oil derivative cash settlements paid (received)	(~~7,045~~900)		46,~~894~~309		(7,945)		11,203
Natural gas derivative cash settlements paid (received)	(210,~~534~~979)		(23,~~099~~895)		(13,513)		(5,994)
Ending fair value of commodity derivatives	$	~~6,166~~—	$	~~7,409~~508	$	—	$	508

~~Page~~As of June 30, 2019, Legacy had no commodity derivatives.

As of March 31, 2019, Legacy had the following NYMEX West Texas Intermediate crude oil swaps paying floating prices and receiving fixed prices for a portion of its future oil production as indicated below:

		Average	Price
Time Period	Volumes (Bbls)	Price per Bbl	Range per Bbl
April-December 2019	2,475,000	$61.33	$57.15	-	$67.65

As of March 31, 2019, Legacy had the following Midland-to-Cushing crude oil differential swaps paying a floating differential and receiving a fixed differential for a portion of its future oil production as indicated below:

		Average	Price
Time Period	Volumes (Bbls)	Price per Bbl	Range per Bbl
April-December 2019	1,743,000	$(3.61)	$(1.15)	-	$(5.60)

As of March 31, 2019, Legacy had the following Midland-to-Cushing crude oil differential enhanced swaps paying a floating differential and receiving a fixed differential for a portion of its future oil production as indicated below:

Average Short

Average Swap

Time Period

Volumes (Bbls)

Call Price per Bbl

Price per Bbl

April-December 2019

1,100,000

$70.00

$(2.91)

As of March 31, 2019, Legacy had the following NYMEX Henry Hub natural gas swaps paying floating natural gas prices and receiving fixed prices for a portion of its future natural gas production as indicated below:

		Average	Price
Time Period	Volumes (MMBtu)	Price per MMBtu	Range per MMBtu
April-December 2019	26,225,000	$3.30	$3.05	-	$3.39

Interest rate derivative transactions

Due to the volatility of interest rates, Legacy periodically enters into interest rate risk management transactions in the form of interest rate swaps for a portion of its outstanding debt balance. These transactions allow Legacy to reduce exposure to interest rate fluctuations. While the use of these arrangements limits Legacy’s ability to benefit from decreases in interest rates, it also reduces Legacy’s potential exposure to increases in interest rates. Legacy’s arrangements, to the extent it enters into any, apply to only a portion of its outstanding debt balance, provide only partial protection against interest rate increases and limit Legacy’s potential savings from future interest rate declines. It is never management’s intention to hold or issue derivative instruments for speculative trading purposes. Conditions sometimes arise where actual borrowings are less than notional amounts hedged, which has, and could result in overhedged amounts.

Legacy does not designate these derivatives as cash flow hedges, even though they reduce its exposure to changes in interest rates. Therefore, the mark-to-market of these instruments is recorded in current earnings as a component of interest expense. The total impact on interest expense from the mark-to-market and settlements was as follows:

	Three Months Ended March 31,
	2019		2018
	(In thousands)
Beginning fair value of interest rate swaps	$	2,044	$	2,117
Total gain on interest rate swaps	(80)		943
Cash settlements received	(629)		(77)
Ending fair value of interest rate swaps	$	1,335	$	2,983

Page 31

The table below summarizes the interest rate swap position as of March 31, 2019:


	Three Months Ended June 30,						Six Months Ended June 30,

	2019		2018		2019		2018
	(In thousands)
Beginning fair value of interest rate swaps	$	1,335	$	2,983	$	2,044	$	2,117
Total gain on interest rate swaps	(39)		372		(119)		1,315
Cash settlements received	(1,296)		(271)		(1,925)		(348)
Ending fair value of interest rate swaps	$	—	$	3,084	$	—	$	3,084

Weighted Average

Estimated Fair Value at

Notional Amount

Fixed Rate

Effective Date

Maturity Date

March 31, 2019

(Dollars in thousands)

235,000

1.363

9/1/2015

9/1/2019

1,335

(8) Asset Retirement Obligation

(7) Asset Retirement Obligation

An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is recognized as a liability in the period in which it is incurred and becomes determinable. When liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased. The fair value of the additions to the ARO asset and liability is estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors; and (iv) a credit-adjusted risk-free interest rate. These inputs require significant judgments and estimates by Legacy's management at the time of the valuation and are the most sensitive and subject to change. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted using the units of production method. Should either the estimated life or the estimated abandonment costs of a property change materially upon Legacy’s periodic review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using Legacy’s credit-adjusted-risk-free rate. The carrying value of the ARO is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost. When obligations are relieved by sale of the property or plugging and abandoning the well, the related liability and asset costs are removed from Legacy's balance sheet. Any difference in the cost to plug and the related liability is recorded as a gain or loss on Legacy's statement of operations in the disposal of assets line item.

The following table reflects the changes in the ARO during the ~~three~~six months ended ~~March~~June 3130, 2019 and year ended December 31, 2018:

	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
	(In thousands)
Asset retirement obligation - beginning of period	$	252,734	$	274,686
Liabilities incurred with properties acquired	—		226
Liabilities incurred with properties drilled	—30		65
Liabilities settled during the period	(~~893~~1,828)		(2,258)
Liabilities associated with properties sold	(243)		(27,673)
Current period accretion	36,~~207~~442		12,568
Current period revisions to previous estimates	—		(4,880)
Asset retirement obligation - end of period	$	~~254~~257,~~805~~135	$	252,734

~~Page~~(9) Stockholders' 32Deficit / Partners' Deficit

(8) Stockholders' Deficit / Partners' Deficit

Preferred Units

On September 20, 2018, in connection with the Corporate Reorganization, all of Legacy LP's 8% Series A Fixed-to-Floating Cumulative Redeemable Perpetual Preferred Units and 8.000% Series B Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units outstanding were converted into shares of common stock.

Incentive Distribution Units

On September 20, 2018, all of Legacy LP's Incentive Distribution Units outstanding were canceled in connection with the Corporate Reorganization.

Page 32

Loss per share / unit

The following table sets forth the computation of basic and diluted income per share / unit:

	Three Months Ended						Six Months Ended
	March 31,
	June 30,						June 30,
	2019		2018		2019		2018
	(In thousands)
Net Income (loss)	$(62,770)	~~(78,378)~~	$	64(50,~~382~~709)	$	(141,148)	$	13,673
Net income attributable to unitholders	(7862,~~378~~770)		64(50,~~382~~709)		(141,148)		13,673
Weighted average number of shares / units outstanding - basic	~~111~~114,~~225~~811		~~103~~104,~~994~~369		113,028		104,183
Effect of dilutive securities:
Restricted shares	—		~~307~~—		—		894
Weighted average number of shares / units outstanding - diluted	~~111~~114,~~225~~811		104,~~301~~369		113,028		105,077
Basic and Diluted (loss) income per share / units	$	(0.7055)	$	(0.6249)	$	(1.25)	$	0.13

For the ~~three~~six months ended ~~March~~June 3130, 2019, 7,~~773~~694,~~732~~651 restricted stock units were excluded from the calculation of diluted loss per share due to their anti-dilutive effect. For the three and ~~three~~six months ended ~~March~~June 3130, 2018, ~~191~~135,430 restricted units and 1,~~160,~~424,114 phantom units were excluded from the calculation of diluted loss per share due to their anti-dilutive effect.

As of ~~March~~June 3130, 2019, 17,921,170 shares related to 2023 Convertible Notes were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

(910) Stock-Based Compensation

Legacy LP Long-Term Incentive Plan

On March 15, 2006, a Long-Term Incentive Plan (as amended, “Legacy LP LTIP”) for Legacy was created and Legacy adopted the Legacy LP LTIP for its employees, consultants and directors, its affiliates and its general partner. The awards under the long-term incentive plan may include unit grants, restricted units, phantom units, unit options and unit appreciation rights (“UARs”). The Legacy LP LTIP permits the grant of awards that may be made or settled in units up to an aggregate of 5,000,000 units.

As of ~~March~~June 3130, 2018, grants of awards net of forfeitures and, in the case of phantom units, historical exercises covering 3,~~399~~459,~~767~~197 units had been made, comprised of 266,014 unit option awards, 988,~~873~~207 restricted unit awards, 1,424,114 phantom unit awards and ~~720~~780,~~766~~862 unit awards.

Pursuant to the terms of the Corporate Reorganization, the Legacy LP LTIP was terminated.

Page 33

Unit Appreciation Rights

Legacy LP previously issued UARs under the Legacy LP LTIP to employees. A unit appreciation right is a notional unit that entitles the holder, upon vesting, to receive cash valued at the difference between the closing price of units on the exercise date and the exercise price, as determined on the date of grant. Because these awards were settled in cash, Legacy accounted for the UARs by utilizing the liability method.

For the ~~three~~six-months ended ~~March~~June 3130, 2018, Legacy recorded $01.85 million of compensation expense due to the change in liability from December 31, 2017 and 2016, respectively, based on its use of the Black-Scholes model to estimate the ~~March~~June 3130, 2018 fair value of these UARs.

Legacy LP did not issue UARs to employees during the year ended December 31, 2018 or the ~~three~~six-month period ended ~~March~~June 3130, 2019. All outstanding UARs vested on September 20, 2018 in connection with the Corporate Reorganization and were subsequently exercised or forfeited.

Page 33

Phantom Units

Legacy LP previously issued phantom units under the Legacy LP LTIP to executive officers. A phantom unit is a notional unit that entitles the holder, upon vesting, to receive either one Partnership unit for each phantom unit or the cash equivalent of a Partnership unit, as stipulated by the form of the grant. Legacy accounted for the phantom units settled in Partnership units by utilizing the equity method. Legacy accounted for the phantom units settled in cash by utilizing the liability method. On September 20, 2018, in connection with the Corporate Reorganization, 391,674 Phantom units that settle in cash and 1,032,440 phantom units that settle in units vested.

Compensation expense related to the phantom units was $1123.82 million for the ~~three~~six months ended ~~March~~June 3130, 2018. All phantom units vested on September 20, 2018 in connection with the Corporate Reorganization.

Restricted Units

Legacy LP previously issued restricted units to certain employees and members of management. All restricted units vested on September 20, 2018 in connection with the Corporate Reorganization.

Compensation expense related to restricted units was $0.24 million for the ~~three~~six months ended ~~March~~June 3130, 2018.

Board Units

On May 15, 2018, Legacy granted and issued 126,~~019~~010 units to four non-employee directors who serve on the Board of Directors of Legacy and 612,~~010~~450 units to two non-employee directors of Legacy LP who, after the corporate reorganization, do not serve on the Board of Directors of Legacy Inc. The value of each unit was $8.69 at the time of issuance.

Legacy Reserves Inc. 2018 Omnibus Incentive Plan

On September 19, 2018, the Legacy Inc. 2018 Omnibus Incentive Plan (the "Legacy Inc. LTIP") was approved by the former unitholders of Legacy LP in connection with the Corporate Reorganization for it and its affiliates' employees, consultants and directors. The Legacy Inc. LTIP provides for up to 10,500,000 shares (the "Share Reserve") to be used for awards, and that the Share Reserve will increase proportionately by 10% of all shares of common stock issued by Legacy Inc. after the effective date of the Legacy Inc. LTIP and before the first anniversary of the effective date. The awards under the Legacy Inc. LTIP may include stock grants, restricted stock, restricted stock units ("RSUs") and stock options. As of ~~March~~June 3130, 2019, grants of awards net of forfeitures covering 7,~~806~~727,~~302~~221 shares had been made, compromised of 7,~~773~~694,~~732~~651 restricted stock units and 32,570 stock awards.

Page 34

Restricted Stock Units

During the ~~three~~six months ended ~~March~~June 3130, 2019, Legacy issued an aggregate 516,594 RSUs to executive and non-executive employees. The RSUs vest over a three-year period. Non-cash compensation expense related to the RSUs was $48.23 million for the ~~three~~six months ended ~~March~~June 3130, 2019. RSUs are accounted for under the equity method.

The following table summarizes the status of RSU activity since January 1, 2019:

	Number of Restricted Stock Units	Grant Date Fair Value
Outstanding at January 1, 2019	7,302,809	$	4.88
Granted	516,594	$	1.32
Cancelled/Forfeited	(45124,~~671~~752)	$	4.23
Outstanding at March 31, 2019	7,773,732	$	4.65
Outstanding at June 30, 2019	7,694,651	$	4.65

As of ~~March~~June 3130, 2019, there was a total of $2723.83 million of unrecognized compensation expense related to the unvested portion of these RSUs. At ~~March~~June 3130, 2019, this cost was expected to be recognized over a weighted-average period of 2.9873 years. Pursuant to the provisions of ASC 718, Legacy’s issued shares, as reflected in the accompanying consolidated balance sheet at ~~March~~June 3130, 2019, do not include 7,~~773~~694,~~732~~651 shares related to unvested RSUs.

Board Shares

On September 25, 2018, Legacy granted and issued 5,030 shares to four non-employee directors who serve on the Board of Directors of Legacy in accordance with Legacy's director compensation policy. The value of each share was $4.97 at the time of issuance.

~~(10) Income~~On ~~Taxes~~October 16, 2018, Legacy granted and issued 12,450 shares to one non-employee director who serves on the Board of Directors of Legacy in accordance with Legacy's director compensation policy. The value of each share was $5.02 at the time of issuance.

(11) Income Taxes

Effective September 20, 2018, pursuant to the Merger Agreement, Legacy Inc. became subject to federal and state income taxes. Prior to consummation of the Corporate Reorganization, Legacy LP was treated as a partnership for federal and state income tax purposes, in which the taxable income or loss was passed through to its unitholders. Legacy LP was subject to Texas margin tax. In addition, certain of Legacy LP’s subsidiaries were c-corporations subject to federal and state income taxes. Therefore, with the exception of the state of Texas and certain subsidiaries, Legacy LP did not directly pay federal and state income taxes and recognition was not given to federal and state income taxes for its operations.

On December 22, 2017, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The provisions of the Tax Act that impact us include, but are not limited to, (1) reducing the U.S. federal corporate income tax rate from 35% to 21%, (2) temporary bonus depreciation that will allow for full expensing of certain qualified property acquired after September 27, 2017, (3) limitations on the maximum deduction for net operating loss (NOL) carryforwards generated in tax years beginning after December 31, 2017, to 80 percent of a taxpayer’s taxable income and (4) limitations on the maximum deduction for net business interest expense in tax years beginning after December 31, 2017, to 30% of the taxpayer’s adjusted taxable income. We have previously reported preliminary amounts for the income effects of the Tax Act for Legacy as of December 31, 2017.

For the ~~period~~six months ended ~~March~~June 3130, 2019 and 2018 we recorded income/(loss) before income taxes of $(78141,~~378~~148) and $6414,~~869.~~290 respectively. All of Legacy's income is sourced within the United States. The effective combined U.S. federal and state income tax rates were 0.00% and 04.7530% for the ~~three~~six months ended ~~March~~June 3130, 2019 and 2018, respectively. During the ~~three~~six months ended ~~March~~June 3130, 2019, the Legacy Inc. has recorded a full valuation allowance against its deferred tax position. A valuation allowance has been recorded as management does not believe that it is more-likely-than-not that its deferred tax assets will be realized.

Page 35

(1112) Leases

As previously described in Note 1 – Summary of Significant Accounting Policies, we lease certain office space, office equipment, production field offices, compressors, drilling rigs, vehicles and other production equipment under cancellable and non-cancelable leases to support our operations.

