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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission File No. 333-172897

RAAM Global Energy Company

(Exact name of registrant as specified in its charter)

 

Delaware   20-0412973

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1537 Bull Lea Rd., Suite 200

Lexington, Kentucky

  40511
(Address of principal executive offices)   (Zip Code)

(859) 253-1300

(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.    Yes  ¨    No  þ

(Explanatory Note: The registrant is a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934. Although not subject to these filing requirements, RAAM Global Energy Company 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.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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

 

Large accelerated filer ¨

  

Accelerated filer ¨

      Non-accelerated filer þ       Smaller reporting company ¨
               (Do not check if a smaller reporting company)

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

As of November 10, 2014, there were 61,433 shares of common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Cautionary Note Regarding Forward-Looking Statements

     3   

Part I. Financial Information

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets

     6   

Condensed Consolidated Statements of Operations

     8   

Condensed Consolidated Statements of Cash Flows

     9   

Notes to Unaudited Condensed Consolidated Financial Statements

     10   

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

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4. Controls and Procedures

     42   

Part II. Other Information

  

Item 1. Legal Proceedings

     43   

Item 1A. Risk Factors

     43   

Item 6. Exhibits

     43   

SIGNATURES

     44   

Exhibit Index

     45   

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan,” “foresee,” “should,” “would,” “could” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information, as to the outcome and timing of future events and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Forward-looking statements may include statements that relate to, among other things, our:

 

    forward-looking oil and natural gas reserve estimates;

 

    future financial and operating performance and results;

 

    business and financial strategy and budgets;

 

    cash flow and anticipated liquidity;

 

    market prices;

 

    technology;

 

    amount, nature and timing of capital expenditures;

 

    drilling of wells and the anticipated results thereof;

 

    timing and amount of future production of oil and natural gas;

 

    competition and government regulations;

 

    operating costs and other expenses;

 

    cash flow and anticipated liquidity;

 

    prospect development;

 

    property acquisitions and sales; and

 

    plans, forecasts, objectives, expectations and intentions.

Forward-looking statements involve known and unknown risks, uncertainties and other factors (some of which are beyond our control) that may cause our actual results, performance or achievements to be materially different from the anticipated future results or financial condition expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to:

 

    low and/or declining prices for oil and natural gas and oil and natural gas price volatility;

 

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    risks associated with drilling, including completion risks, cost overruns and the drilling of non-economic wells or dry holes;

 

    ability to raise additional capital to fund future capital expenditures;

 

    cash flow and liquidity;

 

    ability to find, acquire, market, develop and produce new oil and natural gas properties;

 

    uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures;

 

    geological concentration of our reserves;

 

    discovery, acquisition, development and replacement of oil and natural gas reserves;

 

    operating hazards attendant to the oil and natural gas business;

 

    potential mechanical failure or under-performance of significant wells or pipeline mishaps;

 

    delays in anticipated start-up dates;

 

    actions or inactions of third-party operators of our properties;

 

    ability to find and retain skilled personnel;

 

    strength and financial resources of competitors;

 

    federal and state regulatory developments and approvals;

 

    environmental risks;

 

    changes in interest rates;

 

    ability to comply with the financial covenants in our debt agreements;

 

    weather conditions or events similar to those of September 11, 2001, Hurricanes Isaac, Katrina, Rita, Gustav and Ike and the Deepwater Horizon explosion; and

 

    worldwide political and economic conditions.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part II, “Item 1A. Risk Factors” and elsewhere in this report, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2013, and the risk factors described in registration statements filed with the Securities and Exchange Commission (the “SEC”).

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data, and price and cost assumptions made by reservoir engineers. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.

 

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All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAAM GLOBAL ENERGY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts)

(Unaudited)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 152,471     $ 90,858  

Accounts receivable, net of $210 and $656 provision for bad debts in 2014 and 2013, respectively

     1,410       5,472  

Revenues receivable

     15,829       19,517  

Income taxes receivable

     1,109       507  

Deferred tax asset – current portion

     3,487       3,938  

Prepaid expenses

     3,309       3,863  

Other current assets

     6,583       4,596  
  

 

 

   

 

 

 

Total current assets

     184,198       128,751  

Oil and gas properties (full-cost method):

    

Properties being amortized

     1,483,249       1,432,310  

Properties not subject to amortization

     47,903       45,752  

Less accumulated depreciation, depletion, and amortization

     (1,247,799     (1,190,944
  

 

 

   

 

 

 

Net oil and gas properties

     283,353       287,118  

Other assets:

    

Other capitalized assets, net

     6,516       7,252  

Commodity derivatives

     244       1,541  

Other

     143       1,950  
  

 

 

   

 

 

 

Total other assets

     6,903       10,743  
  

 

 

   

 

 

 

Total assets

   $ 474,454     $ 426,612  
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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RAAM GLOBAL ENERGY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for share amounts)

(Unaudited)

 

     September 30,
2014
    December 31,
2013
 

Liabilities and equity

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 20,044     $ 28,066  

Revenues payable

     14,726       17,699  

Interest payable—senior secured notes

     15,625       7,813  

Current taxes payable

     —          25  

Advances from joint interest partners

     436       4,852  

Commodity derivatives—current portion

     234       4,467  

Asset retirement obligations—current portion

     13,563       14,089  

Debt—current portion

     86,798       2,626  
  

 

 

   

 

 

 

Total current liabilities

     151,426       79,637  

Other liabilities:

    

Commodity derivatives

     —          10  

Asset retirement obligations

     30,529       29,138  

Debt

     2,331       2,448  

Senior secured notes

     250,593       251,037  

Deferred income taxes

     7,145       14,178  

Other long-term liabilities

     221       149  
  

 

 

   

 

 

 

Total other liabilities

     290,819       296,960  
  

 

 

   

 

 

 

Total liabilities

     442,245       376,597  

Commitments and contingencies (see Note 10)

    

Equity:

    

Common stock, $0.01 par value, 380,000 shares authorized, 61,433 and 61,425 outstanding in 2014 and 2013, respectively

     63,534       63,521  

Treasury stock at cost, 6,873 shares in 2014 and 2013

     (8,552     (8,552

Accumulated deficit

     (22,110     (7,441
  

 

 

   

 

 

 

Total equity attributable to RAAM Global shareholders

     32,872       47,528  

Noncontrolling interest

     (663     2,487  
  

 

 

   

 

 

 

Total equity

     32,209       50,015  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 474,454     $ 426,612  
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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RAAM GLOBAL ENERGY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Revenues:

        

Gas sales

   $ 14,035      $ 15,268      $ 48,469      $ 47,760   

Oil sales

     16,565        24,797        55,335        74,588   

Gains (losses) on derivatives, net

     4,631        (1,729     (4,009     (2,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     35,231        38,336        99,795        120,144   

Costs and expenses:

        

Production and delivery costs

     6,574        7,253        20,240        23,192   

Production taxes

     1,827        1,992        5,991        5,902   

Workover costs

     16        1,151        2,131        2,609   

Depreciation, depletion and amortization

     17,036        310,090        58,941        346,271   

General and administrative expenses

     2,752        4,594        9,188        14,223   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     28,205        325,080        96,491        392,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     7,026        (286,744     3,304        (272,053

Other income (expenses):

        

Interest expense, net

     (8,578     (7,813     (24,567     (22,362

Other, net

     (335     (5     387        (152
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (8,913     (7,818     (24,180     (22,514
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before taxes

     (1,887     (294,562     (20,876     (294,567

Income tax benefit

     (3,077     (109,241     (6,953     (109,267
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) including noncontrolling interest

   $ 1,190      $ (185,321   $ (13,923   $ (185,300
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interest (net of tax)

     —          224        746        1,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to RAAM Global

   $ 1,190      $ (185,545   $ (14,669   $ (186,474
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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RAAM GLOBAL ENERGY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended September 30,  
     2014     2013  