The components of our total lease cost were as follows:

	Three Months Ended	Six Months Ended
	March 31,
	June 30,	June 30,
	2019	2019
	(In thousands)
Operating lease cost	$~~836~~800	$1,636
Finance lease cost:
Amortization of right-of-use assets	457	61
Interest on lease liabilities	448	52
Total finance lease costs	8105	113
Short-term lease cost	$3,~~675~~210	$6,885
Total	$4,~~519~~115	$8,634

Supplemental cash flow information related to our leases is included in the table below:

	Three Months Ended		Six Months Ended
	March 31,
	June 30,		June 30,
	2019		2019
	(In thousands)
Cash paid for amounts included in lease liabilities:
Operating cash flows from operating leases	$	4,~~511~~010	$	8,521
Operating cash flows from finance leases	8105		113
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	~~836~~11	$	9,044
Finance leases	6910		2,011

Page 36

Supplemental balance sheet information related to our leases is included in the table below:

	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
	2019
	(In thousands)
Operating Leases
Operating lease right-of-use assets	$	3,~~963~~360
Other current liabilities	(1,~~742~~131)
Other long-term liabilities	(2,477)
Total operating lease liabilities	$	(43,~~219~~608)
Finance Leases
Other property and equipment	961,005
Accumulated depreciation and amortization	(683)
Other property and equipment, net	$	90922
Other current liabilities	(22875)
Other long-term liabilities	(7069)
Total finance lease liabilities	$	(92944)

Our weighted average remaining lease term and weighted average discount rate by lease classification were as follows:

	Three Months Ended
	Six Months Ended
	March 31,
	June 30,
	2019
Weighted Average Remaining Lease Term (Years)
Operating leases	1.8873
Finance leases	2.5759
Weighted Average Discount Rate
Operating leases	24.3141	%
Finance leases	24.3141	%

Our lease liabilities with enforceable contract terms that are greater than one year mature as follows:

	Operating Leases		Finance Leases
	(in thousands)
Remainder of 2019	$	3,100	$	50
Year 1	$	2,867	$	519
2020	1,612		47
Year 2	1,123		480
2021	376		27
Year 3	291		245
2022	205		—
Year 4	199		42
2023	110		—
Year 5	67		—
Thereafter	—		—
Total lease payments	$	54,~~403~~547	$	~~124~~1,286
Less imputed interest	(~~1,184~~939)		(32342)
Total	$	43,~~219~~608	$	92944

Page 37

(1213) Guarantors

Legacy LP's 2020 Senior Notes were issued in a private offering on December 4, 2012 and were subsequently registered through a public exchange offer that closed on January 8, 2014. Legacy LP's 2021 Senior Notes were issued in two separate private offerings on May 28, 2013 and May 8, 2014. $250 million aggregate principal amount of our 2021 Senior Notes were subsequently registered through a public exchange offer that closed on March 18, 2014. The remaining $300 million of aggregate principal amount of Legacy's 2021 Senior Notes were subsequently registered through a public exchange offer that closed on February 10, 2015. Legacy LP's 2023 Convertible Notes were issued in exchange for portions of the 2020 Senior Notes and 2021 Senior Notes on September 20, 2018. The 2020 Senior Notes, the 2021 Senior Notes and the 2023 Convertible Notes are guaranteed by Legacy LP's 100% owned subsidiaries Legacy Reserves Operating GP LLC, Legacy Reserves Operating LP, Legacy Reserves Services LLC, Legacy Reserves Energy Services LLC, Legacy Reserves Marketing LLC, Dew Gathering LLC and Pinnacle Gas Treating LLC, which constitute all of Legacy's wholly-owned subsidiaries other than Legacy Reserves Finance Corporation, and certain other future subsidiaries (the “Guarantors”, together with any future 100% owned subsidiaries that guarantee the Partnership's 2020 Senior Notes, 2021 Senior Notes and the 2023 Convertible Notes, the “Subsidiaries”) as well as Legacy Inc. and the General Partner, as parent guarantors (the "Parent Guarantors"). The Subsidiaries are 100% owned, directly or indirectly, by the Partnership and the guarantees by the Subsidiaries are full and unconditional, except for customary release provisions described in “—Footnote 23—Debt.” Legacy LP is 100% owned, directly or indirectly, by the Parent Guarantors and the guarantees by the Parent Guarantors are full and unconditional, except for customary release provisions described in “—Footnote 23—Debt.” Legacy LP has no assets or operations independent of the Subsidiaries, and there are no significant restrictions upon the ability of the Subsidiaries to distribute funds to the Partnership. The guarantees constitute joint and several obligations of the Guarantors and Parent Guarantors.

(1314) Subsequent Events

On May 9, 2019, the lenders for the Credit Agreement agreed to waive Legacy's compliance with the ratio of consolidated current assets to consolidated current liabilities covenant contained in the Credit Agreement for the fiscal quarter ended March 31, 2019None.

Page 38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Information

This document contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about:

•the Chapter 11 proceedings (as defined below), including our ability to ~~pursue,~~ obtain ~~and~~confirmation ~~consummate~~of ~~financial,~~a ~~transactional~~plan ~~and~~under ~~other~~Chapter ~~strategic~~11 ~~alternatives~~of tothe ~~address~~Bankruptcy ~~our~~Code ~~liquidity,~~(as ~~near-term~~defined ~~debt~~below) ~~maturities~~or ~~and~~an ~~capital structure~~alternative restructuring transaction;

•~~the~~our ~~adequacy~~ability ~~and~~to ~~availability~~obtain ofthe ~~capital~~approval ~~resources,~~of ~~credit~~the ~~and~~Bankruptcy ~~liquidity,~~Court ~~including,~~(as ~~but~~defined ~~not~~below) ~~limited~~with respect to, ~~debt~~motions ~~refinancing~~ or ~~extensions,~~ ~~exchanges~~other orrequests ~~repurchases~~made ofto ~~debt,~~the ~~issuances~~Bankruptcy ofCourt ~~debt~~in orthe ~~equity~~Chapter ~~securities~~11 proceedings, ~~access~~including tomaintaining ~~additional~~strategic ~~borrowing~~control as debtor-in-posssession;

~~capacity~~•the ~~and~~effects ~~our~~of ~~ability~~the toChapter ~~generate~~11 ~~sufficient~~proceedings ~~cash~~on ~~flow~~the ~~from~~Company ~~operations~~and toon ~~fund~~the interests of the various constituents, including holders of our ~~capital~~common ~~expenditures~~stock and ~~meeting~~indebtedness

~~working~~•the length of time that the Company will operate under Chapter 11 protection and the continued availability of capital ~~needs~~during the pendency of the proceedings;

•~~our~~the ~~ability~~adequacy and availability of capital resources, credit and liquidity, including, but not limited to, ~~comply~~debt ~~with~~refinancing or extensions, ~~renegotiate~~exchanges or ~~receive~~repurchases ~~waivers~~of debt, issuances of debt ~~covenants~~or ~~under~~equity securities, access to additional borrowing capacity and our ~~Credit~~ability ~~Agreement~~to ~~(as~~generate ~~defined~~sufficient cash flow from operations to fund our capital expenditures and meeting working capital needs;

below) and our Term Loan Credit Agreement (as defined below);

•our business strategy;

•the amount of oil and natural gas we produce;

•the price at which we are able to sell our oil and natural gas production;

•our ability to identify, acquire, exploit and appropriately finance additional oil and natural gas properties at economically attractive prices;

•our ability to replace reserves and increase reserve value;

•our drilling locations and our ability to continue our development activities at economically attractive costs;

•the level of our lease operating expenses, general and administrative costs and finding and development costs;

•the level of our capital expenditures;

•our ability to divest non-core assets at economically attractive prices;

•our future operating results; and

•our plans, objectives, expectations and intentions.

All of these types of statements, other than statements of historical fact included in this document, are forward-looking

statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this document are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this document are not guarantees of future performance, and our expectations may not be realized or the forward-looking events and circumstances may not occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in Part 1. Item 1A. Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2018. The forward-looking statements in this document speak only as of the date of this document; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly.

Page 39

forward-looking events and circumstances may not occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in Part 1, Item 1A. Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2018 and in Part 2, Item 1A. Risk Factors in this quarterly report on Form 10-Q. The forward-looking statements in this document speak only as of the date of this document; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly.

Overview

Because of our historical growth through acquisitions and development of properties as well as large fluctuations in commodity prices, historical results of operations and period-to-period comparisons of these results and certain financial data may not be meaningful or indicative of future results.

~~Going~~Chapter ~~Concern~~11 Proceedings

~~We have significant obligations and commitments coming due in the near term.~~ On ~~March~~June 2118, 2019, we(the ~~entered~~“Petition ~~into~~Date”), ~~an amendment to~~ the ~~Credit~~Company ~~Agreement~~and ~~(as~~certain ~~defined~~of ~~below)~~its ~~pursuant~~direct toand ~~which~~indirect ~~the~~subsidiaries ~~lenders~~(collectively ~~agreed~~with ~~to extend~~ the ~~maturity date from April 1~~Company, ~~2019~~the to“Debtors”) ~~May~~filed ~~31,~~voluntary ~~2019~~petitions ~~and~~(the as“Bankruptcy ofPetitions”) ~~March~~for ~~31,~~relief ~~2019, we had availability~~ under ~~the~~Chapter ~~Credit~~11 ~~Agreement~~ of ~~$13.0~~the ~~million~~U. ~~Without~~S. ~~additional~~Bankruptcy ~~sources~~Code of(the ~~capital~~“Bankruptcy orCode”) ain ~~significant~~the ~~restructuring~~U.S. ofBankruptcy ~~our~~Court ~~balance~~for ~~sheet,~~ the ~~maturity~~Southern District of ~~our~~Texas ~~Credit~~(the ~~Agreement raises~~“Bankruptcy ~~substantial~~Court”). ~~doubt~~The ~~about~~Debtors’ ~~our~~Chapter ~~ability~~11 tocases ~~continue~~are asbeing aadministered ~~going~~jointly ~~concern,~~under ~~which~~the ~~means~~caption ~~that~~In were ~~may~~Legacy beReserves ~~unable~~Inc. toet ~~continue~~al. ~~operations for~~ (the ~~foreseeable~~“Chapter ~~future~~11 cases” or ~~realize~~“Chapter ~~assets~~11 ~~and discharge liabilities in the ordinary course of operation~~proceedings”).

InThe ~~order~~Debtors toare ~~improve~~operating ~~our~~their ~~liquidity~~businesses ~~position~~as ~~and~~“debtors-in-possession” ~~address~~under ~~near-term~~the ~~debt~~jurisdiction ~~maturities,~~of wethe ~~are~~Bankruptcy ~~currently~~Court ~~evaluating~~and ~~financial,~~in ~~transactional~~accordance ~~and~~with ~~other~~the ~~strategic~~applicable ~~alternatives.~~provisions ~~There~~of ~~can~~the beBankruptcy noCode. ~~assurance~~The ~~that~~Bankruptcy ~~sufficient~~Court ~~liquidity~~has ~~can~~granted becertain ~~raised~~relief orrequested ~~that~~by ~~debt~~the ~~maturities~~Debtors ~~can~~enabling bethe ~~extended~~Company ~~from~~to ~~any~~conduct ~~one~~its orbusiness ~~more~~activities ofin ~~these~~the ~~transactions~~ordinary orcourse, ~~that~~including, ~~these~~among ~~transactions~~other ~~can~~things beand ~~consummated~~subject ~~within~~to the ~~period~~terms ~~needed~~and toconditions ~~meet~~of ~~our~~such ~~obligations.~~orders, ~~Should~~authorization ~~Legacy~~to bepay ~~unable~~employee wages and benefits, to ~~extend~~pay ~~the~~certain ~~debt~~taxes ~~maturities~~and orgovernmental ~~consummate~~fees aand ~~transaction~~charges, weto ~~will~~continue ~~not~~to ~~have~~operate ~~sufficient~~our ~~liquidity~~cash tomanagement ~~repay~~system ~~its~~in ~~Credit~~the ~~Agreement~~ordinary atcourse, ~~maturity~~to ~~and~~secure ~~may~~debtor-in-possession ~~need~~financing, to ~~seek~~remit ~~relief~~funds ~~under~~we ~~the~~hold ~~U.S.~~from ~~Bankruptcy~~time ~~code.~~to ~~Please~~time ~~see~~for ~~“Risk~~the ~~Factors—Risks~~benefit ~~Related~~of tothird ~~Our~~parties ~~Business—We~~(such ~~have~~as ~~engaged~~royalty ~~financial~~owners), and ~~legal advisors~~ to ~~assist~~pay usthe ~~in,~~prepetition ~~among~~claims ~~other~~of ~~things,~~certain ~~evaluating~~of ~~financial,~~our ~~transactional~~vendors ~~and~~that ~~other~~hold ~~strategic~~liens ~~alternatives~~under toapplicable ~~address~~non-bankruptcy ~~our~~law. For ~~liquidity~~goods and ~~capital~~services ~~structure~~provided ~~that~~following ~~may~~the bePetition ~~time consuming~~Date, ~~disruptive~~the ~~and~~Company ~~costly~~intends to ~~our~~pay ~~business,~~vendors ~~and~~in ~~—We~~full ~~may~~under ~~need~~normal toterms ~~seek~~in ~~relief~~the ~~under~~ordinary ~~the~~course Uof business.S. In ~~Bankruptcy~~connection ~~Code,~~with ~~even~~the ifChapter we11 ~~are~~cases, ~~successful~~Legacy inLP ~~effecting~~entered into a ~~financial,~~senior ~~transactional~~secured orsuperpriority ~~other~~debtor-in-possession ~~strategic~~credit ~~alternative.~~agreement, ~~Any~~dated ~~bankruptcy~~as ~~proceeding~~of ~~may~~June ~~result~~21, in2019, ~~holders~~among ofitself ~~our~~as ~~equity~~debtor, ~~securities~~debtor-in-possession and ~~our~~borrower, the other ~~stakeholders~~loan ~~receiving~~parties ~~little~~party orthereto, noas ~~consideration~~debtors,” debtors-in-possession ~~Part~~and 1guarantors, ~~Item~~Wells 1AFargo Bank, ~~Risk~~National ~~Factors~~Association, ofas ~~Legacy’s~~administrative ~~annual~~agent ~~report~~and oncollateral, ~~Form~~and ~~10-K~~the ~~for~~other ~~the~~lenders ~~fiscal~~party ~~year~~thereto ~~ended~~(the ~~December~~“DIP ~~31,~~Credit ~~2018~~Agreement”).

~~Recent~~Restructuring ~~Developments~~Support Agreement

On ~~March~~June 2110, 2019, wethe Debtors entered into a restructuring support and lock-up agreement (the ~~Twelfth~~“Restructuring ~~Amendment~~Support Agreement”) with (i) the lenders (the “~~Twelfth~~Supporting ~~Amendment~~Term Lenders”) tounder ~~our~~the Term Loan Credit Agreement. ~~The~~dated as of October 25, 2016 among Legacy LP, as borrower, the guarantors party thereto, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (as amended, the “Term Loan Credit Agreement”) and (ii) certain lenders (the “Supporting RBL Lenders” and, together with the Supporting Term Lenders, the “Supporting Lenders”) under the Third Amended and Restated Credit Agreement dated as of April 1, 2014 among Legacy LP, as borrower, the guarantors party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (as amended, the “Credit Agreement”).

~~Twelfth~~Subsequent ~~Amendment~~to ~~provides~~entering ~~for,~~into ~~among~~the ~~other~~Restructuring ~~things~~Support Agreement, ~~(i)~~on anJune ~~extension~~13, of2019, the ~~maturity~~Company ofentered into the ~~Credit~~First ~~Agreement~~Amended toand ~~May~~Restated ~~31,~~Restructuring ~~2019,~~Support ~~(ii)~~and anLock-Up ~~increase~~Agreement in(together ~~the~~with ~~applicable~~all ~~interest~~exhibits ~~rate~~and byschedules ~~2.25%~~thereto, ~~(iii)~~including the ~~payment~~term ofsheet aattached ~~fee~~as ~~equal~~Exhibit toA ~~0.35%~~thereto, of the ~~amount~~“Amended ofRestructuring Support Agreement”) with (i) the ~~current~~Supporting ~~borrowing~~Term ~~base~~Lenders, ~~under~~(ii) the ~~Credit~~Supporting ~~Agreement,~~RBL ~~payable~~Lenders onand ~~the~~(iii) ~~effective~~certain ~~date~~(a) holders of ~~the~~6.625% ~~Twelfth~~Senior ~~Amendment,~~Notes due 2021 (ivthe “2021 Note Holders”) issued under the ~~mandatory~~indenture ~~termination~~dated as of ~~our~~May ~~derivative~~28, ~~contracts~~2013, ~~three~~by ~~days~~and ~~prior~~among toLegacy ~~the~~LP, ~~maturity~~Legacy ofReserves Finance Corporation, the ~~Credit~~guarantors ~~Agreement~~party thereto and Wilmington Trust, National Association (~~vi)~~as ~~the~~successor ~~reduction~~to inWells ~~the~~Fargo ~~borrowing~~Bank, ~~base~~National ~~from~~Association), ~~$575~~as ~~million~~indenture totrustee ~~$570~~(as ~~million~~supplemented, ~~effective~~the ~~May~~“2021 ~~22,~~Notes ~~2019~~Indenture”), (~~vii~~b) ~~the~~holders ~~reduction~~of in8% Senior Notes due 2020 (the ~~maximum~~“2020 ~~consolidated~~Note ~~cash~~Holders”) ~~balance~~issued weunder ~~can~~the ~~maintain~~indenture todated ~~$15~~as ~~million,~~of ~~effective~~December ~~April~~4, 12012, ~~2019~~by and ~~(viii)~~among ~~the~~Legacy ~~payment~~LP, ofLegacy aReserves ~~fee~~Finance ~~equal~~Corporation, tothe ~~0.15%~~guarantors ofparty ~~the~~thereto ~~amount~~and ofWilmington ~~the~~Trust, ~~current~~National ~~borrowing~~Association ~~base~~(as ~~under~~successor ~~the~~to ~~Credit~~Wells ~~Agreement~~Fargo Bank, ~~payable~~National onAssociation), as indenture trustee (as supplemented, the ~~earliest~~“2020 toNotes ~~occur~~Indenture”) ofand (xc) ~~May~~holders ~~31,~~of ~~2019~~8% orConvertible ~~(y)~~Senior anNotes ~~acceleration~~due of2023 (together with the ~~outstanding~~2021 ~~indebtedness~~Note ~~under~~Holders and the ~~Credit~~2020 ~~Agreement.~~Note ~~Additionally~~Holders, the ~~Twelfth Amendment~~“Supporting ~~waives~~Noteholders,” ~~certain~~and ~~deviations~~the ~~from~~Supporting Lenders and the ~~requirements~~Supporting ofNoteholders, collectively, the ~~Credit~~“Supporting ~~Agreement,~~Creditors”) ~~including~~issued under the ~~delivery~~indenture dated as of ~~fiscal~~September ~~year~~20, 2018, ~~audited~~by ~~financial~~and ~~statements~~among ~~with~~Legacy aLP, ~~“going~~Legacy ~~concern”~~Reserves orFinance ~~like~~Corporation, ~~qualification~~the orguarantors ~~exception~~party thereto and ~~non-compliance~~Wilmington ~~with~~Trust, ~~the~~National ~~current~~Association, ~~ratio~~as ~~covenant~~indenture ~~for~~trustee ~~the~~and ~~fourth~~conversion ~~quarter~~agent of(as ~~2018~~supplemented, the “2023 Notes Indenture”).