Operating activities

  

Net loss including noncontrolling interest

   $ (13,923   $ (185,300

Adjustments to reconcile net loss to net cash provided by operating activities:

  

Depreciation, depletion and amortization

     60,596       347,653  

Deferred income taxes

     (6,582     (103,636

Stock-based compensation expense

     12       —     

Lower of cost or market inventory adjustment

     343       —     

Changes in assets and liabilities:

  

Accounts and revenues receivable

     7,245       5,729  

Income tax receivables

     (602     1,438  

Prepaids and other current assets

     645       (2,327

Change in derivatives, net

     (2,946     1,748  

Accounts payable and accrued liabilities

     (917     1,714  

Revenues payable

     (2,973     (6,033

Interest payable on Senior Secured Notes

     7,812       9,375  

Current taxes payable

     (25     471  

Settlements of asset retirement obligations

     (7,284     (3,479

Other long-term liabilities

     73       (207
  

 

 

   

 

 

 

Net cash provided by operating activities

     41,474       67,146  

Investing activities

  

Change in advances from joint interest partners

     (4,417     6,676  

Additions to oil and gas properties and equipment

     (49,099     (98,035

Purchase of reserves in place

     (4,921     —     

Proceeds from net sales of oil and gas properties

     506       17,320  
  

 

 

   

 

 

 

Net cash used in investing activities

     (57,931     (74,039

Financing activities

  

Proceeds from borrowings

     88,678       6,757  

Payments on borrowings

     (4,622     (54,987

Issuance of Senior Secured Notes

     —          51,500  

Purchase of noncontrolling interest

     (3,272     —     

Deferred loan costs

     (2,721     —     

Payments of deferred bond costs

     —          (1,540

Payment of dividends

     —          (1,563

Other

     7       —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     78,070       167  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     61,613       (6,726

Cash and cash equivalents, beginning of period

     90,858       68,671  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $     152,471     $ 61,945  
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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RAAM GLOBAL ENERGY COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Nature of Business

RAAM Global Energy Company (“us,” “we,” “our,” “RAAM Global” or the “Company”) is a privately held company engaged primarily in the exploration and development of oil and gas properties and in the resulting production and sale of natural gas, condensate and crude oil. The Company’s production facilities are located in the Gulf of Mexico, offshore Louisiana and onshore Louisiana, Texas, Oklahoma, and California.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of RAAM Global include the accounts of RAAM Global, its wholly-owned subsidiaries, and variable interest entities where RAAM Global is the primary beneficiary (accounted for as noncontrolling interest). Intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements are unaudited; however, in the opinion of the Company’s management, all adjustments necessary for a fair statement of the Company’s interim financial results have been included. These adjustments were of a normal recurring nature. The results for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the entire year.

The accompanying condensed consolidated balance sheet as of December 31, 2013 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”). Certain notes and other information have been condensed or omitted from the interim financial statements presented in this quarterly report. Therefore, these financial statements and notes should be read in conjunction with the Company’s audited annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company’s most significant financial estimates are based on remaining proved oil and gas reserves.

Oil and Gas Properties

The Company uses the full-cost method of accounting for exploration and development costs. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including interest related to significant properties being evaluated and directly related overhead costs, are capitalized. Capitalized overhead costs amounted to $1.9 million and $1.5 million for the three months ended September 30, 2014 and 2013, respectively, and $5.4 million and $4.6 million for the nine months ended September 30, 2014 and 2013, respectively. The Company capitalized interest of $0.4 million and $0.5 million during the three months ended September 30, 2014 and 2013, respectively, related to properties not subject to amortization where significant activity occurred during the period. The Company capitalized interest of $1.0 million and $1.3 million during the nine months ended September 30, 2014 and 2013, respectively, related to properties not subject to amortization where significant activity occurred during the period.

 

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All capitalized costs of oil and gas properties are amortized through depreciation, depletion and amortization (“DD&A”) using the future gross revenue method whereby the annual provision is computed by dividing revenue earned during the period by future gross revenues at the beginning of the period, and applying the resulting rate to the cost of oil and gas properties, including estimated future development and abandonment costs.

Investments in unproved properties and major development projects are not amortized until proved reserves are attributed to the projects or until impairment occurs. If the results of an assessment indicate that the properties are impaired, that portion of such costs is added to the capitalized costs to be amortized.

Unevaluated properties and associated costs not currently being amortized and included in oil and gas properties were $47.9 million and $45.8 million at September 30, 2014 and December 31, 2013, respectively. The Company believes that the unevaluated properties at September 30, 2014 will be substantially evaluated during the remainder of 2014, 2015 and 2016, and the costs will begin to be amortized at that time.

Each quarter, the Company reviews the carrying value of the capitalized oil and gas properties under the full cost accounting guidance of the SEC. This review is referred to as a “ceiling test.” Capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount equal to the sum of the estimated present value of future net cash flows from proved reserves discounted at 10%, less estimated future expenditures to be incurred in developing and producing the proved reserves based on current economic and operating conditions, plus the lower of cost or fair value of unproved properties, each after income tax effects. To calculate estimated future net revenues, commodity prices are calculated using the average of the first-day-of-the-month price for the trailing 12-month period.

At September 30, 2014, the Company’s ceiling test computation resulted in a $0.4 million write-down and was based on the trailing 12-month average prices of $95.56 per barrel of oil plus adjustments by lease for quality, transportation fees, and regional price differentials and $4.24 per MMBtu of natural gas plus adjustments by lease for energy content, transportation fees, and regional price differentials. The Company’s ceiling test computation for the fourth quarter of 2013 resulted in a $59.1 million write-down and was based on the trailing 12-month average prices of $93.42 per barrel of oil, plus adjustments by lease for quality, transportation fees, and regional price differentials and $3.67 per MMBtu of natural gas, plus adjustments by lease for energy content, transportation fees, and regional price differentials. The Company’s ceiling test computation for the third quarter of 2013 resulted in a $276.9 million write-down during that period and was based on the trailing 12-month average prices of $91.69 per barrel of oil, plus adjustments by lease for quality, transportation fees, and regional price differentials and $3.61 per MMBtu of natural gas, plus adjustments by lease for energy content, transportation fees, and regional price differentials.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in current income.

During the first quarter of 2013, the Company sold a 50% working interest in undeveloped acreage onshore Texas to an unrelated third party for $17.3 million. The Company also received a $17.3 million net carry from this unrelated third party. The sale was recorded as a reduction to our net oil and gas properties on the accompanying condensed consolidated balance sheet, with no income statement impact because the sale did not significantly alter the relationship between capitalized costs and proved reserves.

During the second quarter of 2014, the Company purchased working interests in 19 wells located onshore Texas that represented 0.5 MBOE of reserves from a related party for a net purchase price of $4.9 million. The Company obtained a reserve report from independent reserve engineers, which was used to help determine the purchase price. The purchase was approved by the Company’s Board of Directors. The Company considers pro-forma information related to the purchase of these reserves to be nominal.

 

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During the second quarter of 2014, the Company entered into an agreement to purchase all of the issued and outstanding equity of Charter V, Inc. (“Charter V”) from the shareholders (the “Sellers”) of Charter V for a net purchase price of approximately $5.9 million. The aggregate consideration was based upon a Charter V reserve report from independent reserve engineers. The purchase was approved by the Company’s Board of Directors. Charter V held reserves totaling 0.4 MBOE. The Sellers consist of 46 individuals who were employees of the Company and Century Exploration New Orleans, Inc., a subsidiary of the Company, as of December 31, 2010. Among these individuals are Howard A. Settle, Chief Executive Officer and a Director of the Company, Jeff T. Craycraft, Chief Financial Officer, and Michael J. Willis, Senior Vice President and a Director of the Company. Prior to the transaction, Charter V was a consolidated variable interest entity (“VIE”) of the Company. The Company completed the purchase on July 2, 2014.

There are certain related parties that are joint interest and revenue partners in certain of the Company’s properties. See Note 9 for further information.

Derivative Activities

The Company’s revenues are primarily the result of sales of its oil and natural gas production. Market prices of oil and natural gas may fluctuate and affect operating results. The Company engages in derivative activities that primarily include the use of floors, collars and futures transactions in order to minimize the downside risk from adverse price movements but allow for the realization of upside profits, if available.

The Company recognizes its derivative instruments on the condensed consolidated balance sheet as either assets or liabilities measured at fair value with such amounts classified as current or long-term based on anticipated settlement dates. The Company has not designated its derivative instruments as cash flow hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and records the changes in fair value in Gains (losses) on derivatives, net in the accompanying condensed consolidated statements of operations. All realized cash settlements of derivative activities are also recorded in Gains (losses) on derivatives, net in the accompanying condensed consolidated statements of operations. See Note 5, Commodity Derivative Instruments and Derivative Activities included elsewhere in this quarterly report for further details.

Asset Retirement Obligations

In accordance with the provisions of Financial Accounting Standards Board (“FASB”) guidance related to accounting for asset retirement obligations (“ARO”) and FASB guidance on accounting for conditional asset retirement obligations, costs associated with the retirement of fixed assets (e.g., oil and gas production facilities, etc.) that the Company is legally obligated to incur are accrued. The fair value of the obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company reassesses its ARO on a quarterly basis and recognizes necessary increases or decreases as changes in estimates in the respective quarter. The Company evaluates on a quarterly basis whether there are any indicators that suggest that the expected cash flows underlying the ARO liability have changed materially.

The associated asset retirement costs are capitalized as part of the carrying amount of the fixed asset and are depreciated over the life of the applicable asset. Accretion of the discounted ARO is recognized as an increase in the carrying amount of the liability and as an expense in Depreciation, depletion and amortization in the accompanying condensed consolidated statements of operations.

The change in the Company’s asset retirement obligations is set forth below:

 

In thousands       

Balance of ARO as of January 1, 2014

   $ 43,227  

Accretion expense

     1,044  

Additions

     401  

Settlement of ARO

     (7,284

Change in ARO estimates

     6,704  
  

 

 

 

Balance of ARO as of September 30, 2014

   $ 44,092  
  

 

 

 

 

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The change in ARO estimates during the nine months ended September 30, 2014 was due to new information the Company received through quotes from third parties in regard to performing plugging and abandonment work on some of the Company’s properties located in Federal waters. ARO estimates also increased on certain previously existing platforms and facilities in state waters as a result of additional development.

Operating Segments

The Company operates in one business segment – the exploration, development and sale of oil and gas.

3. Fair Value Measurements

FASB guidance establishes a three-level hierarchy for fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

    Level 1 – Valuation is based upon unadjusted quoted prices for identical assets or liabilities in active markets.

 

    Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

    Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurements.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. At September 30, 2014 and December 31, 2013, the Company’s commodity derivative contracts were recorded at fair value. The fair values of these instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets valued by reference to similar financial instruments, adjusted for credit risk and restrictions and other terms specific to the contracts (Level 2).

 

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The Company accounts for derivative instruments in accordance with FASB guidance and all derivative instruments are reflected as either assets or liabilities at fair value on the accompanying condensed consolidated balance sheets. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:

 

     Fair Value Measurements Using(1)                     
In Thousands    Quoted Price in
Active Markets
(Level 1)
     Significant
Other Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
     Total Fair
Value
    Netting     Carrying
Amount
 

September 30, 2014

              

Assets:

              

Commodity derivatives

   $ —         $ 2,389     $ —         $ 2,389     $ (2,145   $ 244  

Liabilities:

              

Commodity derivatives

     —           (2,379     —           (2,379     2,145       (234

December 31, 2013

              

Assets:

              

Commodity derivatives

   $ —         $ 3,735     $ —         $ 3,735     $ (2,194   $ 1,541  

Liabilities:

              

Commodity derivatives

     —           (6,671     —           (6,671     2,194       (4,477

 

 

(1)  The derivative fair values are based on analysis of each contract on a gross basis, even when the legal right of offset exists.

The fair market value of the Company’s derivative assets and liabilities and their locations on the accompanying condensed consolidated balance sheets are as follows:

 

    

Fair Value Measurements Using Significant

Other Observable Inputs (Level 2)

 
Description    September 30,
2014
    December 31,
2013
 
In thousands             

Assets:

    

Fair value of commodity derivatives—current assets

   $ —        $ —     

Fair value of commodity derivatives—long-term assets

     244       1,541  
  

 

 

   

 

 

 

Total Assets

   $ 244     $ 1,541  
  

 

 

   

 

 

 

Liabilities:

    

Fair value of commodity derivatives—current liabilities

   $ (234   $ (4,467

Fair value of commodity derivatives—long-term liabilities

     —          (10
  

 

 

   

 

 

 

Total Liabilities

   $ (234   $ (4,477
  

 

 

   

 

 

 

At September 30, 2014, the fair value of the Company’s senior secured notes (the “Notes”) was estimated to be approximately $191.3 million, based on the prices the bonds have recently been quoted at in the market. This represents a Level 2 valuation as the market for the bonds is not considered to be active. As of September 30, 2014, a total of $250.0 million notional amount of the Notes was outstanding. The carrying amount of the Notes including unamortized premium and discount was $250.6 million as of September 30, 2014.

 

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At December 31, 2013, the fair value of the Notes was estimated to be approximately $259.1 million, based on a Level 2 valuation. As of December 31, 2013, a total of $250.0 million notional amount of the Notes was outstanding. The carrying amount of the Notes was $251.0 million as of December 31, 2013. See Note 6, Debt for further information.

The carrying value of cash and cash equivalents, accounts receivable, revenues receivable, accounts payable, and revenues payable approximate fair value because of the short-term maturity of those instruments. Borrowings under the Term Loan Facility (as defined in Note 6) are at variable interest rates and accordingly their carrying amounts approximate fair value.

4. Accounts and Revenues Receivable

Accounts and revenues receivable at September 30, 2014 and December 31, 2013 were $17.2 million and $25.0 million, respectively, all of which were due from companies in the oil and gas industry. Since all of the Company’s accounts receivable from purchasers and joint interest owners at September 30, 2014 and December 31, 2013 resulted from sales of crude oil, condensate, natural gas and/or joint interest billings to third-party companies in the oil and gas industry, this concentration of customers and joint interest owners may impact the Company’s overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. Management believes that allowances for doubtful accounts were adequate to absorb estimated losses as of September 30, 2014 and December 31, 2013. Management obtains letters of credit from purchasers and continually evaluates the creditworthiness of its partners.

5. Commodity Derivative Instruments and Derivative Activities

In order to manage the variability in cash flows associated with the sale of its oil and gas production, the Company has developed a strategy to combine the use of floors, collars and futures transactions in order to minimize the downside risk from adverse price movements but allow for the realization of upside profits, if available. The use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the financial terms of those contracts. As required by the Fifth Amended and Restated Credit Agreement (as defined in Note 6), the Company’s derivative counterparties are limited to our secured lenders, which helps to minimize any potential non-performance risk.

With respect to any collar transaction, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction, and the Company is required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling price of such transaction. For any particular floor contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price for such transaction. The Company is not required to make any payment in connection with the settlement of a floor contract.

All of the Company’s commodity derivative transactions are settled based on reported settlement prices on the New York Mercantile Exchange (“NYMEX”). The estimated fair value of these transactions is based on various factors that include closing exchange prices on the NYMEX, over-the-counter quotations, volatility and the time value of options. The calculation of the fair value of collars and floors utilizes the Black-Scholes option-pricing model. See Note 2, “Basis of Presentation and Significant Accounting Policies” for additional information on the Company’s derivative activities.