We anticipate breaching certain covenants under Legacy LP's $1.5 billion secured revolving credit facility with Wells Fargo Bank, National Association, as administrative agent and the lenders party thereto as amended most recently by the Twelfth Amendment thereto (as amended, the “Credit Agreement”) and Legacy LP's second lien term loan credit agreement (as amended, our “Term Loan Credit Agreement”), which would constitute a default under our Credit Agreement or our Term Loan Credit Agreement. On May 9, 2019, we received a waiver from the lenders under our Credit Agreement for non-compliance

Page 40

The ~~with~~Amended ~~the~~Restructuring ~~current~~Support ~~ratio~~Agreement ~~covenant~~contemplates, ~~for~~among ~~the~~other ~~quarter ended March 31~~things, ~~2019.~~that ~~Further,~~the ~~while~~Company wewill: ~~received~~(i) afile ~~waiver of~~ the ~~covenant~~Chapter ~~under~~11 ~~our~~proceedings ~~Term~~to ~~Loan~~effect ~~Credit~~a ~~Agreement~~restructuring ~~that~~transaction ~~requires~~through usa topre-negotiated ~~deliver~~Chapter ~~audited~~11 ~~financial~~plan ~~statements~~of ~~without~~reorganization a(the “~~going concern~~Plan”) orto ~~like~~be ~~qualification~~filed orwith ~~exception,~~the ~~such~~Bankruptcy ~~waiver~~Court; ~~expires~~(ii) onenter ~~May~~into ~~31,~~the ~~2019~~DIP ~~and~~Credit ~~such~~Agreement; ~~default~~(iii) ~~cannot~~consummate becertain ~~remedied.~~equity ~~Defaults,~~investments ifthrough ~~not remedied, would require~~ a ~~waiver~~rights ~~from~~offering ~~our~~and ~~lenders~~committed inequity ~~order~~backstops; ~~for us to avoid an event of default~~ and ~~subsequent~~(iv) ~~acceleration~~enter ofinto ~~all~~a ~~amounts~~new ~~outstanding~~senior-secured ~~under~~revolving ~~our~~asset-based ~~Credit~~lending ~~Agreement~~credit orfacility ~~our~~in ~~Term~~a ~~Loan~~maximum ~~Credit~~amount ~~Agreement~~of ~~or foreclosure on our oil and natural gas properties~~$500.0 ~~Furthermore,~~million (the ~~failure~~“Exit toFacility”) ~~repay~~funded ~~outstanding~~by ~~indebtedness when due under our Credit Agreement and~~ certain ~~other~~of ~~payment~~the ~~defaults~~lenders ~~or acceleration~~ under ~~our~~the Credit Agreement ~~or our Term Loan Credit Agreement could cause a cross-default or cross-acceleration of all of our indebtedness~~.

AsThe ~~set~~Amended ~~forth~~Restructuring ~~under~~Support ~~“Investing~~Agreement ~~Activities”~~contains ~~below,~~certain wecovenants ~~have~~on ~~entered~~the ~~into~~part ~~oil~~of ~~and~~each ~~natural~~of ~~gas~~the ~~derivatives~~Company ~~designed~~and tothe ~~mitigate~~Supporting ~~the~~Creditors, ~~effects~~including ofthat ~~price~~the ~~fluctuations~~Supporting ~~covering~~Creditors avote ~~portion~~in favor of ~~our~~the ~~expected~~Plan ~~production,~~and ~~which~~otherwise ~~allows~~use usgood faith efforts to ~~mitigate~~negotiate, ~~but~~execute ~~not~~and ~~eliminate,~~implement ~~oil~~the ~~and~~restructuring ~~natural~~transactions ~~gas~~contemplated ~~price~~by ~~risk~~the Amended Restructuring Support Agreement and the Plan. ~~Such~~Additionally, ~~derivative~~the ~~instruments~~Amended ~~are~~Restructuring ~~not~~Support ~~designated~~Agreement asprovides ~~cash~~for ~~flow~~certain ~~hedges~~conditions to the obligations of the parties and for termination upon the occurrence of certain events, ~~therefore~~including without limitation, the ~~mark-~~failure to~~-market~~ ~~adjustment~~achieve ~~reflecting~~certain ~~the~~milestones ~~change~~and incertain ~~fair~~breaches ~~value~~and/or ~~associated~~other ~~with~~actions ~~these~~by ~~instruments~~the isparties ~~recorded~~under inthe ~~current~~Amended ~~earnings~~Restructuring Support Agreement.

WeProposed ~~regularly~~Plan ~~conduct financial sensitivity analyses to assess the effect~~ of changes in pricing and production. These analyses allow us to determine our ability to execute our capital investment programs, the value of our proved reserves, our projected borrowing base under our revolving credit facility and, more generally, our ability to meet future financial obligations. Reorganization

WeIn ~~also~~order ~~face~~to successfully emerge from Chapter 11, the ~~challenge~~Debtors will need to obtain confirmation from the Bankruptcy Court of ~~natural~~a ~~production~~Plan ~~declines.~~that Assatisfies ~~initial~~the ~~reservoir~~requirements ~~pressures~~of ~~are~~the ~~depleted,~~Bankruptcy ~~oil~~Code. The ~~and~~Amended ~~natural~~Restructuring ~~gas~~Support ~~production~~Agreement ~~from~~contemplates that a ~~given~~Plan ~~well~~supported orby ~~formation~~the ~~decreases.~~Supporting WeCreditors ~~attempt~~(the to“Supporting ~~overcome~~Creditors ~~this~~Plan”) ~~natural~~will ~~decline~~be ~~through~~filed awith ~~combination~~the ofBankruptcy ~~acquiring~~Court, ~~additional~~provided, ~~reserves~~however, ~~drilling~~if tothe ~~find~~Supporting ~~additional~~Noteholders ~~reserves,~~terminate ~~recompleting~~the orAmended ~~adding~~Restructuring ~~pay~~Support Agreement in ~~existing~~accordance ~~wellbores~~with ~~and~~the ~~improving~~terms ~~artificial~~of ~~lift~~the Amended Restructuring Support Agreement (a “Noteholder Termination”), a Plan, supported by only the Supporting Lenders (the “Supporting Lenders Plan”) will be filed with the Bankruptcy Court.

On August 2, 2019, the Debtors filed the Supporting Creditors Plan, which is subject to approval by the Bankruptcy Court. The Supporting Creditors Plan provides for the following, among other things:

•holders of claims arising under the 2020 Notes Indenture, the 2021 Notes Indenture and the 2023 Notes Indenture (the “Noteholders”) will receive their respective pro rata share of (i) 2.50% of the New Common Stock, subject to decrease,(ii) subscription rights to participate in a $66.50 million rights offering (the “Supporting Creditor Plan Rights Offering”), which can be exercised to the extent that such Noteholders are “accredited investors” as defined under Regulation D promulgated under the Securities Act of 1933, as amended (“Securities Act”), and (iii) a share premium of 1.50% of the New Common Stock, available to accredited investors that participate in the Supporting Creditor Plan Rights Offering and non-accredited investors;

•all existing equity interests in the Company will receive no recovery under the Plan and will be extinguished;

•a $189.8 million committed equity investment by the Supporting Term Lenders;

•at the option of the Supporting Term Lenders, an offering of up to $125.0 million of New Common Stock to third parties, the Supporting Term Lenders or the Noteholders; and

Page 41

If a Noteholder Termination occurs, the Supporting Lenders Plan would provide for the following, among other things:

•the Noteholders will receive their respective pro rata share of (i) 2.00% of the New Common Stock, and (ii) subscription rights to participate in a $100.0 million rights offering (the “Supporting Lenders Plan Rights Offering” and, together with the Supporting Creditors Plan Rights Offering, the “Rights Offering”) to the extent that such Noteholders are “accredited investors” as defined under Regulation D promulgated under the Securities Act;

•all existing equity interests in the Company will receive no recovery under the Plan and will be extinguished;

•a $200.0 million committed equity investment by the Supporting Term Lenders; and

Risks Associated with Chapter 11 Proceedings

For the duration of our Chapter 11 proceedings, our operations and our ability to develop and execute our business plan are subject to the risks and uncertainties associated with the reorganization process under the Bankruptcy Code as described in Part 2, Item 1A. Risk Factors in this quarterly report on Form 10-Q. Due to these risks and uncertainties, the description of our operations, properties and capital plans included in this quarterly report on Form 10-Q may not accurately reflect our operations, properties and capital plans following the conclusion of the Chapter 11 proceedings.

Ability to Continue as a Going Concern

Trends Affecting Our Business and Operations

Irrespective of our balance sheet constraints, sustained periods of low prices for oil or natural gas have and could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.

Outlook. The oil and natural gas industry is in a challenging environment, especially over the past five years, as evidenced by volatility in the crude oil prices that ranged from over $100 per barrel in early 2014 to less than $30 per barrel in early 2016. While prices ~~in 2017 and 2018~~ have recovered off the lows experienced in 2016 they ~~have~~ experienced a sharp decline at the end of 2018 from levels seen in 2017 and, despite a recovery in 2019, are still well below levels seen in 2014. Sustained development activity in the Permian Basin has created certain basin-wide operational challenges. Crude oil and associated natural gas production growth has strained existing takeaway capacity and caused widening basis differentials in the Permian Basin relative to benchmark crude oil and natural gas prices, which affect the prices we realize for our crude oil and natural gas production. The narrowing of these basis differentials is largely dependent on the construction of new takeaway capacity and other factors beyond our control. While we believe that a significant number of these projects will be completed in 2019, there is no guarantee that these projects will be completed on time or at all. In addition, the availability of services related to drilling, completion and other well site activity is becoming tighter. We do not have the ability to control the supply of these services and if we are unable to find adequate services for our operations at economic prices, there could be a material adverse impact on our financial condition. Also, production from our horizontal development within the Permian Basin has, from time to time, been temporarily shut-in or constrained due to proximate development operations. We cannot control or accurately forecast the timing, duration or other operational impositions associated with such well interference but the impacts could have a material adverse effect on our financial condition. We intend to continue to prudently manage our historical low-decline proved developed producing oil and gas properties to support the development of our high return prospects as we pursue additional cash flow and increase oil and natural gas reserves.

WePage anticipate breaching certain covenants under the Credit Agreement and the Term Loan Credit Agreement, which would constitute a default under our Credit Agreement or our Term Loan Credit Agreement. On May 9, 2019, we received a waiver from the lenders under our Credit Agreement for non-compliance with the current ratio covenant for the quarter ended March 31, 2019. Further, while we received a waiver of the covenant under our Term Loan Credit Agreement that requires us to deliver audited financial statements without a “going concern” or like qualification or exception, such waiver expires on May 31, 2019 and such default cannot be remedied. Defaults, if not remedied, would require a waiver from our lenders in order for us to avoid an event of default and subsequent acceleration of all amounts outstanding under our Credit Agreement or our Term Loan Credit Agreement or foreclosure on our oil and natural gas properties. Furthermore, the failure to repay outstanding indebtedness when due under our Credit Agreement and certain other payment defaults or acceleration under our Credit Agreement or our Term Loan Credit Agreement could cause a cross-default or cross-acceleration of all of our indebtedness.42

~~Page~~production 41growth has strained existing takeaway capacity and caused widening basis differentials in the Permian Basin relative to benchmark crude oil and natural gas prices, which affect the prices we realize for our crude oil and natural gas production. The narrowing of these basis differentials is largely dependent on the construction of new takeaway capacity and other factors beyond our control. While we believe that a significant number of these projects will be completed in 2019, there is no guarantee that these projects will be completed on time or at all. We do not have the ability to control the supply of drilling and completion services and if the availability of such services becomes tighter or the price of such increases, there could be a material adverse impact on our financial condition. Also, production from our horizontal development within the Permian Basin has, from time to time, been temporarily shut-in or constrained due to proximate development operations. We cannot control or accurately forecast the timing, duration or other operational impositions associated with such well interference but the impacts could have a material adverse effect on our financial condition. Further, the expected economic results of our drilling program may not materialize. Two of our recent Lea Unit Wolfcamp wells produced worse-than-expected results. While no other wells in the area were budgeted in the second half of 2019, management is working to better understand the localized geology and geophysics before proceeding with additional Wolfcamp wells in the area.

Considering the Chapter 11 proceedings and the current environment for the oil and natural gas industry, our goals in 2019 are to:

•~~reposition~~expeditiously ~~our~~emerge ~~balance~~from ~~sheet~~the byChapter ~~evaluating~~11 ~~and opportunistically pursuing strategic alternatives to materially reduce our outstanding indebtedness and restructure our near term maturity indebtedness.~~proceedings;

•minimize production declines and operating costs through efficient operations; and

•efficiently develop our horizontal inventory in the Permian Basin to generate strong cash-on-cash investment returns.

In the event that cash flows from operations are greater than we currently anticipate, whether as a result of increased commodity prices, reduced interest expense or otherwise, or additional external financing sources become available to us, we intend to pay down debt, accelerate our development plan, and increase development capital expenditures.

Our future growth will depend on our ability to continue to add reserves in excess of production. We will maintain our focus on adding reserves through organic development projects and acquisitions. Our ability to add reserves through organic development projects and acquisitions is dependent upon many factors including our ability to raise capital, obtain regulatory approvals and contract drilling rigs and completions equipment and personnel.

Our revenues are highly sensitive to changes in oil and natural gas prices and to levels of production. As set forth under “Investing Activities,” we have entered into oil and natural gas derivatives designed to mitigate the effects of price fluctuations covering a portion of our expected production, which allows us to mitigate, but not eliminate, oil and natural gas price risk. By removing a portion of our price volatility on our future oil and natural gas production through 2019, we have mitigated, but not eliminated, the potential effects of changing oil and natural gas prices on our cash flows from operations for those periods. Commodity prices may decrease, which could alter our acquisition and development plans, and adversely affect our growth strategy and ability to access additional capital in the capital markets and through our revolving credit facility. We continuously conduct financial sensitivity analyses to assess the effect of changes in pricing and production. These analyses allow us to determine how changes in oil and natural gas prices will affect our ability to execute our development plans and to meet future financial obligations. Further, the financial analyses allow us to monitor any impact such changes in oil and natural gas prices may have on the value of our proved reserves and their impact on any redetermination to our borrowing base under our revolving credit facility.

Production and Operating Costs Reporting

We strive to increase our production levels to maximize our revenue and cash flow. Additionally, we continuously monitor our operations to ensure that we are incurring operating costs at the optimal level. Accordingly, we continuously monitor our production and operating costs per well to determine if any wells or properties should be shut-in or recompleted.

Such costs include, but are not limited to, the cost of electricity to lift produced fluids, chemicals to treat wells, field personnel to monitor the wells, well repair expenses to restore production, well workover expenses intended to increase production, and ad valorem taxes. We incur and separately report severance taxes paid to the states in which our properties are located. These taxes are reported as production taxes and are a percentage of oil and natural gas revenue. Ad valorem taxes are a percentage of property valuation. While gathering and transportation costs are generally borne by the purchasers of our oil and the price paid for our oil reflects these costs, much of our natural gas production is subject to such costs before the transfer of ownership to the purchaser, and we recognize these expenses as operating costs. We do not consider royalties paid to mineral owners an expense as we deduct hydrocarbon volumes owned by mineral owners from the reported hydrocarbon sales volumes.

Page 4243

Operating Data

The following table sets forth selected unaudited financial and operating data of Legacy for the periods indicated.