 

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Table of Contents

Due to the volatility of oil and natural gas prices, the estimated fair values of the Company’s commodity derivative instruments are subject to large fluctuations from period to period. The Company has experienced the effects of these commodity price fluctuations in both the current period and prior periods and expects that volatility in commodity prices will continue.

As of September 30, 2014, the Company held the commodity derivative instruments shown below related to the forecasted sale of its U.S. Gulf Coast natural gas production for 2014, 2015 and 2016:

 

Remaining Contract Term

   Contract
Type
   Volume in
MMBtus/
Month
     NYMEX
Strike
Price
 

October 2014—December 2014

   Swap      61,333      $ 4.15  

October 2014—December 2014

   Swap      143,000      $ 3.91  

October 2014—December 2014

   Swap      297,329      $ 4.09  

January 2015—December 2015

   Swap      375,806      $ 4.01  

October 2014—December 2014

   Call—Sell      312,800      $ 5.00  

October 2014—December 2014

   Call—Buy      312,800      $ 4.50  

January 2015—December 2015

   Put—Sell      316,430      $ 3.50  

January 2016—December 2016

   Put—Buy      240,397      $ 4.00  

January 2016—December 2016

   Put—Sell      240,397      $ 3.50  

January 2016—December 2016

   Call—Sell      240,397      $ 4.73  

As of September 30, 2014, the Company held the commodity derivative instruments shown below related to the forecasted sale of its U.S. Gulf Coast oil production for 2014, 2015 and 2016:

 

Remaining Contract Term

   Contract
Type
   Volume
in BBls/
Month
     NYMEX
Strike
Price
 

October 2014—December 2014

   Swap      3,261      $ 92.90  

October 2014—December 2014

   Swap      27,077      $ 90.62  

January 2015—December 2015

   Swap      22,338      $ 89.44  

January 2016—December 2016

   Swap      15,335      $ 88.12  

Additional information regarding the fair value of the Company’s derivatives can be referenced in Note 3, “Fair Value Measurements.”

Subsequent to September 30, 2014, the Company entered into the following commodity derivative instruments shown below related to the forecasted sale of its U.S. Gulf Coast natural gas production for 2015 and 2016:

 

Contract Term

   Contract
Type
   Volume
in MMBtus/
Month
     NYMEX
Strike
Price
 

January 2015—March 2015

   Swap      212,973       $ 4.09   

January 2016

   Swap      81,354       $ 4.02   

January 2016—March 2016

   Swap      120,675       $ 4.10   

 

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6. Debt

Senior Secured Notes

On September 24, 2010, the Company completed an offering of $150.0 million senior secured notes at a coupon rate of 12.5% (the “Original Notes”) with a maturity date of October 1, 2015. Interest on the Original Notes is payable in cash semi-annually in arrears on April 1 and October 1 of each year, which commenced on April 1, 2011, to holders of record at the close of business on the preceding March 15 or September 15. Interest on the Original Notes is computed on the basis of a 360-day year of twelve 30-day months. The Original Notes were sold at 99.086% of their face amount and were recorded at their discounted amount, with the discount to be amortized over the life of the notes. The Company used a portion of the net proceeds from the offering to repay all outstanding indebtedness under its previous credit facility and the remainder of the proceeds were used to fund a portion of our planned capital expenditures for development and drilling. On May 10, 2011, the Company closed an exchange offer registering substantially all of the Original Notes.

On July 15, 2011, the Company completed the issuance and sale of $50.0 million aggregate principal amount of additional 12.5% Senior Notes due 2015 (the “Additional Notes,” collectively with the Original Notes, the “Existing Notes”). The Additional Notes are additional notes permitted under the indenture dated as of September 24, 2010, pursuant to which the Company initially issued the Original Notes, as supplemented by the First Supplemental Indenture dated as of July 15, 2011. The Additional Notes were sold at 102.5% of their face amount and were recorded at their premium amount, with the premium to be amortized over the life of the notes. The Additional Notes have identical terms, other than the issue date and issue price, and constitute part of the same series as the Original Notes. On November 18, 2011, the Company closed an exchange offer registering all of the Additional Notes.

On April 11, 2013, the Company completed the issuance and sale of $50.0 million aggregate principal amount of additional 12.5% Senior Notes due 2015 (the “New Additional Notes,” collectively with the Original Notes and the Additional Notes, the “Notes”). The New Additional Notes are additional notes permitted under the indenture dated as of September 24, 2010, pursuant to which the Company initially issued the Original and Additional Notes, as supplemented by the First Supplemental Indenture dated as of July 15, 2011 (the “First Supplemental Indenture”), the Second Supplemental Indenture dated as of April 11, 2013 (the “Second Supplemental Indenture”) and the Third Supplemental Indenture dated as of April 11, 2013 (the “Third Supplemental Indenture,” and together with the Base Indenture, First Supplemental Indenture and the Second Supplemental Indenture, the “Indenture”). The New Additional Notes have identical terms, other than the issue date and issue price, and constitute part of the same series as the Original and Additional Notes. The New Additional Notes were sold at 103.0% of their face amount and were recorded at their premium amount, with the premium to be amortized over the life of the notes. The Company received net proceeds from the issuance and sale of the New Additional Notes of approximately $50.3 million, after underwriting fees and estimated offering expenses. The Company used the net proceeds from the offering to repay existing indebtedness under the Company’s previous credit facility and for general corporate purposes. On November 5, 2013, the Company closed an exchange offer registering all of the New Additional Notes.

The Notes are guaranteed on a senior secured basis by each of our existing and future domestic subsidiaries that guarantee indebtedness under our Term Loan Facility. The Notes and the guarantees are secured by a security interest in substantially all of our existing and future domestic subsidiaries’ (other than certain future unrestricted subsidiaries’) assets to the extent they constitute collateral under our Term Loan Facility, subject to certain exceptions. Pursuant to an Intercreditor Agreement, the lien securing the Notes is subordinated and junior to liens securing our Term Loan Facility.

The Company is actively working with investment banking advisors to prepare for refinancing the Notes in 2015. In conjunction with these advisors, the Company has developed and is executing a robust drilling program. The Company has established a timetable in which a significant number of wells will be drilled and completed prior to the refinancing. The Company believes that the addition of these wells will increase production and reserves and will lead to future drilling opportunities in our core project areas.

 

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Table of Contents

Term Loan Facility

On September 12, 2014, the Company entered into a Fifth Amended and Restated Credit Agreement with Wilmington Trust, National Association, as administrative agent and the lenders party thereto (the “Fifth Amended and Restated Credit Agreement”). The Fifth Amended and Restated Credit Agreement provides the Company with an $85.0 million term loan facility (the “Term Loan Facility”) which is secured by a first lien on substantially all of the Company’s real and personal property. As of September 30, 2014, $85.0 million was outstanding under the Term Loan Facility. The maturity date for the Term Loan Facility is the earlier of September 12, 2016 or 91 days prior to the maturity date of the Senior Secured Notes. The annual interest rate on the Term Loan Facility is 6.5%, plus the greater of the LIBOR rate for the interest period or 1%. At September 30, 2014, the interest rate was 7.5%. Interest is payable quarterly on September 30, December 31, March 31, and June 30 of each year, which commenced on September 30, 2014.

The proceeds of the term loan incurred under the Fifth Amended and Restated Credit Agreement were or will be used to (a) repay all expenses, fees or indemnitees outstanding under the Fourth Amended and Restated Credit Agreement dated as of November 29, 2011, (b) finance capital expenditures associated with the Company’s oil and gas properties, (c) provide working capital for the Company’s operations and (d) pay transaction fees and expenses incurred in connection with the transactions contemplated by the Fifth Amended and Restated Credit Agreement. The Fifth Amended and Restated Credit Agreement contains customary restrictions on, among other things the Company’s ability to incur debt, grant liens on their property, make dispositions or investments, enter into mergers or issue new securities, make distributions, enter into affiliate transactions, enter into hedging contracts, amend their organizational documents and create new subsidiaries. In addition, the Fifth Amended and Restated Credit Agreement requires the Company to maintain the following financial covenants as defined in the agreement: (i) a minimum Current Ratio of 1.0:1.0 as of the end of each fiscal quarter, (ii) a maximum First Lien Leverage Ratio of 2.0:1.0 as of the end of each fiscal quarter for the four immediately preceding fiscal quarters and (iii) a minimum PDP Asset Coverage Ratio of 1.0:1.0 as of January 1, 2015 and 1.1:1.0 as of April 1, 2015, July 1, 2015, January 1, 2016 and July 1, 2016. As of September 30, 2014, the Company was in compliance with all of these debt covenants.

Promissory Note

The Company has a promissory note related to the construction of the Houston office building. The balance was approximately $2.5 million at September 30, 2014 and $2.6 million at December 31, 2013. The note requires monthly installments of principal and interest in the amount of approximately $27,000 until September 1, 2025. There are no covenant requirements under this promissory note.

Finance Agreement

During May 2014, the Company entered into an agreement to finance the premiums for its annual insurance policies. At September 30, 2014, $2.5 million was outstanding under this agreement. The finance agreement requires monthly installments of principal and interest in the amount of approximately $0.4 million until April 1, 2015. There are no covenant requirements under this agreement.

7. Income Taxes

Income tax benefit for the three months ended September 30, 2014 was $3.1 million or an effective tax rate of 163.0% compared to an income tax benefit of $109.2 million or an effective tax rate of 37.1% for the three months ended September 30, 2013. Income tax benefit for the nine months ended September 30, 2014 was $7.0 million or an effective tax rate of 33.3% compared to an income tax benefit of $109.3 million or an effective tax rate of 37.1% for the nine months ended September 30, 2013. The Company’s effective income tax rates for the three and nine months ended September 30, 2014 differed from the federal statutory rate of 35.0% primarily because of state and local income taxes, percentage depletion in excess of cost basis, valuation allowance against deferred tax assets and certain other permanent differences. The Company’s effective income tax rates for the three and nine months ended September 30, 2013 differed from the federal statutory rate of 35.0% primarily because of state and local income taxes and percentage depletion in excess of cost basis.

 

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8. Shareholders’ Equity

During the nine months ended September 30, 2014, no dividends were paid. During the nine months ended September 30, 2013, dividends were paid at $25.00 per share to shareholders of record effective March 15, 2013.

9. Related-Party Transactions

There are certain related parties that are joint interest and revenue partners in certain of the Company’s properties. Amounts due from such related parties of $10,000 and $1.1 million at September 30, 2014 and December 31, 2013, respectively, are included in Accounts receivable on the Company’s condensed consolidated balance sheets and represent joint interest owner receivables. Amounts due to such related parties of $95,000 and $2.0 million at September 30, 2014 and December 31, 2013, respectively, are included in Revenues payable on the Company’s condensed consolidated balance sheets and represent revenue owner payables.

During the second quarter of 2014, the Company purchased working interests in 19 wells located onshore Texas that represented 0.5 MBOE of reserves from a related party entity for $4.9 million. The Company obtained a reserve report from independent reserve engineers, which was used to help determine the purchase price. The purchase was approved by the Company’s Board of Directors.

10. Commitments and Contingencies

The Company has been named as a defendant in certain lawsuits arising in the ordinary course of business. While the outcome of these lawsuits cannot be predicted with certainty, management does not expect that any of these matters will have a material adverse effect on the financial position, cash flows or results of operations of the Company.

11. Condensed Consolidating Financial Information

The following condensed consolidating financial information is presented in accordance with SEC Regulation S-X requirements relating to multiple subsidiary guarantors of securities issued by the parent company of those subsidiaries. Each of RAAM Global’s 100%-owned subsidiaries are guarantors of the Notes described in Note 6, “Debt.” The guarantees are full and unconditional and joint and several.

The following tables present condensed consolidating balance sheets as of September 30, 2014 and December 31, 2013, condensed consolidating statements of operations for the three and nine months ended September 30, 2014 and 2013, and condensed consolidating statements of cash flows for the nine months ended September 30, 2014 and 2013, and should be read in conjunction with the condensed consolidated financial statements herein.

 

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Condensed Consolidating Balance Sheets

At September 30, 2014 (in thousands)

 

     RAAM Global
Energy
Company
     Subsidiary
Guarantors
     Non-guarantor
VIE
    Eliminations     Consolidated  

Assets

            

Current assets:

            

Cash and cash equivalents

   $ 751      $ 151,720      $  —       $  —       $ 152,471  

Receivables, net

     1,109        20,367        —          (3,128     18,348  

Deferred tax asset—current

     —           3,487        —          —          3,487  

Commodity derivatives—current portion

     —           —           —          —          —     

Prepaids and other current assets

     4,316        5,576        —          —          9,892  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     6,176        181,150        —          (3,128     184,198  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net oil and gas properties

     —           280,355        2,998       —          283,353  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total other assets

     302,241        807        —          (296,145     6,903  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 308,417      $ 462,312      $ 2,998     $ (299,273   $ 474,454  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and equity

            

Current liabilities:

            

Payables and accrued liabilities

   $ 17,060      $ 33,335      $ 3,128     $ (3,128   $ 50,395  

Advances from joint interest partners

     —           436        —          —          436  

Commodity derivatives—current portion

     —           234        —          —          234  

Asset retirement obligations—current portion

     —           13,563        —          —          13,563  

Debt—current portion

     142        86,656        —          —          86,798  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     17,202        134,224        3,128       (3,128     151,426  

Other liabilities:

            

Commodity derivatives

     —           —           —          —          —     

Asset retirement obligations

     —           30,529        —          —          30,529  

Long-term debt

     2,331        —           —          —          2,331  

Senior secured notes

     250,593        —           —          —          250,593  

Deferred income taxes

     5,198        1,414        533       —          7,145  

Other long-term liabilities

     221        —           —          —          221  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total other liabilities

     258,343        31,943        533       —          290,819  

Total liabilities

     275,545        166,167        3,661       (3,128     442,245  

Equity attributable to RAAM Global shareholders

     32,872        296,145        —          (296,145     32,872  

Noncontrolling interest

     —           —           (663     —          (663
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total equity

     32,872        296,145        (663     (296,145     32,209  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 308,417      $ 462,312      $ 2,998     $ (299,273   $ 474,454  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Balance Sheets

At December 31, 2013 (in thousands)

 

     RAAM Global
Energy
Company
     Subsidiary
Guarantors
     Non-guarantor
VIEs
     Eliminations     Consolidated  

Assets

             

Current assets:

             

Cash and cash equivalents

   $ 628      $ 90,225      $ 5      $  —       $ 90,858  

Receivables, net

     507        33,124        823        (8,958     25,496  

Deferred tax asset—current

     —           3,938        —           —          3,938  

Prepaids and other current assets

     2,561        5,898        —           —          8,459  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     3,696        133,185        828        (8,958     128,751  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net oil and gas properties

     4,112        271,459        11,547        —          287,118  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other assets

     309,899        1,966        —           (301,122     10,743  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 317,707      $ 406,610      $ 12,375      $ (310,080   $ 426,612  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and equity

             

Current liabilities:

             

Payables and accrued liabilities

   $ 11,200      $ 43,127      $ 8,234      $ (8,958   $ 53,603  

Advances from joint interest partners

     —           4,852        —           —          4,852  

Commodity derivatives—current portion

     —           4,467        —           —          4,467  

Asset retirement obligations—current portion

     —           14,089        —           —          14,089  

Debt—current portion

     147        2,479        —           —          2,626  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     11,347        69,014        8,234        (8,958     79,637  

Other liabilities:

             