	Three Months Ended March 31,
			Three Months Ended June 30,								Six Months Ended June 30,
	~~2019~~		2019		~~2018~~		2018		2019		2018
	~~(In thousands, except per unit data)~~		(In thousands, except per unit data)
Revenues:
Oil sales	$	~~77,761~~	$	88,375	$	~~93,411~~	$	99,799	$	166,136	$	193,210
Natural gas liquids (NGL) sales	~~4,515~~		3,994		~~7,396~~		5,735		8,509		13,131
Natural gas sales	~~36,221~~		25,410		~~36,672~~		33,747		61,631		70,419
Total revenue	$	~~118,497~~	$	117,779	$	~~137,479~~	$	139,281	$	236,276	$	276,760
Expenses:
Oil and natural gas production, excluding ad valorem taxes	$	~~44,964~~	$	43,072	$	~~45,585~~	$	46,882	$	88,036	$	92,467
Ad valorem taxes	~~2,513~~		3,007		~~2,382~~		2,549		5,520		4,931
Total oil and natural gas production	$	~~47,477~~	$	46,079	$	~~47,967~~	$	49,431	$	93,556	$	97,398
Production and other taxes	$	~~6,149~~	$	6,381	$	~~7,326~~	$	7,658	$	12,530	$	14,984
General and administrative, excluding transaction costs and LTIP	$	~~9,705~~	$	15,706	$	~~9,502~~	$	8,003	$	25,411	$	17,505
Transaction costs	~~2,669~~		17,942		~~1,782~~		1,607		20,611		3,389
LTIP expense	~~4,156~~		4,125		~~12,806~~		12,886		8,281		25,692
Total general and administrative	$	~~16,530~~	$	37,773	$	~~24,090~~	$	22,496	$	54,303	$	46,586
Depletion, depreciation, amortization and accretion	$	~~42,549~~	$	41,868	$	~~36,547~~	$	38,139	$	84,417	$	74,686
Commodity derivative cash settlements:
Oil derivative cash settlements (paid) received	$	~~7,045~~	$	900	$	~~(4,894)~~	$	(6,309)	$	7,945	$	(11,203)
Natural gas derivative cash settlements received	$	~~2,534~~	$	10,979	$	~~2,099~~	$	3,895	$	13,513	$	5,994
Production:
Oil (MBbls)	~~1,613~~		1,589		~~1,547~~		1,629		3,202		3,176
Natural gas liquids (MGal)	~~10,020~~		7,830		~~9,244~~		11,332		17,850		20,576
Natural gas (MMcf)	~~13,938~~		13,906		~~14,280~~		14,555		27,844		28,835
Total (MBoe)	~~4,175~~		4,093		~~4,147~~		4,325		8,268		8,472
Average daily production (Boe/d)	~~46,389~~		44,979		~~46,078~~		47,527		45,678		46,807
Average sales price per unit (excluding derivative cash settlements):
Oil price (per Bbl)	$	~~48.21~~	$	55.62	$	~~60.38~~	$	61.26	$	51.89	$	60.83
Natural gas liquids price (per Gal)	$	~~0.45~~	$	0.51	$	~~0.80~~	$	0.51	$	0.48	$	0.64
Natural gas price (per Mcf)	$	~~2.60~~	$	1.83	$	~~2.57~~	$	2.32	$	2.21	$	2.44
Combined (per Boe)	$	~~28.38~~	$	28.77	$	~~33.15~~	$	32.21	$	28.58	$	32.67
Average sales price per unit (including derivative cash settlements):
Oil price (per Bbl)	$	~~52.58~~	$	56.18	$	~~57.22~~	$	57.39	$	54.37	$	57.31
Natural gas liquids price (per Gal)	$	~~0.45~~	$	0.51	$	~~0.80~~	$	0.51	$	0.48	$	0.64
Natural gas price (per Mcf)	$	~~2.78~~	$	2.62	$	~~2.72~~	$	2.59	$	2.70	$	2.65
Combined (per Boe)	$	~~30.68~~	$	31.68	$	~~32.48~~	$	31.65	$	31.17	$	32.05
Average WTI oil spot price (per Bbl)	$	~~54.82~~	$	59.88	$	~~62.91~~	$	68.07	$	57.39	$	65.55
Average Henry Hub natural gas spot price (per MMbtu)	$	~~2.92~~	$	2.57	$	~~3.08~~	$	2.85	$	2.74	$	2.96
Average unit costs per Boe:
Oil and natural gas production, excluding ad valorem taxes	$	~~10.77~~	$	10.52	$	~~10.99~~	$	10.84	$	10.65	$	10.91
Ad valorem taxes	$	~~0.60~~	$	0.73	$	~~0.57~~	$	0.59	$	0.67	$	0.58
Production and other taxes	$	~~1.47~~	$	1.56	$	~~1.77~~	$	1.77	$	1.52	$	1.77
General and administrative excluding transaction costs and LTIP	$	~~2.32~~	$	3.84	$	~~2.29~~	$	1.85	$	3.07	$	2.07
Total general and administrative	$	~~3.96~~	$	9.23	$	~~5.81~~	$	5.20	$	6.57	$	5.50
Depletion, depreciation, amortization and accretion	$	~~10.19~~	$	10.23	$	~~8.81~~	$	8.82	$	10.21	$	8.82

Page 43

Results of Operations

Three-Month Period Ended March 31, 2019 Compared to Three-Month Period Ended March 31, 2018

Our revenues from the sale of oil were $77.8 million and $93.4 million for the three-month periods ended March 31, 2019 and 2018, respectively. Our revenues from the sale of NGLs were $4.5 million and $7.4 million for the three-month periods ended March 31, 2019 and 2018, respectively. Our revenues from the sale of natural gas were $36.2 million and $36.7 million for the three-month periods ended March 31, 2019 and 2018, respectively. The $15.7 million decrease in oil revenues reflects a decrease in the average realized price of $12.17 per Bbl (20.16)% comprised of a decrease in average realized price due to an decrease in the average West Texas Intermediate (“WTI”) crude oil price of $8.09 per Bbl as well as widening differentials. This decrease was partially offset by the increase in oil production of 66 MBbls (4.27%) due to our Permian horizontal drilling program. The $2.9 million decrease in NGL sales reflects a decrease in the realized NGL price of $0.35 per Gal (43.75%) partially offset by increased ethane recoveries in our Piceance Basin properties. The $0.5 million lower realized natural gas revenues is a reflection of decreased natural gas production of approximately 342 MMcf (2.39%) partially offset by an increase in realized price of $0.03 per Mcf (1.17%). This increase was primarily due to reduced regional differentials partially offset by lower NYMEX Henry Hub prices.

For the three-month period ended March 31, 2019, we recorded $51.5 million of net losses on oil and natural gas derivatives. Commodity derivative gains and losses represent the changes in fair value of our commodity derivatives during the period and are based on oil and natural gas futures prices. The net losses recognized during the three-month period ended March 31, 2019 are primarily due to increased projected oil prices and reduction in the projected Midland to Cushing differential during the period, which reduced the total value of our oil derivatives. For the three-month period ended March 31, 2018, we recorded $1.7 million of net losses on oil and natural gas derivatives. Settlements of such contracts resulted in net cash receipts(payments) of $9.6 million and $(2.8) million during the three months ended March 31, 2019 and 2018, respectively.

Our oil and natural gas production expenses, excluding ad valorem taxes, decreased to $45.0 million ($10.77 per Boe) for the three-month period ended March 31, 2019 from $45.6 million ($10.99 per Boe) for the three-month period ended March 31, 2018. This decrease can be attributed to general cost containment activities causing a decrease during the period for costs per Boe of $0.22. Our ad valorem tax expense increased to $2.5 million for the three-month period ended March 31, 2019 compared to $2.4 million or the three-month period ended March 31, 2018.

Our production and other taxes were $6.1 million and $7.3 million for the three-month periods ended March 31, 2019 and 2018, respectively. Production and other taxes decreased due to the decrease in our weighted average product price.

Our general and administrative expenses were $16.5 million and $24.1 million for the three-month periods ended March 31, 2019 and 2018, respectively. General and administrative expenses decreased due to reduction in LTIP expense of $8.7 million partially offset by increased legal and consulting expenses.

We incurred depletion, depreciation, amortization and accretion expense, or DD&A, of $42.5 million and $36.5 million for the three-month periods ended March 31, 2019 and 2018, respectively. DD&A increased $6.0 million due primarily to increased net cost basis related to our horizontal Permian activities along with increases in associated production.

In the three-month period ended March 31, 2019, we recognized impairment expense of $7.4 million on 6 separate producing fields primary related to increases in lease expenditures as well as declining commodity prices. In the three-month period ended March 31, 2018, we did not recognize impairment.

We recorded losses/(gains) on disposal of assets of $1.0 million and $(20.4) million for the three-month periods ended March 31, 2019 and 2018, respectively. The losses in 2019 were primarily related to the disposition of marginal oil and natural gas assets partially offset by costs associated with disposal.

We recorded interest expense of $37.1 million and $27.4 million for the three-month periods ended March 31, 2019 and 2018, respectively. Interest expense increased period over period due to increased interest rates and accelerated amortization related to our Term Loan Credit Agreement acceleration of indebtedness to May 31, 2019.

We recorded gain on extinguishment of debt of $13.1 million due to the exchange of 2021 Senior Notes and exchange and conversion of 2023 Senior Notes as compared to $51.7 million in 2018.

Page 44

AsResults of the three months ended March 31, 2019, the Legacy Inc. has a full valuation allowance against its deferred tax position and thus no income tax expense was recognized. A valuation allowance has been recorded as management does not believe it is more-likely-than-not that its deferred tax assets will be realized.Operations

AsThree-Month aPeriod ~~result~~Ended ~~of the items described above~~June 30, ~~Legacy~~2019 ~~recorded~~Compared ~~net~~to ~~income (losses) of $(78.4) million and $64.4 million for the three~~Three-~~month~~Month ~~periods~~Period ~~ended~~Ended ~~March~~June 3130, ~~2019 and~~ 2018, ~~respectively.~~

Our revenues from the sale of oil were $88.4 million and $99.8 million for the three-month periods ended June 30, 2019 and 2018, respectively. Our revenues from the sale of NGLs were $4.0 million and $5.7 million for the three-month periods ended June 30, 2019 and 2018, respectively. Our revenues from the sale of natural gas were $25.4 million and $33.7 million for the three-month periods ended June 30, 2019 and 2018, respectively. The $11.4 million decrease in oil revenues reflects a decrease in the average realized price of $5.64 per Bbl (9.21%) due to a decrease in the average West Texas Intermediate (“WTI”) crude oil price of $8.19 per Bbl partially offset by improved regional differentials. Additionally, oil production decreased 40 MBbls (2.46%) due natural production declines, reduced horizontal drilling activity and individually immaterial asset divestitures in 2018. The $1.7 million decrease in NGL sales was caused by a production decrease of 3,502 Mgals (30.90%) primarily related to a reduction in ethane recoveries associated with our Piceance Basin properties. The $8.3 million decline in natural gas revenues is a reflection of decreased natural gas production of approximately 649 MMcf (4.46%) due to both a reduction in our horizontal drilling activity as well as third-party plant and gathering interruptions resulting in production shut-ins and individually immaterial asset divestitures. Additionally, our realized natural gas price declined $0.49 per Mcf (21.12%) due to a decrease in the average Henry Hub natural gas price of $0.16 as well as widening regional differentials.

For the three-month period ended June 30, 2019, we recorded $5.7 million of net gains on oil and natural gas derivatives. Commodity derivative gains and losses represent the changes in fair value of our commodity derivatives during the period and are based on oil and natural gas futures prices. The net gains recognized during the three-month period ended June 30, 2019 are primarily due to the termination of our derivative contracts during the period resulting in the acceleration of the in-the-money derivatives. For the three-month period ended June 30, 2018, we recorded $9.3 million of net losses on oil and natural gas derivatives. Settlements of such contracts resulted in net cash receipts (payments) of $11.9 million and $(2.4) million during the three months ended June 30, 2019 and 2018, respectively.

Our oil and natural gas production expenses, excluding ad valorem taxes, decreased to $43.1 million ($10.51 per Boe) for the three-month period ended June 30, 2019 from $46.9 million ($10.83 per Boe) for the three-month period ended June 30, 2018. This decrease can be attributed to general cost containment activities. Our ad valorem tax expense increased to $3.0 million for the three-month period ended June 30, 2019 compared to $2.5 million or the three-month period ended June 30, 2018 due primarily to increased ad valorem charges on our Piceance Basin properties.

Our production and other taxes were $6.4 million and $7.7 million for the three-month periods ended June 30, 2019 and 2018, respectively. Production and other taxes decreased due to a combination of the decrease in our weighted average product price and production volumes.

Our general and administrative expenses were $37.8 million and $22.5 million for the three-month periods ended June 30, 2019 and 2018, respectively. General and administrative expenses increased due to increased transaction costs related to our reorganization activities partially offset by decreased LTIP expenses.

We incurred depletion, depreciation, amortization and accretion expense, or DD&A, of $41.9 million and $38.1 million for the three-month periods ended June 30, 2019 and 2018, respectively. DD&A increased $3.7 million due primarily to increased net cost basis related to our horizontal Permian drilling activity.

In the three-month period ended June 30, 2019, we recognized impairment expense of $1.4 million on five separate producing fields primary related to increases in production expenditures as well as declining commodity prices. In the three-month period ended June 30, 2018, we recognized $35.4 million of impairment on seven separate producing fields primarily related to the decline in natural gas future price changes from December 31, 2017 to June 30, 2018.

We recorded gains on disposal of assets of $2.0 million and $1.1 million for the three-month periods ended June 30, 2019 and 2018, respectively. These gains in 2019 were primarily related to the disposition of marginal oil and natural gas assets partially offset by costs associated with disposal.

We recorded interest expense of $52.9 million and $28.6 million for the three-month periods ended June 30, 2019 and 2018, respectively. Interest expense increased period over period due to increased interest rates and $16.4 million of accelerated amortization related to our Term Loan Credit Agreement acceleration of indebtedness to May 31, 2019.

Page 45

As of the three months ended June 30, 2019, we have a full valuation allowance against our deferred tax position and thus no Federal income tax expense was recognized. A valuation allowance has been recorded as management does not believe it is more-likely-than-not that our deferred tax assets will be realized.

As a result of the items described above, Legacy recorded net losses of $62.8 million and $50.7 million for the three-month periods ended June 30, 2019 and 2018, respectively.

Six-Month Period Ended June 30, 2019 Compared to Six-Month Period Ended June 30, 2018

Our revenues from the sale of oil were $166.1 million and $193.2 million for the six-month periods ended June 30, 2019 and 2018, respectively. Our revenues from the sale of NGLs were $8.5 million and $13.1 million for the six-month periods ended June 30, 2019 and 2018, respectively. Our revenues from the sale of natural gas were $61.6 million and $70.4 million for the six-month periods ended June 30, 2019 and 2018, respectively. The $27.1 million decrease in oil revenues reflects the decrease in average realized price of $8.94 per Bbl (14.7%) due to a decrease in average WTI crude oil prices of $8.16 per Bbl as well as widening regional differentials partially offset by an increase in oil production of 26 MBbls (1%) The $4.6 million decrease in NGL sales reflects a decline in production of (13.2%) due primarily to decreased ethane recoveries in our Piceance Basin properties. Additionally our realized NGL price decreased approximately $0.16 per Gal (25%) due to lower commodity prices. The $8.8 million decrease in natural gas revenues reflects lower realized natural gas prices and a decrease in natural gas production. Average realized natural gas prices decreased by $0.23 per Mcf (9%) during the six months ended June 30, 2019 compared to the same period in 2018 due to the decrease in average NYMEX Henry Hub natural gas prices of $0.22 per Mcf. Our natural gas production decreased by approximately 991 MMcf (3%) due to natural production declines as well as third-party plant and gathering interruptions resulting in production shut-ins.

For the six-month period ended June 30, 2019, we recorded $45.7 million of net losses on oil and natural gas derivatives. Commodity derivative gains and losses represent the changes in fair value of our commodity derivatives during the period and are based on oil and natural gas futures prices. The net losses recognized during the six-month period ended June 30, 2019 are primarily driven by improved regional differentials which reduced the value of our differential swaps. For the six-month period ended June 30, 2018, we recorded $11.0 million of net losses on oil and natural gas derivatives. Settlements of such contracts resulted in cash (payments) receipts of $21.5 million and $(5.2) million during the six months ended June 30, 2019 and 2018, respectively.

Our oil and natural gas production expenses, excluding ad valorem taxes, decreased to $88.0 million for the six-month period ended June 30, 2019 from $92.5 million for the six-month period ended June 30, 2018. This decrease is primarily attributable to general cost containment measures. Our ad valorem tax expense increased to $5.5 million ($0.67 per Boe) for the six-month period ended June 30, 2019 compared to $4.9 million ($0.58 per Boe) for the six-month period ended June 30, 2018 due primarily to increased ad valorem charges on our Piceance assets.

Our production and other taxes were $12.5 million and $15.0 million for the six-month periods ended June 30, 2019 and 2018, respectively. Production and other taxes decreased due to the decrease in our weighted average product price and decreased production.

Our general and administrative expenses were $54.3 million and $46.6 million for the six-month periods ended June 30, 2019 and 2018, respectively. General and administrative expenses increased due to increased legal and consulting expenses related to our reorganization activities partially offset by reduced LTIP expenses.

We incurred depletion, depreciation, amortization and accretion expense, or DD&A, of $84.4 million and $74.7 million for the six-month periods ended June 30, 2019 and 2018, respectively. DD&A increased $9.7 million due primarily to increased net cost basis related to our horizontal Permian drilling activity.

Impairment expense was $8.8 million and $35.4 million for the six-month periods ended June 30, 2019 and 2018, respectively. In the six-month period ended June 30, 2019, we recognized $8.8 million of impairment expense on 11 separate producing fields primarily related to the decline in future pricing and increased operating expenses in certain fields. Impairment expense for the six-month period ended June 30, 2018 was $35.4 million recognized on 7 separate producing fields.

We recorded gains on disposal of assets of $1.0 million and $21.5 million for the six-month periods ended June 30, 2019 and 2018, respectively. The gains were primarily related to the disposition of marginal oil and natural gas assets.

We recorded interest expense of $90.1 million and $56.0 million for the six-month periods ended June 30, 2019 and 2018, respectively. Interest expense increased approximately $34.1 million primarily due to increased interest rates on

Page 46

borrowings and $21.9 million of accelerated amortization related to our Term Loan Credit Agreement acceleration of indebtedness to May 31, 2019.

We recorded gain on extinguishment of debt of $13.1 million due to debt conversions in the first quarter of 2019. We recognized $51.7 million in the six months ending June 30, 2018 on the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price.

As a result of the items described above, Legacy recorded a net income (loss) of $(141.1) million and $13.7 million for the six-month periods ended June 30, 2019 and 2018, respectively.

Non-GAAP Financial Measure

Our management uses Adjusted EBITDA as a tool to provide additional information and metrics relative to the performance of our business. Our management believes that Adjusted EBITDA is useful to investors because this measure is used by many companies in the industry as a measure of operating and financial performance and is commonly employed by financial analysts and others to evaluate the operating and financial performance of Legacy from period to period and to compare it with the performance of other peers within the industry. Adjusted EBITDA may not be comparable to a similarly titled measure of other publicly traded limited partnerships or limited liability companies because all companies may not calculate Adjusted EBITDA in the same manner.

The following presents a reconciliation of “Adjusted EBITDA,” which is a non-GAAP measure, to its nearest comparable GAAP measure. Adjusted EBITDA should not be considered as an alternative to GAAP measures, such as net income, operating income, cash flow from operating activities, or any other GAAP measure of financial performance. Adjusted EBITDA is defined as net income (loss) plus:

•Interest expense;

•Gain on extinguishment of debt;

•Income tax expense;

•Depletion, depreciation, amortization and accretion;

•Impairment of long-lived assets;

•(Gain) loss on disposal of assets;

•Equity in (income) loss of equity method investees;

•Share-based compensation expense related to LTIP awards accounted for under the equity or liability methods;

•Minimum payments earned in excess of overriding royalty interest;

•Net (gains) losses on commodity derivatives;

•Net cash settlements (paid) received on commodity derivatives;

•Transaction and reorganization costs.

Page 4547

The following table presents a reconciliation of our consolidated net income to Adjusted EBITDA for the three and six months ended ~~March~~June 3130, 2019 and 2018, respectively.

	~~Three Months Ended~~		Three Months Ended								Six Months Ended
	March 31,
			June 30,								June 30,
	~~2019~~		2019		~~2018~~		2018		2019		2018
	~~(In thousands)~~		(In thousands)
Net (loss) income	$	~~(78,378)~~	$	(62,770)	$	~~64,382~~	$	(50,709)	$	(141,148)	$	13,673
Plus:
Interest expense	$	~~37,119~~	$	52,933	$	~~27,368~~	$	28,589	90,052		55,957
Gain on extinguishment of debt	~~(13,105)~~		—		~~(51,693)~~		—		(13,105)		(51,693)
Income tax expense	—		—		~~487~~		130		—		617
Depletion, depreciation, amortization and accretion	~~42,549~~		41,868		~~36,547~~		38,139		84,417		74,686
Impairment of long-lived assets	~~7,398~~		1,434		—		35,381		8,832		35,381
(Gain) loss on disposal of assets	1,034				(20,395)
Gain on disposal of assets			(2,045)				(1,145)		(1,011)		(21,540)
Equity in (income) loss of equity method investees	—		(4)		~~(17)~~		(3)		(4)		(20)
Share-based compensation expense	~~4,156~~		4,118		~~12,806~~		12,886		8,274		25,692
Minimum payments earned in excess of overriding royalty interest (a)	~~(543)~~		556		~~522~~		334		1,099		856
Net (gains) losses on commodity derivatives	~~51,460~~		(5,713)		~~1,704~~		9,315		45,747		11,019
Net cash settlements (paid) received on commodity derivatives	~~9,579~~		11,879		~~(2,795)~~		(2,414)		21,458		(5,209)
Transaction costs	2,669				1,782
Transaction and reorganization costs			19,902				1,607		22,571		3,389
Adjusted EBITDA	$	~~63,938~~	$	62,158	$	~~70,698~~	$	72,110	$	127,182	$	142,808

____________________

a.A portion of minimum payments earned in excess of overriding royalties earned under a contractual agreement expiring December 31, 2019. The remaining amount of the minimum payments are recognized in net income.

For the three months ended ~~March~~June 3130, 2019 and 2018, respectively, ~~Adjusted~~adjusted EBITDA decreased ~~(10)~~13.80% to $6462.2 million from $7172.1 million primarily due to lower production combined with declining realized prices. These decreases were partially offset by reduced operating costs. For the six months ended June 30, 2019 and 2018, respectively, Adjusted EBITDA decreased 10.94% to $127.2 million from $142.8 million, primarily ~~attributable~~due to ~~decreased~~lower ~~revenues~~ production combined with declining realized prices. These decreases were partially offset by ~~increased~~reduced ~~derivative~~operating ~~settlements~~costs.

Capital Resources and Liquidity

~~Legacy’s~~Liquidity ~~primary~~Before ~~sources~~Filing ofUnder ~~capital~~Chapter ~~and~~11 ~~liquidity have been cash flow from operations, the issuance~~ of the ~~Senior~~Bankruptcy ~~Notes, the issuance of additional equity securities, our second lien term loans and bank borrowings, or a combination thereof. To date,~~Code

Legacy’s primary sources of capital and liquidity have historically been cash flow from operations, the issuance of the Senior Notes, the issuance of additional equity securities, our second lien term loans and bank borrowings, or a combination thereof. To date, Legacy’s primary use of capital has been for the acquisition and development of oil and natural gas properties, the repayment of bank borrowings and repurchases of Senior Notes.

~~bank~~The ~~borrowings~~Company’s ~~and~~filing ~~repurchases~~of the Chapter 11 proceedings resulted in the acceleration of the Debtors’ obligations under the Term Loan Credit Agreement and the indentures governing the Senior Notes (as defined below). Additionally, other events of default under the Company's debt agreements, including cross-defaults, are present, including violations of certain financial ratio covenants, the failure to make principal and interest payments on certain of the Company’s indebtedness, as well as the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2018. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default.

IfLiquidity weAfter ~~are unable~~Filing toUnder ~~extend~~Chapter ~~our~~11 debt maturities or consummate a transaction, we anticipate that we will not have sufficient liquidity to fund our operations or to repay our Credit Agreement when it matures on May 31, 2019. We also anticipate breaching certain covenants under our Credit Agreement and our Term Loan Credit Agreement, which would constitute a default under our Credit Agreement and our Term Loan Credit Agreement. On May 9, 2019, we received a waiver from the lenders under our Credit Agreement for non-compliance with the current ratio covenant for the quarter ended March 31, 2019. While we have received a waiver under our Term Loan Credit Agreement that requires us to deliver audited financial statements without a “going concern” or like qualification or exception, such waiver expires on May 31, 2019 and such default cannot be remedied. Defaults, if not remedied, would require a waiver from our lenders in order for us to avoid an event of default and potential subsequent acceleration of all amounts outstanding under our Credit Agreement or our Term Loan Credit Agreement or foreclosure on our oil and natural gas properties. Certain payment defaults or acceleration under our Credit Agreement or Term Loan Credit Agreement could cause a cross-default or cross-acceleration of all of our other indebtedness. If an event of default occurs, or if other debt agreements cross-default, and the ~~lenders~~Bankruptcy under the affected debt agreements accelerate the maturity of any loans or other debt outstanding, we will not have sufficient liquidity to repay all of our outstanding indebtedness. Future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to operate or to maintain planned levels of capital expenditures. Please see “—Cash Flow from Financing Activities—Credit Facility.”Code

~~Page~~The 46Debtors are operating their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined or stayed the continuation of any judicial or administrative

~~Our~~Page Credit Agreement initially became a current liability as of April 1, 2018 as the Credit Agreement was set to mature on April 1, 2019. On March 21, 2019, we entered into the Twelfth Amendment to our Credit Agreement, providing for, among other things, (i) an extension of the maturity of the Credit Agreement to May 31, 2019, (ii) an increase in the applicable interest rate by 2.25%, (iii) the payment of a fee equal to 0.35% of the amount of the current borrowing base under the Credit Agreement, payable on the effective date of the Twelfth Amendment, (iv) the mandatory termination of our derivative contracts three days prior to the maturity of the Credit Agreement, (vi) the reduction in the borrowing base from $575 million to $570 million, effective May 22, 2019, (vii) the reduction in the maximum consolidated cash balance we can maintain $15 million, effective April 1, 2019 and (viii) the payment of a fee equal to 0.15% of the amount of the current borrowing base under the Credit Agreement, payable on the earliest to occur of (x) May 31, 2019 or (y) an acceleration of the outstanding indebtedness under the Credit Agreement. Additionally, the Twelfth Amendment waives certain deviations from the requirements of the Credit Agreement, including the delivery of fiscal year 2018 audited financial statements with a “going concern” or like qualification or exception and non-compliance with the current ratio covenant for the fourth quarter of 2018.48

~~Our~~proceedings ~~commodity~~or ~~derivatives~~other ~~position~~actions against the Debtors or their property to recover, ~~which~~collect weor ~~use~~secure a claim arising prior to ~~mitigate~~the ~~commodity~~filing ~~price~~of ~~volatility~~the Bankruptcy Petitions. The Bankruptcy Court has granted certain relief requested by the Debtors enabling the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorization to pay employee wages and benefits, to pay certain taxes and governmental fees and charges, to continue to operate our cash management system in the ordinary course, to secure debtor-in-possession financing, to remit funds we hold from time to time for the benefit of third parties (ifsuch ~~positive~~as royalty owners), ~~support~~and to pay the prepetition claims of certain of our ~~borrowing~~vendors ~~capacity~~that hold liens under applicable non-bankruptcy law. For goods and services following the Petition Date, ~~resulted~~the Company intends to pay vendors in $9 full under normal terms in the ordinary course of business.6 In ~~million~~connection with the Chapter 11 cases, Legacy LP entered into a senior secured superpriority debtor-in-possession credit agreement, dated as of ~~favorable~~June ~~settlements~~21, 2019, among itself as debtor, debtor-in-possession and borrower, the ~~three~~other ~~months~~loan ~~ended March 31~~parties party thereto, ~~2019~~as debtors, debtors-in-possession and guarantors, Wells Fargo Bank, National Association, as administrative agent and collateral, and the other lenders party thereto (the “DIP Credit Agreement”).

AsDespite ~~market~~the ~~conditions~~liquidity ~~warrant~~provided by the DIP Credit Agreement, weour ability to maintain normal credit terms with our suppliers and vendors may, ~~subject~~become impaired. We may be required to pay cash in advance to certain ~~limitations~~vendors and may experience restrictions on the availability of trade credit, ~~repurchase~~which would further reduce our liquidity. If liquidity problems persist, ~~exchange~~our orsuppliers ~~otherwise~~could refuse to provide key products and services in the future.

~~pay~~In ~~down~~addition ~~our~~to ~~outstanding~~the ~~debt,~~cash ~~including~~requirements ~~our~~to ~~Senior~~fund ~~Notes~~ongoing operations, we have incurred significant professionals fees and other costs in ~~open~~connection ~~market~~with ~~transactions,~~the ~~privately~~Chapter ~~negotiated~~11 ~~transactions,~~proceedings by and expect that we will continue to incur significant fees and costs throughout the Chapter 11 proceedings.

~~tender~~Although ~~offer~~we orhave ~~otherwise~~obtained ~~which~~financing ~~may~~under ~~impact~~ the ~~trading~~DIP Credit Agreement, we cannot state with certainty that our liquidity ofwill ~~such~~be ~~securities.~~sufficient ~~The~~to ~~amounts~~allow ~~involved~~us into ~~any~~satisfy ~~such~~our ~~transactions, individually~~obligations related to the Chapter 11 cases or inthat we will be able to confirm a Plan with the ~~aggregate~~Bankruptcy Court that allows us to emerge from bankruptcy. In addition, ~~may~~we bemust ~~material~~comply with the covenants and conditions of our DIP Credit Agreement in order to continue to access borrowings thereunder. The DIP Credit Agreement is described below in “—Financing Activities—DIP Credit Agreement.”

Future Liquidity Considerations

Our Term Loan Credit Agreement contains a number of restrictive covenants and limitations that impose significant operating and financial restrictions on us. Under the Term Loan Credit Agreement, if as of the last day of any fiscal quarter, our “First Lien Debt to EBITDA” ratio is less than (i) 1.50:1.00 between March 31, 2018 and June 30, 2019 and (ii) 1.25:1.00 between September 30, 2019 and December 31, 2019, then we are restricted from spending more than $60 million on capital expenditures, acquisitions or investments for the subsequent four quarters. As of March 31, 2019, our First Lien Debt to EBITDA ratio was 2.1.

Interest payments on our Senior Notes are payable on June 1, 2019 and December 1, 2019 through the respective maturities.

In order to improve its liquidity position and address its near-term debt maturities, we are currently evaluating financial, transactional and other strategic alternatives. There can be no assurance that sufficient liquidity can be raised or that debt maturities can be extended from any one or more of these transactions or that these transactions can be consummated within the period needed to meet our obligations. If we are unable to extend the debt maturities or consummate a transaction, we will not have sufficient liquidity to repay our Credit Agreement at maturity and may need to seek relief under the U.S. Bankruptcy code. The significant risks and uncertainties described in Part I, Item 1A, Risk Factors of our annual report on Form 10-K for the fiscal year ended December 31, 2018, raise substantial doubt about our ability to continue as a going concern. The report of our independent registered public accounting firm that accompanies the audited consolidated financial statements in our annual report on Form 10-K for the fiscal year ended December 31, 2018 contains an explanatory paragraph regarding the substantial doubt about Legacy’s ability to continue as a going concern.

Cash Flow from Operations

Our net cash provided by operating activities was $3537.4 million and $54115.0 million for the ~~three~~six-month periods ended ~~March~~June 3130, 2019 and 2018, respectively. The 2019 period was impacted by decreased commodity prices and production volumes, increased interest expense and transaction costs.

Our cash flow from operations is subject to many variables, the most significant of which is the volatility of oil, NGL and natural gas prices. Oil, NGL and natural gas prices are determined primarily by prevailing market conditions, which are dependent on regional and worldwide economic activity, weather and other factors beyond our control. Our future cash flow from operations will depend on our ability to maintain and increase production through acquisitions and development projects, as well as the prices of oil, NGL and natural gas.

Page 47

Cash Flow from Investing Activities

We invested $5781.82 million of capital for the ~~three~~six-month period ended ~~March~~June 3130, 2019. We received $0.2.4 million of proceeds net of costs related to the divestiture of various oil and natural gas properties in individually immaterial transactions and post-close adjustments. We invested $73118.93 million of capital for the ~~three~~six-month period ended ~~March~~June 3130, 2018~~, which consisted of $72~~.2 million for development projects, exclusive of accrued capital expenditures, individually immaterial acquisitions of oil and natural gas properties and prospective acreage as well as adjustments to prior period acquisitions. We received $2729.12 million of proceeds net of costs related to the divestiture of various oil and natural gas properties in individually immaterial transactions and post-close adjustments.

Our annual capital expenditure budget for 2019, which predominantly consists ~~maintaining~~of drilling, recompletion and well stimulation projects, is set at $135 million, subject to any limitations contained in the agreements governing our indebtedness. Our remaining borrowing capacity under our ~~revolving~~DIP ~~credit~~Credit ~~facility~~Agreement (as defined below) is $25100.0 million as of ~~May~~August 87, 2019. The amount and timing of our capital expenditures is largely discretionary and within our control, with the exception of certain projects managed by other operators. Accordingly, we routinely monitor and adjust our capital expenditures in response to changes in oil and natural gas prices, drilling and acquisition costs, industry conditions, non-operated capital requirements and internally generated cash flow. Matters outside our control that could affect the timing of our capital expenditures include obtaining required permits and approvals in a timely manner as well as other regulatory matters.

WePage enter into oil and natural gas derivative transactions to reduce the impact of oil and natural gas price volatility on our operations. We use derivatives to offset price volatility of oil and natural gas prices. For the three-month periods ended March 31, 2019 and 2018, we received (paid) settlements of $9.6 million and $(2.8) million, respectively, related to our commodity derivatives. 49

We enter into oil and natural gas derivative transactions to reduce the impact of oil and natural gas price volatility on our operations. We use derivatives to offset price volatility of oil and natural gas prices. For the six-month periods ended June 30, 2019 and 2018, we received (paid) settlements of $21.5 million and $(5.2) million, respectively, related to our commodity derivatives. As of June 30, 2019 we had no active derivative contracts.

By reducing the cash flow effects of price volatility from a portion of our oil and natural gas production, we have mitigated, but not eliminated, the potential effects of changing prices on our cash flow from operations for those periods. While mitigating negative effects of lower commodity prices, these derivative contracts also limit the benefits we would receive from increases in commodity prices. It is our policy to enter into derivative contracts only with counterparties that are major, creditworthy institutions deemed by management as competent and competitive market makers. In addition, none of our current counterparties require us to post margin. However, we cannot be assured that all of our counterparties will meet their obligations under our derivative contracts. Due to this uncertainty, we routinely monitor the creditworthiness of our counterparties.

The following tables summarize, for the periods indicated, our oil and natural gas derivatives ~~currently~~entered into on July 25, 2019 and in place as of ~~May~~August 87, 2019, covering the period from ~~April~~ August 1, 2019 through December 31, 2019. We use derivatives, ~~including~~ swaps, ~~enhanced swaps and three-way collars,~~ as our mechanism for offsetting the cash flow effects of changes in commodity prices whereby we pay the counterparty floating prices and receive fixed prices from the counterparty, which serves to reduce the effects on cash flow of the floating prices we are paid by purchasers of our oil and natural gas. These transactions are mostly settled based upon the monthly average closing price of the front-month NYMEX WTI oil, the price on the last trading day of front-month NYMEX Henry Hub natural gas.