Commodity derivatives

     —           10        —           —          10  

Asset retirement obligations

     —           28,941        197        —          29,138  

Long-term debt

     2,448        —           —           —          2,448  

Senior secured notes

     251,037        —           —           —          251,037  

Deferred income taxes

     5,198        7,523        1,457        —          14,178  

Other long-term liabilities

     149        —           —           —          149  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other liabilities

     258,832        36,474        1,654        —          296,960  

Total liabilities

     270,179        105,488        9,888        (8,958     376,597  

Equity attributable to RAAM Global shareholders

     47,528        301,122        —           (301,122     47,528  

Noncontrolling interest

     —           —           2,487        —          2,487  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     47,528        301,122        2,487        (301,122     50,015  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 317,707      $ 406,610      $ 12,375      $ (310,080   $ 426,612  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Operations

Three Months Ended September 30, 2014 (in thousands)

 

     RAAM Global
Energy
Company
    Subsidiary
Guarantors
    Eliminations     Consolidated  

Revenues:

        

Gas sales

   $  —       $ 14,035     $  —       $ 14,035  

Oil sales

     —          16,565        —          16,565   

Gains on derivatives, net

     —          4,631        —          4,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          35,231        —          35,231   

Costs and expenses:

        

Production and delivery costs

     —          6,574        —          6,574   

Production taxes

     —          1,827        —          1,827   

Workover costs

     —          16        —          16   

Depreciation, depletion and amortization

     77        16,959        —          17,036   

General and administrative expenses

     1,475        1,277        —          2,752   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     1,552        26,653        —          28,205   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (1,552     8,578        —          7,026   

Other income (expenses):

        

Interest expense, net

     (8,015     (563     —          (8,578

Income from equity investment in subsidiaries

     10,371       —          (10,371     —     

Other, net

     —          (335     —          (335
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     2,356        (898     (10,371     (8,913
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     804        7,680        (10,371     (1,887

Income tax benefit

     (386     (2,691     —          (3,077
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) including noncontrolling interest

   $ 1,190     $ 10,371     $ (10,371     1,190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interest (net of tax)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to RAAM Global

   $ 1,190     $ 10,371     $ (10,371   $ 1,190  
  

 

 

   

 

 

   

 

 

   

 

 

 

The non-guarantor VIE had no activity for the three months ended September 30, 2014.

 

22


Table of Contents

Condensed Consolidating Statements of Operations

Three Months Ended September 30, 2013 (in thousands)

 

     RAAM Global
Energy
Company
    Subsidiary
Guarantors
    Non-guarantor
VIEs
     Eliminations      Consolidated  

Revenues:

            

Gas sales

   $  —       $ 14,435     $ 833      $  —        $ 15,268  

Oil sales

     —          23,883        914        —           24,797   

Losses on derivatives, net

     —          (1,729     —           —           (1,729
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     —          36,589        1,747        —           38,336   

Costs and expenses:

            

Production and delivery costs

     —          7,143        110        —           7,253   

Production taxes

     —          1,912       80        —           1,992  

Workover costs

     —          1,128        23        —           1,151   

Depreciation, depletion and amortization

     197        308,722        1,171         —           310,090   

General and administrative expenses

     2,550        2,044        —           —           4,594   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expense

     2,747        320,949        1,384         —           325,080   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     (2,747     (284,360     363         —           (286,744

Other income (expenses):

            

Interest expense, net

     (7,779     (34     —           —           (7,813

Income from equity investment in subsidiaries

     (180,487     —          —           180,487        —     

Other, net

     —          (5     —           —           (5
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total other income (expenses)

     (188,266     (39     —           180,487         (7,818
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

     (191,013     (284,399     363         180,487        (294,562

Income tax (benefit) provision

     (5,692     (103,688     139        —           (109,241
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) including noncontrolling interest

   $ (185,321   $ (180,711   $ 224      $ 180,487      $ (185,321
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to noncontrolling interest (net of tax)

     224       —          —           —           224   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to RAAM Global

   $ (185,545   $ (180,711   $ 224      $ 180,487      $ (185,545
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Operations

Nine Months Ended September 30, 2014 (in thousands)

 

     RAAM Global
Energy
Company
    Subsidiary
Guarantors
    Non-guarantor
VIEs
     Eliminations     Consolidated  

Revenues:

           

Gas sales

   $  —       $ 46,822     $ 1,647      $  —       $ 48,469  

Oil sales

     —          54,202        1,133        —          55,335   

Losses on derivatives, net

     —          (4,009     —           —          (4,009
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     —          97,015        2,780        —          99,795   

Costs and expenses:

           

Production and delivery costs

     —          20,066        174        —          20,240   

Production taxes

     —          5,819        172        —          5,991   

Workover costs

     —          2,131        —           —          2,131   

Depreciation, depletion and amortization

     257        57,264        1,420         —          58,941   

General and administrative expenses

     5,877        3,303        8         —          9,188   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expense

     6,134        88,583        1,774         —          96,491   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from operations

     (6,134     8,432        1,006         —          3,304   

Other income (expenses):

           

Interest expense, net

     (23,954     (613     —           —          (24,567

Loss from equity investment

     —          —          —           —          —     

Loss on disposals of inventory

     —          —          —           —          —     

Income from equity investment in subsidiaries

     14,730       —          —           (14,730     —     

Other, net

     308       79        —           —          387   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other income (expenses)

     (8,916     (534     —           (14,730     (24,180
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before taxes

     (15,050     7,898        1,006         (14,730     (20,876

Income tax (benefit) provision

     (381     (6,832     260        —          (6,953
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) including noncontrolling interest

   $ (14,669   $ 14,730     $ 746      $ (14,730     (13,923
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to noncontrolling interest (net of tax)

     —          —          746        —          746   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) attributable to RAAM Global

   $ (14,669   $ 14,730     $  —        $ (14,730   $ (14,669
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Operations

Nine Months Ended September 30, 2013 (in thousands)

 

     RAAM Global
Energy
Company
    Subsidiary
Guarantors
    Non-guarantor
VIEs
     Eliminations      Consolidated  

Revenues:

            

Gas sales

   $  —       $ 45,383     $ 2,377      $  —        $ 47,760  

Oil sales

     —          71,832        2,756        —           74,588   

Losses on derivatives, net

     —          (2,204     —           —           (2,204
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     —          115,011        5,133        —           120,144   

Costs and expenses:

            

Production and delivery costs

     —          22,853        339        —           23,192   

Production taxes

     —          5,688       214        —           5,902  

Workover costs

     —          2,579        30        —           2,609   

Depreciation, depletion and amortization

     558        343,052        2,661         —           346,271   

General and administrative expenses

     6,482        7,737        4        —           14,223   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expense

     7,040        381,909        3,248         —           392,197   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     (7,040     (266,898     1,885         —           (272,053

Other income (expenses):

            

Interest expense, net

     (21,819     (543     —           —           (22,362

Income from equity investment in subsidiaries

     (161,944     —          —           161,944        —     

Other, net

     (150     (2     —           —           (152
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total other income (expenses)

     (183,913     (545     —           161,944        (22,514
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

     (190,953     (267,443     1,885         161,944        (294,567

Income tax (benefit) provision

     (5,653     (104,325     711        —           (109,267
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) including noncontrolling interest

   $ (185,300   $ (163,118   $ 1,174      $ 161,944      $ (185,300
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to noncontrolling interest (net of tax)

     1,174       —          —           —           1,174   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to RAAM Global

   $ (186,474   $ (163,118   $ 1,174      $ 161,944      $ (186,474
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2014 (in thousands)

 

     RAAM Global
Energy
Company
    Subsidiary
Guarantors
    Non-guarantor
VIEs
    Eliminations     Consolidated  

Net cash provided by (used in) operating activities

   $ (15,301   $ 69,096     $ 2,409     $ (14,730   $ 41,474  

Investing activities

          