Oil Swaps:

Time Period	Volumes (Bbls)	Average Price per Bbl	Price Range per Bbl
April-December 2019	2,475,000	$61.33	$57.15	-	$67.65
August - December 2019	1,836,000	$57.68	$56.25 - $58.19

~~Page~~We 48have entered into regional crude oil differential swap contracts in which we have swapped the floating WTI-ARGUS (Midland) crude oil price for floating WTI-ARGUS (Cushing) crude oil price less a fixed-price differential. As noted above, we receive a discount to the NYMEX WTI crude oil price at the point of sale. Due to refinery downtime and limited takeaway capacity that has impacted the Permian Basin, the difference between the WTI-ARGUS (Midland) price, which is the price we receive on almost all of our Permian crude oil production, and the WTI-ARGUS (Cushing) price reached historic highs in late 2012 and early 2013 and again in late 2014. We entered into these differential swaps to negate a portion of this volatility. The following table summarizes the oil differential contracts currently in place as of August 7, 2019, covering the period from August 1, 2019 through December 31, 2019:

We have entered into regional crude oil differential swap contracts in which we have swapped the floating WTI-ARGUS (Midland) crude oil price for floating WTI-ARGUS (Cushing) crude oil price less a fixed-price differential. As noted above, we receive a discount to the NYMEX WTI crude oil price at the point of sale. Due to refinery downtime and limited takeaway capacity that has impacted the Permian Basin, the difference between the WTI-ARGUS (Midland) price, which is the price we receive on almost all of our Permian crude oil production, and the WTI-ARGUS (Cushing) price reached historic highs in late 2012 and early 2013 and again in late 2014. We entered into these differential swaps to negate a portion of this volatility. The following table summarizes the oil differential contracts currently in place as of May 8, 2019, covering the period from April 1, 2019 through December 31, 2019:

Time Period

Volumes (Bbls)

Average Price per Bbl

Price Range per Bbl

August - December 2019

1,530,000

$(0.33)

$ (0.35) - $(0.3)

		Average
Time Period	Volumes (Bbls)	Price per Bbl	Price Range per Bbl
April-December 2019	1,743,000	$(3.61)	$(1.15)	$(5.60)

We have entered into regional crude oil differential enhanced swap contracts in which we have swapped the floating WTI-ARGUS (Midland) crude oil price for floating WTI-ARGUS (Cushing) crude oil price less a fixed-price differential combined with a short call option to enhance the price of the differential swap. The following table summarizes the oil differential contracts currently in place as of May 8, 2019, covering the period from January 1, 2019 through December 31, 2019:

Average Short

Average Swap

Time Period

Volumes (Bbls)

Call Price per Bbl

Price per Bbl

April-December 2019

1,100,000

$70.00

$(2.91)

Natural Gas Swaps:

Time Period						Volumes (MMBtu)						Average Price per MMBtu						Price Range per MMBtu
April-December 2019						26,225,000						$3.30						$3.05			-			$3.39

On July 25, 2019 we entered into regional natural gas differential swap contracts in which we have swapped the floating CIG natural gas price for a floating NYMEX Henry Hub price less a fixed differential. The following table summarizes these type of enhanced swap in place as of August 7, 2019, covering the period from August 1, 2019 through December 31, 2019:

Time Period

Volumes (MMBtu)

Average Price per MMBtu

Price Range per MMBtu

August - December 2019

6,120,000

$0.47

$0.473 - $0.475

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On July 25, 2019 we also entered into regional natural gas differential swap contracts in which we have swapped the floating WAHA natural gas price for a floating NYMEX Henry Hub price less a fixed differential. The following table summarizes these type of enhanced swap in place as of August 7, 2019, covering the period from August 1, 2019 through December 31, 2019:

Time Period

Volumes (MMBtu)

Average Price per MMBtu

Price per MMBtu

August - December 2019

4,284,000

$0.85

Financing Activities

Our net cash provided by financing activities was $1825.16 million for the ~~three~~six months ended ~~March~~June 3130, 2019, compared to cash used by financing activities of $515.69 million for the ~~three~~six months ended ~~March~~June 3130, 2018. During the ~~three~~six months ended ~~March~~June 3130, 2019, total net borrowings under our revolving credit facility were $2122.0 million compared to $199.0 million in 2018. Our net borrowings for the ~~three~~six months ended ~~March~~June 3130, 2018 on our Second Lien were $$133.6 million and $1.2 million in 2019.

DIP Credit Agreement

In connection with the Chapter 11 cases, Legacy LP entered into the DIP Credit Agreement, which provides for, among other things, the following:

•a senior secured priming superpriority debtor-in-possession revolving loan credit facility in an aggregate principal amount of up to $350.0 million (the “DIP Facility”), consisting of (i) a new money revolving loan facility in an aggregate amount of up to $100.0 million (the “New Money Facility”), $35.0 million of which would be available on an interim basis and which will include a sub-facility of up to $1.0 million for the issuance of letters of credit, and (ii) a refinancing term loan in the amount of $250.0 million (the “Refinancing Facility”);

•the Company is be required to pay an unused commitment fee equal to 1.00% per annum to the lenders under the New Money Facility in respect of the unused commitments thereunder;

•the obligations under the DIP Credit Agreement are secured by a first priority lien on substantially all of the assets of the Company, subject to limited exceptions provided for in the DIP Motion;

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The DIP Credit Agreement provides for certain customary events of default, including the failure to achieve certain milestones set forth in the DIP Credit Agreement.

Our Revolving Credit Facility

On April 1, 2014, Legacy LP entered into a five-year $1.5 billion secured revolving credit facility with Wells Fargo Bank, National Association, as administrative agent, Compass Bank, as syndication agent, UBS Securities LLC and U.S. Bank National Association, as co-documentation agents and the lenders party thereto (as amended, the “Credit Agreement”). On March 21, 2019, the maturity of the Credit Agreement was extended from April 1, 2019 to May 31, 2019. Our obligations under the Credit Agreement are secured by mortgages on over 95% of the total value of its oil and natural gas properties as well as a pledge of all of its ownership interests in our operating subsidiaries and Legacy's ownership interests in the General Partner. Concurrently with the Corporate Reorganization, the General Partner and Legacy Inc. provided guarantees of Legacy LP's obligations under the Credit Agreement. The amount available for borrowing at any one time is limited to the borrowing base and contains a $2 million sub-limit for letters of credit. The borrowing base iswas ~~current~~reduced ~~set at $575 million, and under the terms of the Credit Agreement, our borrowing base reduces~~ to $570 million on May 22, 2019.

As of ~~March~~June 3130, 2019, we had approximately $~~562~~475.05 million drawn under the Credit Agreement at a weighted average interest rate of 79.7963%~~, leaving approximately $13~~.0 ~~million of availability under the Credit Agreement.~~ For the ~~three~~six-month period ended ~~March~~June 3130, 2019, we paid in cash $721.9 million of interest expense on the Credit Agreement.

AsThe ofCredit ~~May 8,~~Agreement ~~2019,~~matured weon ~~had~~May ~~approximately $25.0~~31, ~~million of availability under the Credit Agreement~~2019.

Page 49

On March 21, 2019, we received a waiver of the covenant that required us to deliver fiscal year 2018 audited financial statements without a "going concern" or like qualification or exception and a waiver with respect to our ratio of consolidated current assets to consolidated current liabilities being less than 1.0 to 1.0 for the fiscal quarter ended December 31, 2018.

As of March 31, 2019, our ratio of consolidated current assets to consolidated current liabilities was less than 0.7 to 1.0, in violation of a covenant contained in our Credit Agreement. On May 9, 2019, we received a waiver with respect to compliance with such covenant for the fiscal quarter ended March 31, 2019. Except with respect to compliance with the covenants that have been waived, as of March 31, 2019, we were in compliance with all covenants of our Credit Agreement. If we are unable to extend the debt maturities or consummate a transaction, we anticipate breaching certain covenants under the Credit Agreement, which would constitute a default under our Credit Agreement. Defaults, if not remedied, would require a waiver from our lenders in order for us to avoid an event of default and subsequent acceleration of all amounts outstanding under our Credit Agreement and potential foreclosure on our oil and natural gas properties. Furthermore, the failure to repay outstanding indebtedness when due under our Credit Agreement and certain other payment defaults or acceleration under our Credit Agreement could cause a cross-default or cross-acceleration of all of our indebtedness. If an event of default would occur and were continuing, we would be unable to make borrowings under the Credit Agreement and our financial condition and liquidity would be adversely affected. For further information related to our Credit Agreement, please refer to "—Footnote 2—Debt" in the Notes to Condensed Consolidated Financial Statements.

The Credit Agreement permits us to issue additional senior notes in order to refinance our currently outstanding Senior Notes as well as to issue an additional $300 million in aggregate principal amount of new senior notes, in each case, subject to specified conditions in the Credit Agreement (including pro forma compliance with the first lien debt to EBITDA ratio and interest coverage ratio described below), which include that the borrowing base shall be reduced by an amount equal to (i) (A) in the case of new senior notes, 25% of the stated principal amount of such senior notes and (B) in the case of refinancing our currently outstanding Senior Notes, 100% of the portion of the new debt that exceeds the original principal amount of the senior notes being refinanced or (ii) in the sole discretion of the lenders holding at least 66-2/3% of the outstanding aggregate principal amounts of the loans or participation interests in letters of credit issued under the Credit Agreement prior to the issuance of the senior notes or new debt, an amount less than the amount specified in clause (A). In addition, we must prepay any amount outstanding under the Credit Agreement in excess of the redetermined borrowing base upon such a reduction.

Prior to the Twelfth Amendment, Legacy could elect that borrowings be comprised entirely of alternate base rate ("ABR") loans or Eurodollar loans. Interest on the loans is determined as follows:

•with respect to ABR loans, the alternate base rate equals the highest of the prime rate, the Federal funds effective rate plus 0.50%, or the one-month London Interbank Offered Rate (“LIBOR”) plus 1.00%, plus an applicable margin ranging from and including 1.00% to 2.00% per annum, determined by the percentage of the borrowing base then in effect that is utilized, provided, that if the ratio of our first lien debt as of the last day of any fiscal quarter to our EBITDA (as defined in the Credit Agreement) for the four fiscal quarters ending on such day is greater than 3.00 to 1.00, then the applicable margin shall be increased by 0.50% during the next succeeding fiscal quarter, or

•with respect to any Eurodollar loans, one-, two-, three- or six-month LIBOR plus an applicable margin ranging from and including 2.00% to 3.00% per annum, determined by the percentage of the borrowing base then in effect that is utilized.

Effective March 21, 2019, the Twelfth Amendment provides an increase of 2.25% to the interest rate paid on all ABR and Eurodollar loans.

We pay a commitment fee ranging from and including 0.375% to 0.50% per annum on the average daily amount of the unused amount of the commitments under the Credit Agreement, determined by the percentage of the borrowing base then in effect that is utilized, payable quarterly.

Interest is generally payable quarterly for ABR loans and on the last day of the applicable interest period for any Eurodollar loans.

Our Credit Agreement also contains various covenants that limit our ability to:

•incur indebtedness;

Page 50

•enter into certain leases;

•grant certain liens;

Page 52

•enter into certain derivatives;

•make certain loans, acquisitions, capital expenditures and investments;

•make dividends;

•merge, consolidate or allow certain material changes in the character of our business;

•repurchase Senior Notes or repay second lien term loans;

•engage in certain asset dispositions, including a sale of all or substantially all of our assets; or

•maintain a consolidated cash balance in excess of $20 million, or, effective April 1, 2019, $15 million, without prepaying the loans in an amount equal to such excess.

Our Credit Agreement also contains covenants that, among other things, require us to maintain specified ratios or conditions as follows:

•as of the last day of any fiscal quarter, secured debt to EBITDA for the four fiscal quarters ending on the last day of the fiscal quarter immediately preceding the date of determination to not be greater than 4.50 to 1.00;

•as of the last day of any fiscal quarter, total EBITDA over the last four quarters to total interest expense over the last four quarters to be greater than 2.00 to 1.00;

•consolidated current assets, as of the last day of the most recent quarter and including the unused amount of the total commitments, to consolidated current liabilities as of the last day of the most recent quarter of not less than 0.7 to 1.00, excluding current maturities under the Credit Agreement and non-cash assets and liabilities under ASC 815, which includes the current portion of oil, natural gas and interest rate derivatives;

•as of the last day of any fiscal quarter, the ratio of (a) the sum of (i) the net present value using NYMEX forward pricing, discounted at 10 percent per annum, of our proved developed producing oil and gas properties (“PDP PV-10”), as reflected in the most recent reserve report delivered either July 1 or December 31 of each year, as the case may be, beginning with the reserve report to be delivered on July 1, 2017 (giving pro forma effect to material acquisitions or dispositions since the date of such reports), (ii) the net mark to market value of our swap agreements and (iii) our cash and cash equivalents to (b) Secured Debt to not be equal to or less than 1.00 to 1.00.

If an event of default exists under our Credit Agreement, the lenders will be able to accelerate the maturity of the credit agreement and exercise other rights and remedies. Each of the following would be an event of default:

•failure to pay any principal when due or any reimbursement amount, interest, fees or other amount within certain grace periods;

•a representation or warranty is proven to be incorrect when made;

•failure to perform or otherwise comply with the covenants or conditions contained in the Credit Agreement or other loan documents, subject, in certain instances, to certain grace periods;

•default by us on the payment of any other indebtedness in excess of $15.0 million, or any event occurs that permits or causes the acceleration of the indebtedness;

Page 51

•bankruptcy or insolvency events involving us or any of our subsidiaries;

Page 53

•the loan documents cease to be in full force and effect;

•our failing to create a valid lien, except in limited circumstances;

•a change in control, which will occur upon (a) Legacy Inc. ceasing to (i) be the beneficial owner of 100% of the equity interests of the General Partner, (ii) control the General Partner or (iii) be the beneficial owner of 100% of the limited partner equity interests in Legacy LP; (b) the General Partner ceases to be the sole general partner of Legacy LP; (c) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or greater than 50% of the properties or assets of Legacy LP and its subsidiaries taken as a whole; (d) the adoption of a plan relating to the liquidation or dissolution of Legacy Inc. or Legacy LP; (e) the consummation of any transaction that results in any person becoming the beneficial owner of more than 50% of the aggregate voting power of Legacy Inc.; or (f) the first day on which a majority of the members of the Board are not continuing directors;

•the entry of, and failure to pay, one or more adverse judgments in excess of $15.0 million or one or more non-monetary judgments that could reasonably be expected to have a material adverse effect and for which enforcement proceedings are brought or that are not stayed pending appeal;

•specified ERISA events relating to our employee benefit plans that could reasonably be expected to result in liabilities in excess of $2.0 million in any year;

•the Intercreditor Agreement (as defined below) ceases to be in effect, except to the extent permitted by the terms thereof; and

•if an “Event of Default” occurs under the Term Loan Credit Agreement (as defined below).

OnWe ~~September~~periodically ~~14,~~enter ~~2018 and September 20, 2018, Legacy entered~~ into ~~the~~interest ~~Tenth~~rate ~~Amendment~~swap ~~and~~transactions ~~Eleventh Amendment, respectively,~~ to ~~the~~mitigate ~~Credit Agreement (~~the ~~“Credit~~volatility ~~Agreement~~of ~~Amendments”)~~interest rates. ~~The~~As ~~Credit~~of ~~Agreement~~June 30, ~~Amendments~~2019, ~~amend~~we ~~certain~~had ~~provisions~~no ~~set~~interest ~~forth~~rate ~~in the Credit Agreement to, among other items:~~swaps.

~~•permit~~For ~~the~~further ~~issuance~~information ofrelated ~~the~~to ~~2023~~our ~~Convertible~~Credit Agreement, please refer to "—Footnote 3—Debt" in the Notes; to Condensed Consolidated Financial Statements.

•provide that the 2023 Convertible Notes constitute debt that is permitted refinancing debt;

•allow for the payment of a cash conversion incentive in connection with the early cashless conversion of the 2023 Convertible Notes into common shares; and

•permit the redemption of certain senior notes or permitted refinancing debt of such senior notes with any combination of the following: (i) proceeds of certain permitted refinancing debt: (ii) net cash proceeds of any sale of equity interests (other than disqualified capital stock) of Legacy Inc.; and/or (iii) in exchange for equity interests (other than disqualified capital stock) of Legacy Inc.

On March 21, 2019, we entered into the Twelfth Amendment, providing for, among other things, (i) an extension of the maturity of the Credit Agreement to May 31, 2019, (ii) an increase in the applicable interest rate by 2.25%, (iii) the payment of a fee equal to 0.35% of the amount of the current borrowing base under the Credit Agreement, payable on the effective date of the Twelfth Amendment, (iv) the mandatory termination of our derivative contracts three days prior to the maturity of the Credit Agreement, (vi) the reduction in the borrowing base from $575 million to $570 million, effective May 22, 2019, (vii) the reduction in the maximum consolidated cash balance we can maintain to $15 million, effective April 1, 2019 and (viii) the payment of a fee equal to 0.15% of the amount of the current borrowing base under the Credit Agreement, payable on the earliest to occur of (x) May 31, 2019 or (y) an acceleration of the outstanding indebtedness under the Credit Agreement. Additionally, the Amendment waives certain deviations from the requirements of the Credit Agreement, including the delivery of fiscal year 2018 audited financial statements with a “going concern” or like qualification or exception and non-compliance with the current ratio covenant for the fourth quarter of 2018.