Change in investments between affiliates

     20,893       (33,880     (1,743     14,730       —     

Change in advances from joint interest partners

     —          (4,417     —          —          (4,417

Additions to oil and gas properties and equipment

     (5     (48,423     (671     —          (49,099

Purchase of reserves in place

     —          (4,921     —          —          (4,921

Proceeds from net sales of oil and gas properties

     —          506       —          —          506  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     20,888       (91,135     (2,414     14,730       (57,931

Financing activities

          

Proceeds from borrowings

     —          88,678       —          —          88,678  

Payments on borrowings

     (122     (4,500     —          —          (4,622

Deferred loan costs

     (2,070     (651     —          —          (2,721

Purchase of noncontrolling interest

     (3,272     —          —          —          (3,272

Other

     —          7       —          —          7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (5,464     83,534       —          —          78,070  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     123       61,495       (5     —          61,613  

Cash and cash equivalents, beginning of period

     628       90,225       5       —          90,858  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 751     $ 151,720     $ —        $ —        $ 152,471  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2013 (in thousands)

 

     RAAM Global
Energy
Company
    Subsidiary
Guarantors
    Non-guarantor
VIEs
    Eliminations     Consolidated  

Net cash provided by (used in) operating activities

   $ (172,141   $ 72,777     $ 4,566     $ 161,944     $ 67,146  

Investing activities

          

Change in investments between affiliates

     133,583       31,495       (3,134     (161,944     —     

Change in advances from joint interest partners

     —          6,676       —          —          6,676  

Additions to oil and gas properties and equipment

     (2,362     (94,237     (1,436     —          (98,035

Proceeds from net sales of oil and gas properties

     —          17,320       —          —          17,320  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     131,221       (38,746     (4,570     (161,944     (74,039

Financing activities

          

Proceeds from borrowings

     —          6,757       —          —          6,757  

Payments on borrowings

     (102     (54,885     —          —          (54,987

Issuance of 12.5% Senior Secured Notes due 2015

     51,500       —          —          —          51,500  

Payments of deferred bond costs

     (1,540     —          —          —          (1,540

Payment of dividends

     (1,563     —          —          —          (1,563
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     48,295       (48,128     —          —          167  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     7,375       (14,097     (4     —          (6,726

Cash and cash equivalents, beginning of period

     514       68,148       9       —          68,671  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,889     $ 54,051     $ 5     $ —        $ 61,945  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. Our operating results for the periods discussed may not be indicative of future performance. The following discussion and analysis includes forward-looking statements and should be read in conjunction with “Risk Factors” under Part II, Item 1A of this report, along with the “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report and our Annual Report on Form 10-K for the year ended December 31, 2013, for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.

Overview

We are a privately held oil and natural gas exploration and production company engaged in the exploration, development, production and acquisition of oil and gas properties. Our operations are located in the Gulf of Mexico, offshore Louisiana and onshore Louisiana, Texas, Oklahoma and California. We focus on the development of both conventional and unconventional resource plays.

We are currently focused on evaluating and developing our asset base, optimizing our acreage positions and evaluating potential acquisitions, with an emphasis on the development of our conventional plays and also on the development and acquisition of unconventional plays. We are currently seeking partners for joint venture or farm-out arrangements for certain assets located in the Yegua and Cook Mountain region and the Mid-Continent region. We were successful in obtaining a farm-out partner in our Breton Sound area. We are currently developing and executing an active drilling program in our four core areas: Shallow Waters (Breton Sound and Palmetto), Federal Waters of the Gulf of Mexico, Texas Yegua Trend and the California Stevens play.

We have developed a business model of conducting a thorough evaluation of numerous plays, including a detailed geological and geophysical review. When a promising prospect is identified, we conduct core analysis and a very detailed petro physical evaluation in order to fully understand the reserve potential, and we develop a complete economic model to establish the expected returns. Once these evaluations are complete, we create a buy outline for purchasing the undeveloped acreage. We then work to secure a joint venture partner to assist us in developing the acreage. In this model, we would ideally recover a significant portion of our initial investment in the acreage through the arrangement with the joint venture partner. We successfully executed this model in the Bend Arch play during 2013. We subsequently decided to sell our remaining interest in that play to pursue other opportunities; however, we believe it demonstrates the successful execution of our business model.

Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as economic, political and regulatory developments as well as competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas 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.

Recent Developments

During the third quarter of 2014, the Company successfully entered into the Fifth Amended and Restated Credit Agreement, which provides the Company with an $85.0 million term loan facility. After completing this new financing arrangement, the Company launched an active drilling program. The Company believes the wells selected for this program have the best chance of proving up new reserves, increasing cash flow, and establishing future drilling opportunities.

Shallow Waters—Breton Sound. During September 2014, the first successful farm-out well was brought online. As of November 10, 2014, this well was producing at a rate of 10.5 million cubic feet per day and 621 barrels of condensate per day. The Company has a 22.4% Net Revenue Interest in this well. Another farm-out well is scheduled to be spud in late November 2014. The Company has completed its proprietary 3-D survey over another prospect area in this field. The Company maintains a 100% working interest in this area and expects to spud the prospect in December 2014. The Breton Sound field has several additional locations to be drilled.

 

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Table of Contents

Shallow Waters—Palmetto. The Company has opened a new area of exploration in the State Waters of Louisiana. The Company has 3,173 acres under lease. The first Palmetto well was spud on October 25, 2014, and is currently drilling. There could be as many as four additional locations to be drilled in the Palmetto lease based on the success of the initial well.

Offshore Federal Waters of the Gulf of Mexico. The Company is in the process of permitting a well to be drilled off its currently producing platform in Ship Shoal Block 150 in the Gulf of Mexico. The well is scheduled to be spud in November and estimated to reach total depth in January 2015.

Texas Yegua Trend. On November 3, 2014, the Company brought a new well online in the Texas Yegua Trend. As of November 10, 2014, the well was producing 2.3 million cubic feet per day and 87 barrels of condensate. The Company has a 48.1% Net Revenue Interest in this well. On November 5, 2014, the Company mobilized a rig to drill another prospect in the Texas Yegua Trend. It is estimated that the well will be drilled and logged prior to December 31, 2014.

California Stevens Play. In October 2014, the first California Stevens well was drilled and successfully completed and placed into production. As of November 10, 2014, the well was producing 280 barrels of oil per day. The Company has a 79.7% Net Revenue Interest in this well. On September 22, 2014, the Company spud the second California Stevens well and is currently drilling this well. The well is expected to reach total depth and be logged prior to December 31, 2014. The Company believes the California Stevens play has as many as ten to fifteen additional locations to be drilled based on the success of the second well which is currently being drilled.

In summary, the Company has drilled or participated in three successful wells which are currently online and producing: a Breton Sound farm-out well, a Texas Yegua Trend well, and a California Stevens well. The Company currently has two wells drilling: a Palmetto well in the State waters of Louisiana and a California Stevens well. The Company expects to have three additional wells spud in November 2014: a Breton Sound farm-out well, a Texas Yegua Trend well, and a Ship Shoal 150 well in the Federal Waters of the Gulf of Mexico. In addition, the Company expects to spud a 100% Company-owned prospect in the Breton Sound field in December 2014.