Page 52

As of March 31, 2019, we were in compliance with all financial and other covenants of the Credit Agreement other than the ratio of consolidated current assets to consolidated current liabilities. If we are unable to extend the debt maturities or consummate a transaction, we anticipate breaching certain covenants under our Credit Agreement, which would constitute a default under our Credit Agreement. Defaults, if not remedied, would require a waiver from our lenders in order for us to avoid an event of default and subsequent acceleration of all amounts outstanding under our Credit Agreement and potential foreclosure on our oil and natural gas properties. Furthermore, the failure to repay outstanding indebtedness when due under our Credit Agreement and certain other payment defaults or acceleration under our Credit Agreement could cause a cross-default or cross-acceleration of all of our indebtedness.

We periodically enter into interest rate swap transactions to mitigate the volatility of interest rates. As of March 31, 2019, we had interest rate swaps on notional amounts of $235 million with a weighted average fixed rate of 1.36%. These swaps mature in September 2019.

Second Lien Term Loan Credit Agreement

On October 25, 2016, Legacy entered into ~~a Second Lien Term Loan Credit Agreement (as amended,~~ the "Term Loan Credit Agreement") among Legacy, as borrower, Cortland Capital Market Services LLC ("Cortland"), as administrative agent and second lien collateral agent, and the lenders party thereto, providing for term loans up to an aggregate principal amount of $300.0 ~~million (the "Second Lien Term Loans").~~ The ~~Term~~term loans under the Term Loan Credit Agreement are issued with an upfront fee of 2.00% and bear interest at a rate of 12.00% per annum payable quarterly in cash or, prior to the 18 month anniversary of the Term Loan Credit Agreement, Legacy may elect to pay in kind up to 50% of the interest payable. Effective March 21, 2019, the Seventh Amendment (as defined below) to the Term Loan Credit Agreement provides an increase of 2.25% to the interest rate paid on all term loans. GSO Capital Partners L.P. (“GSO”) and certain funds and accounts managed, advised or sub-advised, by GSO are the initial lenders thereunder. The Term Loan Credit Agreement matures on August 31, 2021; provided that, if on July 1, 2020, Legacy has greater than or equal to a face amount of $15.0 million of Senior Notes that were outstanding on the date the Term Loan Credit Agreement was entered into or any other senior notes with a maturity date that is earlier than August 31, 2021, the Term Loan Credit Agreement will mature on August 1, 2020. The Second Lien Term Loans are secured on a second lien priority basis by the same collateral that secures the Legacy's Credit Agreement and are unconditionally guaranteed on a joint and several basis by the same wholly owned subsidiaries of Legacy that are guarantors under the Credit Agreement. In addition, upon consummation of the Corporate Reorganization, the General Partner and Legacy Inc. became guarantors.

As of ~~May~~August 87, 2019, we had approximately $339.8 million drawn under the Second Lien Term Loan Credit Agreement.

OnWe ~~December~~used ~~31,~~the ~~2017,~~initial $60.0 ~~Legacy~~million of ~~entered~~gross ~~into~~loan ~~the~~proceeds ~~Third~~from ~~Amendment~~our ~~to the~~ Term Loan Credit Agreement ~~(the~~to ~~"Third~~repay ~~Amendment")~~outstanding ~~among~~indebtedness ~~Legacy,~~and aspay ~~borrower,~~associated ~~Cortland,~~transaction asexpenses. ~~administrative~~We ~~agent~~used ~~and~~subsequent ~~second~~draws ~~lien~~to ~~collateral~~fund ~~agent, and~~ the ~~lenders~~acceleration ~~party~~payment ~~thereto,~~under ~~including~~our ~~GSO~~JDA and ~~certain~~repurchase ~~funds~~a ~~and~~portion ~~accounts~~of ~~managed,~~our ~~advised~~2021 orSenior ~~sub-advised~~Notes. byThe ~~GSO,~~Second ~~which,~~Lien ~~among~~Term ~~other~~Loans ~~things,~~under ~~increased~~ the ~~maximum~~Term ~~amount~~Loan ~~available~~Credit ~~for~~Agreement ~~borrowing~~will ~~under~~be ~~the~~issued ~~Second~~with ~~Lien~~an ~~Term~~upfront ~~Loans~~fee ~~to $400~~of 2.000% ~~million,~~and ~~extended~~bear ~~the~~interest ~~availability~~at ofa ~~undrawn~~rate ~~principal ($60.2 million as~~ of ~~May~~ 8,12.00% per ~~2019)~~annum topayable ~~October 25,~~quarterly ~~2019,~~in ~~relaxed~~cash. ~~the~~The ~~asset~~Second ~~coverage~~Lien ~~ratio~~Term ~~financial~~Loans ~~covenant~~may ~~from~~be ~~1.0x~~used tofor ~~0.85x~~general ~~during~~corporate ~~2018~~purposes and ~~required~~for ~~Legacy~~the LPrepayment toof ~~mortgage~~outstanding ~~certain~~indebtedness, ~~additional~~in ~~properties~~each ~~located~~case inas ~~the~~may ~~Permian~~be ~~Basin.~~approved ~~Borrowings~~by ofus ~~additional~~and ~~amounts~~GSO. ~~under~~The ~~the~~ Term Loan Credit Agreement ~~are~~contains ~~subject~~customary toprepayment ~~the~~provisions ~~consent~~and ofmake-whole ~~the lenders thereunder~~premiums. ~~The Third Amendment became effective on January 5, 2018.~~

WePage used the initial $60.0 million of gross loan proceeds from our Term Loan Credit Agreement to repay outstanding indebtedness and pay associated transaction expenses. We used subsequent draws to fund the acceleration payment under our JDA and repurchase a portion of our 2021 Senior Notes. The Second Lien Term Loans under the Term Loan Credit Agreement will be issued with an upfront fee of 2% and bear interest at a rate of 12.00% per annum payable quarterly in cash. The Second Lien Term Loans may be used for general corporate purposes and for the repayment of outstanding indebtedness, in each case as may be approved by us and GSO. The Term Loan Credit Agreement contains customary prepayment provisions and make-whole premiums.54

The Term Loan Credit Agreement also contains covenants that, among other things, require us to maintain specified ratios or conditions as follows:

•not permit, as of the last day of the fiscal quarter, the ratio of the sum of (i) PDP PV-10, (ii) the net mark to market value of our swap agreements and (iii) our cash and cash equivalents to Secured Debt to be less than (i) 0.85 to 1.00 through and including the fiscal quarter ended December 31, 2018 and (ii) 1.00 to 1.00 thereafter;

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•not permit, as of the last day of any fiscal quarter beginning with the fiscal quarter ending December 31, 2018, our ratio of Secured Debt as of such day to EBITDA for the four fiscal quarters then ending to be greater than 4.50 to 1.00;

•We are required to mortgage 95% of the total value of all of its Oil and Gas Properties set forth in the most recently evaluated Reserve Report and grant a mortgage on certain identified undeveloped acreage in the Permian Basin; and

•require us to grant a perfected security interest in its cash and securities accounts, subject to certain customary exceptions.

On September 14, 2018 and September 20, 2018, Legacy entered into the Fifth Amendment and Sixth Amendment, respectively to the Term Loan Credit Agreement (the "Term Loan Amendments"). The Term Loan Amendments amend certain provisions set forth in the Term Loan Credit Agreement to, among other items:

•permit the issuance of the 2023 Convertible Notes;

•provide that the 2023 Convertible Notes constitute debt that is permitted refinancing of debt;

•allow for the payment of a cash conversion incentive in connection with the early cashless conversion of the 2023 Convertible Notes into common shares; and

All capitalized terms used but not defined in the foregoing description have the meaning assigned to them in the Term Loan Credit Agreement.

~~As of March 31, 2019, we were in compliance with all covenants of the Term Loan Credit Agreement. The Term Loan Credit Agreement matures on August 31, 2020.~~ For further information related to our Term Loan Credit Agreement, please refer to "—Footnote 23—Debt" in the Notes to Condensed Consolidated Financial Statements.

A customary intercreditor agreement was entered into by Wells Fargo Bank, National Association, as priority lien agent, and Cortland Capital Markets Services LLC, as junior lien agent and acknowledged and accepted by Legacy and the subsidiary guarantors (the "Intercreditor Agreement"). If an event of default exists under the Term Loan Credit Agreement, subject to the terms of the Intercreditor Agreement, the lenders will be able to accelerate the maturity of the Term Loan Credit Agreement and exercise other rights and remedies.

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8% Senior Notes Due 2020

On December 4, 2012, Legacy LP and Legacy Reserves Finance Corporation (together, the "Issuers") completed a private placement offering to eligible purchasers of an aggregate principal amount of $300.0 million of our 2020 Senior Notes, which were subsequently registered through a public exchange offer that closed on January 8, 2014. The 2020 Senior Notes were issued at 97.848% of par. We received approximately $286.7 million of net cash proceeds, after deducting the discount to initial purchasers and offering expenses payable by us.

Legacy has the option to redeem the 2020 Senior Notes, in whole or in part, at any time at par with any accrued and unpaid interest, if any, to the date of redemption.

Legacy may be required to offer to repurchase the 2020 Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, in the event of a change of control as defined by the indenture as supplemented. The Issuer's obligations under the 2020 Senior Notes are guaranteed by Legacy Inc., The General Partner, and Legacy LP's 100% owned subsidiaries Legacy Reserves Operating GP LLC, Legacy Reserves Operating LP, Legacy Reserves Services LLC, Legacy Reserves Energy Services LLC, Legacy Reserves Marketing LLC, Dew Gathering LLC and Pinnacle Gas Treating LLC (collectively, the "Guarantors"). In the future, the guarantees may be released or terminated under the following circumstances: (i) in connection with any sale or other disposition of all or substantially all of the properties of the guarantor; (ii) in connection with any sale or other disposition of sufficient capital stock of the guarantor so that it no longer qualifies as our Restricted Subsidiary (as defined in the indenture); (iii) if designated to be an unrestricted subsidiary; (iv) upon legal defeasance, covenant defeasance or satisfaction and discharge of the indenture; (v) upon the liquidation or dissolution of the guarantor provided no default or event of default has occurred or is occurring; (vi) at such time the guarantor does not have outstanding guarantees of its, or any other guarantor's, other debt; or (vii) upon merging into, or transferring all of its properties to Legacy or another guarantor and ceasing to exist. Refer to Note 12 - Subsidiary Guarantors in the Notes to the Consolidated Financial Statements for further details on our guarantors.

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The indenture governing the 2020 Senior Notes (as supplemented, the "2020 Notes Indenture") limits Legacy's ability and the ability of certain of its subsidiaries to (i) sell assets; (ii) pay distributions or dividends on, repurchase or redeem equity interests or purchase or redeem Legacy's subordinated debt, provided that such subsidiaries may pay dividends to the holders of their equity interests (including Legacy) and Legacy may pay distributions to the holders of its equity interests subject to the absence of certain defaults, the satisfaction of a fixed charge coverage ratio test and certain other conditions; (iii) make certain investments; (iv) incur or guarantee additional indebtedness or issue preferred securities; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from certain of its subsidiaries to Legacy; (vii) consolidate, merge or transfer all or substantially all of Legacy's assets; (viii) engage in certain transactions with affiliates; (ix) create unrestricted subsidiaries; and (x) engage in certain business activities. These covenants are subject to a number of important exceptions and qualifications. If at any time when the 2020 Senior Notes are rated investment grade by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services and no Default (as defined in the indenture) has occurred and is continuing, many of such covenants will terminate and Legacy and its subsidiaries will cease to be subject to such covenants. The 2020 Notes Indenture also includes customary events of default. Legacy is in compliance with all financial and other covenants of the 2020 Senior Notes. However, if the lenders under Legacy's Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under the Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2020 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

Interest is payable on June 1 and December 1 of each year.

During the fiscal year ended December 31, 2016, we repurchased a face amount of $52.0 million of our 2020 Senior Notes on the open market. On June 1, 2016, we exchanged 2,719,124 units for $15.0 million of face amount of its outstanding 2020 Senior Notes. On September 20, 2018, the Issuers exchanged $21.0 million aggregate principal amount of 2020 Senior Notes for $21.0 million aggregate principal amount of 2023 Convertible Notes. On November 21, 2018, Legacy exchanged $3.1 million aggregate principal amount of 2020 Senior Notes for 1 million shares of our common stock. We treated these repurchases and exchanges as an extinguishment of debt. Accordingly, we recognized a gain for the difference between (1) the face amount of the 2020 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price.

AsFor offurther ~~March 31,~~information ~~2019,~~related weto ~~were~~our ~~in compliance with all financial and other covenants of the~~ 2020 Senior Notes. Asplease ~~previously~~refer ~~noted,~~to if"—Footnote ~~the~~3—Debt" ~~lenders~~in ~~under~~the ~~our~~Notes ~~Credit Agreement were~~ to ~~accelerate~~Condensed ~~the~~Consolidated ~~indebtedness~~Financial ~~under our Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of our other outstanding indebtedness and permit the~~Statements.

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holders of such indebtedness to accelerate the maturities of such indebtedness. For further information related to our 2020 Senior Notes please refer to "—Footnote 2—Debt" in the Notes to Condensed Consolidated Financial Statements.

6.625% Senior Notes Due 2021

On May 28, 2013, the Issuers completed a private placement offering to eligible purchasers of an aggregate principal amount of $250 million of our 2021 Senior Notes, which were subsequently registered through a public exchange offer that closed on March 18, 2014. This issuance of our 2021 Senior Notes was at 98.405% of par. We received approximately $240.7 million of net cash proceeds, after deducting the discount to initial purchasers and offering expenses payable by us.

On May 13, 2014, the Issuers completed a private placement offering to eligible purchasers of an aggregate principal amount of an additional $300 million of our 2021 Senior Notes. This issuance of our 2021 Senior Notes was at 99.0% of par. We received approximately $291.8 million of net cash proceeds, after deducting the discount to initial purchasers and offering expenses payable by us.

During the fiscal year ended December 31, 2016, we repurchased a face amount of $117.3 million of our 2021 Senior Notes on the open market.

The terms of the 2021 Senior Notes, including the Guarantors, are substantially identical to the terms of the 2020 Senior Notes with the exception of the interest rate and redemption provisions noted below. Legacy will have the option to redeem the 2021 Senior Notes, in whole or in part, at par together with any accrued and unpaid interest, if any, to the date of redemption.

Legacy may be required to offer to repurchase the 2021 Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, in the event of a change of control as defined by the indenture, as supplemented. Legacy is in compliance with all financial and other covenants of the 2021 Senior Notes. However, if the lenders under our Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under our Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2021 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

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During the year ended December 31, 2016, we repurchased a face amount of $117.3 million of our 2021 Senior Notes on the open market. We treated these repurchases as an extinguishment of debt. Accordingly, we recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price. We previously repurchased, and have not retired, $304.4 million of our 2021 Senior Notes. Subject to certain restrictions, we retain our voting rights under the indenture governing the 2021 Senior Notes.

On December 31, 2017, we entered into a definitive agreement with certain funds managed by Fir Tree Partners pursuant to which we acquired $187.0 million of the 6.625% Notes for a price of approximately $132 million inclusive of accrued but unpaid interest with a settlement date of January 5, 2018. We treated these repurchases for accounting purposes as an extinguishment of debt. Accordingly, we recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the repurchase price during the three months ended March 31, 2018.

On September 20, 2018, the Issuers exchanged $109.0 million aggregate principal amount of 2021 Senior Notes for $109.0 million aggregate principal amount of 2023 Convertible Notes. On December 17, 2018, Legacy exchanged $5.3 million aggregate principal amount of 2021 Senior Notes for 2 million shares of our common stock.

During the ~~three~~six months ended ~~March 31~~June 30, 2019, $1.75 million of 2021 Senior Notes were exchanged for 593,367 shares of common stock. Legacy treated the exchange as an extinguishment of debt. Accordingly, Legacy recognized a gain for the difference between (1) the face amount of the 2021 Senior Notes repurchased net of the unamortized portion of both the original issuer's discount and issuance costs and (2) the fair value of the shares issued in the exchange based on the closing price on the date of exchange. As of ~~March~~June 3130, 2019, there were $129.5 million of 2021 Senior Notes outstanding.

Interest is payable on June 1 and December 1 of each year.

AsFor offurther ~~March 31,~~information ~~2019,~~related weto ~~were~~our ~~in compliance with all financial and other covenants of the~~ 2021 Senior Notes~~. As previously noted~~, ifplease ~~the~~refer ~~lenders~~to ~~under~~"—Footnote ~~our~~3—Debt" ~~Credit~~in ~~Agreement~~the ~~were~~Notes to ~~accelerate~~Condensed ~~the~~Consolidated ~~indebtedness~~Financial ~~under our Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of our other outstanding indebtedness and permit the~~Statements.

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holders of such indebtedness to accelerate the maturities of such indebtedness. For further information related to our 2021 Senior Notes, please refer to "—Footnote 2—Debt" in the Notes to Condensed Consolidated Financial Statements.

2023 Convertible Senior Notes due 2023

On September 20, 2018, the Issuers, completed private exchanges with certain holders of senior notes, pursuant to which the Issuers exchanged (i) $21.004 million aggregate principal amount of 2020 Senior Notes for $21.004 million aggregate principal amount of 2023 Convertible Notes and 105,020 shares of common stock and (ii) $109 million aggregate principal amount of 2021 Notes for $109 million aggregate principal amount of 2023 Convertible Notes. The 2023 Convertible Notes were issued pursuant to an Indenture, dated as of September 20, 2018 (the “2023 Convertible Note Indenture”)

Upon issuance, Legacy separately accounted for the liability and equity components in accordance with Accounting Standards Codification 470-20. The initial fair value of the 2023 Convertible Notes in its entirety (inclusive of the equity component related to the conversion option) was estimated using observable inputs such as trades that occurred on the day of the transaction. The liability component was recorded at the estimated fair value of a similar debt instrument without the conversion feature. The difference between the aggregate principal amount of the 2023 Convertible Notes and the fair value of the liability component was recorded as a debt discount and is being amortized to interest expense over the term of the notes using the effective interest method. The fair value of the liability component of the 2023 Convertible Notes was estimated at $101.0 million, resulting in a debt discount of $29.0 million The equity component, representing the value of the conversion option, was computed by deducting the fair value of the liability component from the initial fair value of the 2023 Convertible Notes. The equity component was recorded in additional paid-in capital within stockholders’ equity and will not be remeasured as long as it continues to meet the conditions for equity classification.

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Early Conversion Date						Early Conversion Payment
December 1, 2018 through May 31, 2019						$64.22
June 1, 2019 through September 19, 2019						$24.22

The terms of the 2023 Convertible Notes, including the Guarantors, are substantially identical to the terms of the 2020 Senior Notes and 2021 Senior Notes with the exception of the interest rate, conversion and redemption provisions noted above. Additionally, if the lenders under Legacy's Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under the Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2023 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

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Additionally, if the lenders under Legacy's Credit Agreement or Term Loan Credit Agreement were to accelerate the indebtedness under the Credit Agreement or Term Loan Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of the 2023 Senior Notes and permit the holders of such notes to accelerate the maturities of such indebtedness.

During the year ended December 31, 2018, certain holders of the 2023 Convertible Notes exercised their option to convert $1.9 million of face amount of 2023 Convertible Notes in exchange for 316,828 shares of our common stock.

During the three months ended March 31, 2019, $6.5 million of 2023 Convertible Notes were exchanged for 2.4 million shares of common stock and $14.1 million of 2023 Convertible Notes were converted for 2.3 million shares of common stock. Legacy recognized $1.6 million and $10.7 million of gain on extinguishment of debt on these transactions respectively.

Interest is payable on June 1 and December 1 of each year.

As of March 31, 2019, we were in compliance with all financial and other covenants of the 2023 Convertible Notes. As previously noted, if the lenders under our Credit Agreement were to accelerate the indebtedness under our Credit Agreement as a result of a default, such acceleration could cause a cross-default of all of our other outstanding indebtedness and permit the holders of such indebtedness to accelerate the maturities of such indebtedness. For further information related to our 2023 Convertible Notes, please refer to “—Footnote 23—Debt” in the Notes to Condensed Consolidated Financial Statements.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to select and apply accounting policies that best provide the framework to report our results of operations and financial position. The selection and application of those policies requires management to make difficult subjective or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

AsPage ~~of March 31, 2019, our critical accounting policies were consistent with those discussed in our Annual Report on Form 10-K for the period ended December 31, 2018.~~58

As of June 30, 2019, our critical accounting policies were consistent with those discussed in our Annual Report on Form 10-K for the period ended December 31, 2018.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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, as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserves, the fair value of assets and liabilities acquired in business combinations, valuation of derivatives, future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations and accrued revenues. Actual results could differ from these estimates.

Recent Accounting Pronouncements

None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.

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Commodity Price Risk

Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Realized pricing is primarily driven by the spot market prices applicable to our natural gas production and the prevailing price for crude oil. Pricing for oil, natural gas and NGLs has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control, such as the strength of the global economy and the supply of oil outside of the United States.

We periodically enter into and anticipate entering into derivative arrangements with respect to a portion of our projected oil and natural gas production through various transactions that offset changes in the future prices received. These transactions may include swaps, enhanced swaps and three-way collars. These derivative activities are intended to support oil and natural gas prices at targeted levels and to manage our exposure to oil and natural gas price fluctuations. We do not hold or issue derivative instruments for speculative trading purposes.

As of ~~March~~June 3130, 2019, ~~the~~we ~~fair~~had ~~value~~no ofopen ~~our~~ commodity derivative positions ~~was a net asset of $6~~.2 ~~million based on NYMEX futures prices from April 2019 to December 2019 for both oil and natural gas.~~ As of December 31, 2018, the fair market value of our commodity derivative positions was a net asset of $676.2 million based on NYMEX futures prices from January 2017 to December 2019 for both oil and natural gas. For more discussion about our derivative transactions and to see a table listing the oil and natural gas derivatives from April 2019 through December 2019, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cash Flow from Investing Activities.”

Interest Rate Risks

At ~~March~~June 3130, 2019, we had debt outstanding under our Credit Agreement of $~~562~~475.05 million, which incurred interest at floating rates in accordance with our revolving credit facility. The average annual interest rate incurred by us under our Credit Agreement for the ~~three~~six-month period ended ~~March~~June 3130, 2019 was 510.7338%. A 1% increase in LIBOR on our outstanding debt under our revolving credit facility as of ~~March~~June 3130, 2019 would result in an estimated $34.38 million increase in annual interest expense assuming our current interest rate hedges remain in place and do not expire. ~~We have entered into interest rate swaps with a weighted-average fixed rate of 1.36% to mitigate the volatility of interest rates on notional amounts of $235 million of floating rate debt.~~ Our Credit Agreement provides for the mandatory termination of our interest rate swaps three days prior to the maturity date of the Credit Agreement and as such we held no active derivative contracts as of June 30, 2019. It is never management's intention to hold or issue derivative instruments for speculative trading purposes. Conditions sometimes arise where actual borrowings are less than notional amounts hedged which has and could result in overhedged amounts.

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Item 4. Controls and Procedures.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of ~~March~~June 3130, 2019. Based upon that evaluation and subject to the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.

Our chief executive officer and chief financial officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

~~Page~~During 59the first quarter of 2019, we added internal control processes over financial reporting as a result of the adoption of the new lease standard (ASC 842). There have been no other changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the first quarter of 2019, we added internal control processes over financial reporting as a result of the adoption of the new lease standard (ASC 842). There have been no other changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Legacy is, from time to time, involved in litigation and claims arising out of its operations in the normal course of business including regulatory and environmental matters, none of which are expected to be material. Management does not believe that it is probable that the outcome of these actions will have a material adverse effect on Legacy’s consolidated financial position, results of operations or cash flow, although the ultimate outcome and impact of such legal proceedings on Legacy cannot be predicted with certainty.

Item 1A. Risk Factors.

In addition to the ~~information~~factors set forth below in this quarterly report, you should carefully consider the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described in these reports are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We are subject to the risks and uncertainties associated with our Chapter 11 proceedings.

We have filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. For the duration of the Chapter 11 cases, our business and operations will be subject to various risks, including but not limited to the following:

•our ability to develop, file and complete the Plan;

•our ability to obtain Bankruptcy Court, creditor and regulatory approval of the Plan in a timely manner;

•our ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 cases and the outcomes of Bankruptcy Court rulings and of the Chapter 11 cases in general;

•risks associated with third party motions in the Chapter 11 cases, which may interfere with our business operations or our ability to propose and/or complete the Plan;

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•increased costs related to the Chapter 11 cases and related litigation;

•a loss of, or a disruption in the goods or services received from, suppliers, contractors or service providers with whom we have commercial relationships;

•potential increased difficulty in retaining and motivating our key employees and senior management through the process of reorganization, and potential increased difficulty in attracting new employees; and

•significant time and effort required to be spent by our senior management in dealing with the bankruptcy and restructuring activities rather than focusing exclusively on business operations.

We are also subject to risks and uncertainties with respect to the actions and decisions of creditors and other third parties who have interests in the Chapter 11 Cases that may be inconsistent with our plans. These risks and uncertainties could affect our business and operations in various ways and may significantly increase the duration of the Chapter 11 Cases. Because of the risks and uncertainties associated with Chapter 11 cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 cases may have on our business, cash flows, liquidity, financial condition and results of operations, nor can we predict the ultimate impact that events occurring during the Chapter 11 cases may have on our corporate or capital structure.

The Amended Restructuring Support Agreement is subject to significant conditions and milestones that may be difficult for us to satisfy.

There are certain material conditions we must satisfy under the Amended Restructuring Support Agreement, including the timely satisfaction of milestones in the Chapter 11 proceedings, such as confirmation of the Plan and effectiveness of the Plan. Our ability to timely complete such milestones is subject to risks and uncertainties many of which are beyond our control.

If the Amended Restructuring Support Agreement is terminated, our ability to confirm and consummate the Plan could be materially and adversely affected.

The Amended Restructuring Support Agreement contains a number of termination events, the occurrence of which gives certain parties to the Amended Restructuring Support Agreement the right to terminate the agreement. If the Amended Restructuring Support Agreement is terminated, each of the parties thereto will be released from their obligations in accordance with the terms of the Amended Restructuring Support Agreement. Such termination may result in the loss of support for the Plan by the parties to the Amended Restructuring Support Agreement, which could adversely affect our ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that any new plan would be as favorable to holders of claims as the current Plan.

We may not be able to obtain confirmation of our Plan, sufficient debtor-in-possession financing may not be available, and our emergence from the Chapter 11 cases is not assured.

There can be no assurance that the Plan (or any other plan of reorganization) will be approved by the Bankruptcy Court, that we will receive the requisite votes to confirm the Plan, and we may have to defend against objections to confirmation of the Plan from the various parties in interest in the Chapter 11 cases. As such, we cannot predict the impact that any objection might have on the Bankruptcy Court’s decision whether to confirm the Plan. Any objection may cause us to devote significant resources to respond to and defend against such objection, which could have an adverse effect on our business, financial condition and results of operations. In addition, the DIP Credit Agreement may not be sufficient to meet our liquidity requirements or may be restricted or ultimately terminated by the lenders under the DIP Credit Agreement in accordance with the terms of the definitive documents governing such financing.

If the Plan is not confirmed by the Bankruptcy Court, or if cash flows and borrowings under the DIP Credit Agreement are not sufficient to meet our liquidity requirements, it is uncertain whether we would be able to reorganize our business. The amount of distributions that will be available to our creditors and other holders of claims against and interests in us and our businesses, including holders of secured claims, in connection with our reorganization and consummating a plan of reorganization is uncertain. We likely would incur significant costs in connection with developing and seeking approval of an alternative plan of reorganization, or additional financing, which may not be supported by certain of our stakeholders. If we were unable to develop a feasible alternative plan of reorganization, or if we were unable to maintain access to the DIP Credit Agreement as currently contemplated and were unable to obtain any additional financing that may be necessary to operate our businesses during the Chapter 11 cases, it is possible that we would have to liquidate a portion or all of our assets, in which case

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it is likely that holders of claims would receive substantially less favorable distributions than they would receive if we were to emerge as a viable, reorganized business.

Our historical financial information may not be indicative of our future financial performance.

During the pendency of the Chapter 11 cases, we expect our financial results may be volatile as asset impairments and dispositions, and certain other restructuring activities may significantly impact our consolidated financial statements. As a result, our historical financial performance may not be indicative of our financial performance after the Petition Date. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, as a result of revisions to our operating plans pursuant to a plan of reorganization. Moreover, if we emerge from Chapter 11, we may be required to adopt fresh-start accounting. If fresh-start accounting is applicable, our assets and liabilities will be recorded at fair value as of the fresh-start reporting date. The fair value of our assets and liabilities may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. If fresh-start accounting is required, our financial results after the application of fresh-start accounting may be materially different from historical trends.

Trading in our securities is highly speculative and poses substantial risks. We expect that the existing common stock of the Company will be extinguished.

The Plan, as outlined in the Amended Restructuring Support Agreement, provides that our outstanding Senior Notes and term loans under the Term Loan Credit Agreement will be converted into equity of the reorganized Company and that the existing common stock of the Company will be extinguished upon the Company’s emergence from Chapter 11. The Plan provides that all equity interests of existing equity holders will be extinguished. Even if the Plan is confirmed as currently outlined, the value of any securities that are currently issued and outstanding is highly speculative.

The pursuit of the Chapter 11 cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.

While the Chapter 11 cases continue, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Chapter 11 cases are protracted.

During the pendency of the Chapter 11 cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability execute the objectives of our business, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.

In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.

Upon a showing of cause, the Bankruptcy Court may convert our Chapter 11 case to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in our Plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

We may be subject to claims that will not be discharged in our Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any claims not ultimately discharged through a Chapter 11 plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

~~Seventh~~Page Amendment dated March 21, 2019 to the Term Loan Credit Agreement, dated as of October 30, 2017, among Legacy Reserves Inc., the guarantors named therein, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (filed as Exhibit 10.54 to Legacy Reserves Inc.’s Annual Report on Form 10-K (File No. 001-38668) on March 22, 2019)63

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Item 6. Exhibits.

The following documents are filed as a part of this Quarterly Report on Form 10-Q or incorporated by reference:

Exhibit Number			Description
10.1			~~Employment Agreement dated as of February 7, 2019, between Robert L. Norris,~~ Legacy Reserves ~~Services~~2019 ~~LLC~~Key ~~and~~Employee ~~Legacy~~Incentive ~~Reserves~~Plan ~~Inc.~~ (filed as Exhibit 10.1 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on ~~February~~May 1123, 2019)
10.2			~~Restricted~~Form ~~Stock~~of ~~Unit Award Agreement, dated February 19, 2019, between Robert L. Norris and~~ Legacy Reserves ~~Inc.~~Retention Agreement (filed as Exhibit 10.2 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on ~~February~~May 1123, 2019)
10.3			~~Twelfth~~Forbearance ~~Amendment dated March 21, 2019~~ to ~~the~~ Third Amended and Restated Credit Agreement, dated as of ~~April~~May 131, ~~2014~~2019, among Legacy Reserves ~~Inc.~~LP, as borrower, the guarantors ~~named~~party ~~therein~~thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders ~~signatory~~party thereto (filed as Exhibit 10.531 to Legacy Reserves Inc.’s ~~Annual~~Current Report on Form 108-K (File No. 001-38668) on ~~March~~June 226, 2019)
10.4			~~Seventh~~Forbearance ~~Amendment dated March 21, 2019~~ to ~~the~~ Term Loan Credit Agreement, dated as of ~~October~~May 3031, ~~2017~~2019, among Legacy Reserves ~~Inc.~~LP, as borrower, the guarantors ~~named~~party ~~therein~~thereto, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (filed as Exhibit 10.542 to Legacy Reserves Inc.’s ~~Annual~~Current Report on Form 108-K (File No. 001-38668) on ~~March~~June 226, 2019)
10.5			Second Forbearance to Third Amended and Restated Credit Agreement dated as of June 7, 2019, among Legacy Reserves LP, as borrower, the guarantors party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (filed as Exhibit 10.1 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 13, 2019)
10.6			Second Forbearance to Term Loan Credit Agreement dated as of June 7, 2019, among Legacy Reserves LP, as borrower, the guarantors party thereto, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (filed as Exhibit 10.2 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 13, 2019)
10.7			Third Forbearance to Third Amended and Restated Credit Agreement dated as of June 12, 2019, among Legacy Reserves LP, as borrower, the guarantors party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (filed as Exhibit 10.3 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 13, 2019)
10.8			Third Forbearance to Term Loan Credit Agreement dated as of June 12, 2019, among Legacy Reserves LP, as borrower, the guarantors party thereto, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (filed as Exhibit 10.4 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 13, 2019)
10.9			First Amended and Restated Restructuring Support Agreement dated as of June 13, 2019 (filed as Exhibit 10.1 to Legacy Reserves Inc.’s Current Report on Form 8-K/A (File No. 001-38668) on June 14, 2019)
10.10			Backstop Commitment Agreement dated as of June 10, 2019 (filed as Exhibit 10.2 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 14, 2019)
10.11			Amendment to Backstop Commitment Agreement dated as of June 13, 2019 (filed as Exhibit 10.3 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 14, 2019)
10.12			Sponsor Backstop Commitment Agreement dated as of June 13, 2019 (filed as Exhibit 10.4 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 14, 2019)
10.13			Noteholder Backstop Commitment Agreement dated as of June 13, 2019 (filed as Exhibit 10.5 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 14, 2019)
10.14			Senior Secured Superpriority Debtor-In-Possession Credit Agreement dated as of June 21, 2019, among Legacy Reserves LP, as a debtor and debtor-in-possession, the other loan parties party thereto, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent (filed as Exhibit 10.1 to Legacy Reserves Inc.’s Current Report on Form 8-K (File No. 001-38668) on June 21, 2019)
31.1*			Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)
31.2*			Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)
32.1*			Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002)
101.INS**			XBRL Instance Document
101.SCH**			XBRL Taxonomy Extension Schema Document
101.DEF**			XBRL Taxonomy Extension Definition Linkbase Document
101.PRE**			XBRL Taxonomy Extension Presentation Linkbase Document
101.CAL**			XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**			XBRL Taxonomy Extension Label Linkbase Document

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* Filed herewith

** Filed electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LEGACY RESERVES INC.

May 10, 2019

By:

/s/ Robert L. Norris

August 9, 2019

By:

/s/ Robert L. Norris

Robert L. Norris

Chief Financial Officer

(On behalf of the Registrant and as Principal Financial Officer)

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Filing Compare · Legacy Reserves Inc.