 

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How We Evaluate Our Operations

We use a variety of financial and operational measures to assess our performance. Among these measures are (1) volumes of crude oil and natural gas produced, (2) crude oil and natural gas prices realized, (3) per unit operating and administrative costs and (4) Adjusted EBITDA (as defined below). The following table contains financial and operational data for the three and nine month periods ended September 30, 2014 and 2013.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  

Average daily production:

           

Oil (Bbl per day)

     1,827        2,349        2,006        2,489  

Natural gas (Mcf per day)

     32,942        41,033        35,071        41,717  

Oil equivalents (Boe per day)

     7,318        9,188        7,851        9,442  

Average prices: (1)

           

Oil ($/Bbl)

   $ 98.53      $ 114.73      $ 101.05      $ 109.77  

Natural gas ($/Mcf)

   $ 4.63      $ 4.04      $ 5.06      $ 4.19  

Oil equivalents ($/Boe)

   $ 45.45      $ 47.40      $ 48.43      $ 47.47  

Production and delivery costs ($/Boe)

   $ 9.76      $ 8.58      $ 9.44      $ 9.00  

General and administrative expenses ($/Boe)

   $ 4.09      $ 5.43      $ 4.29      $ 5.52  

Net income (loss) attributable to RAAM Global (in thousands)

   $ 1,190      $ (185,545    $ (14,669    $ (186,474

Adjusted EBITDA (2) (in thousands)

   $ 17,558      $ 23,876      $ 59,018      $ 74,652  

 

(1)  Average prices presented do not give effect to our derivative activities or the monetization of oil derivatives during February 2013 or the monetization of oil and gas derivatives during June, July and September 2014. Please see Item 1, Note 5, “Commodity Derivative Instruments and Derivative Activities” for a discussion of our derivative activities.
(2)  Adjusted EBITDA as used herein represents net income before net losses (gains) on derivatives, net of cash settlements received or paid, interest expense, income taxes, depreciation, depletion and amortization. We consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance calculated in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). We have included this non-GAAP financial measure because management utilizes this information for assessing our performance and liquidity and as an indicator of our ability to make capital expenditures, service debt and finance working capital requirements. Management believes that Adjusted EBITDA is a measurement that is commonly used by analysts and some investors in evaluating the performance and liquidity of companies in our industry. In particular, we believe that it is useful to our analysts and investors to understand this relationship because it excludes noncash expense items, such as depletion. We believe that excluding these transactions allows investors to meaningfully trend and analyze the performance and liquidity of our core cash operations. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with U.S. GAAP or as an alternative to net cash provided by operating activities as a measure of our profitability or liquidity. Adjusted EBITDA has significant limitations, including that it does not reflect our cash requirements for capital expenditures, contractual commitments, working capital or debt service. In addition, other companies may calculate Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

 

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The following table sets forth a reconciliation of net income (loss) as determined in accordance with U.S. GAAP, the most comparable U.S. GAAP measure, to Adjusted EBITDA for the three and nine month periods ended September 30, 2014 and 2013.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  
In thousands                         

Net income (loss) attributable to RAAM Global

   $ 1,190     $ (185,545   $ (14,669   $ (186,474

Net (gains) losses on derivatives, net of cash settlements received or paid

     (6,197     721        (2,946     1,684   

Interest expense

     8,606        7,851        24,645        22,438   

Depreciation, depletion and amortization

     17,036        310,090        58,941        346,271   

Income taxes

     (3,077     (109,241     (6,953     (109,267
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 17,558     $ 23,876     $ 59,018     $ 74,652  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Results of Operations

The following table sets forth the unaudited results of operations for the three and nine month periods ended September 30, 2014 and 2013 in thousands.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2014     2013     2014     2013  

Revenues:

        

Gas sales

   $ 14,035     $ 15,268     $ 48,469     $ 47,760  

Oil sales

     16,565        24,797        55,335        74,588   

Gains (losses) on derivatives, net

     4,631        (1,729     (4,009     (2,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     35,231        38,336        99,795        120,144   

Costs and expenses:

        

Production and delivery costs

     6,574        7,253        20,240        23,192   

Production taxes

     1,827        1,992        5,991        5,902   

Workover costs

     16        1,151        2,131        2,609   

Depreciation, depletion and amortization

     17,036        310,090        58,941        346,271   

General and administrative expenses

     2,752        4,594        9,188        14,223   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

     28,205        325,080        96,491        392,197   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     7,026        (286,744     3,304        (272,053

Other income (expenses):

        

Interest expense, net

     (8,578     (7,813     (24,567     (22,362

Other, net

     (335     (5     387        (152
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (8,913     (7,818     (24,180     (22,514
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before taxes

     (1,887     (294,562     (20,876     (294,567

Income tax benefit

     (3,077     (109,241     (6,953     (109,267
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) including noncontrolling interest

   $ 1,190     $ (185,321   $ (13,923   $ (185,300
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interest (net of tax)

     —          224        746        1,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to RAAM Global

   $ 1,190     $ (185,545   $ (14,669   $ (186,474
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Revenues

Oil and natural gas production. Oil and natural gas production for the three months ended September 30, 2014 decreased to 0.7 MMBoe from 0.8 MMBoe for the three months ended September 30, 2013. During the three months ended September 30, 2014, natural gas production decreased 20% and oil production decreased 22%, resulting in a 20% decrease in Boe production as compared to the three months ended September 30, 2013. Oil and natural gas production decreased because the Company was engaged in limited drilling activity and production from new wells in both the shallow waters of Louisiana and onshore Texas did not offset normal production declines from our mature wells.

 

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Total revenues. Total revenues for the three months ended September 30, 2014 decreased to $35.2 million from $38.3 million for the three months ended September 30, 2013. Natural gas revenues (exclusive of derivatives) decreased $1.2 million or 8% due to lower production even though natural gas prices were higher for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Natural gas prices increased by 15% period over period, to an average price of $4.63 for the three months ended September 30, 2014 from an average natural gas price of $4.04 for the three months ended September 30, 2013.

Oil revenues (exclusive of derivatives) decreased $8.2 million or 33%, as compared to the prior year period due to lower oil volumes and lower oil prices. The average oil price of $98.53 for the three months ended September 30, 2014 represented a 14% decrease from the average oil price of $114.73 for the three months ended September 30, 2013.

Operating costs and expenses

Production and delivery costs. Production and delivery costs for the three months ended September 30, 2014 decreased to $6.6 million from $7.3 million for the same period in 2013. Production and delivery costs per Boe increased to $9.76 per Boe for the three months ended September 30, 2014 from $8.58 per Boe for the same period in 2013 primarily as a result of lower production volumes during the third quarter of 2014. In the third quarter of 2014 the Company experienced lower insurance, lift boat, and boat transportation costs than those during the same period in 2013.

Production taxes. Production taxes were $1.8 million for the three months ended September 30, 2014, and $2.0 million for the comparable period in 2013. The Company pays production taxes to state governments at rates specified by geographic location and commodity. Production taxes on natural gas increased by $0.1 million due to higher natural gas prices for the three months ended September 30, 2014 while production taxes on oil decreased by $0.3 million due to lower oil prices for the three months ended September 30, 2014.

Workover costs. Workover costs for the three months ended September 30, 2014 decreased to $16,000 from $1.2 million for the same period in 2013. Workovers are performed on wells that need certain mechanical changes or enhancements to maintain or increase production. Due to less mechanical needs during the third quarter of 2014, the Company performed less workovers in that period than were necessary during the same period in 2013. 

Depreciation, depletion and amortization. Depreciation, depletion and amortization for the three months ended September 30, 2014 decreased to $17.0 million from $310.1 million for the three months ended September 30, 2013. Excluding the effects of the ceiling test write-down in each period depreciation, depletion and amortization for the three months ended September 30, 2014 decreased to $24.78 per Boe down from $39.25 per Boe for the three months ended September 30, 2013. The decrease in depreciation, depletion and amortization was primarily due to a $276.9 million ceiling test write-down to eliminate the proved reserves in the Ewing Bank 920 Project during the third quarter of 2013, as compared to a $0.4 million ceiling test write-down in the third quarter of 2014. At September 30, 2014, the Company also had a significantly lower cost basis to deplete than at September 30, 2013 resulting in less depletion in the third quarter of 2014.

General and administrative expenses. General and administrative expenses decreased to $2.8 million for the three months ended September 30, 2014 from $4.6 million for the three months ended September 30, 2013. The decrease in general and administrative expenses was mainly due to lower consultant compensation and data processing costs during the third quarter of 2014 as compared to the same period of 2013.

Interest expense, net. Net interest expense increased to $8.6 million for the three months ended September 30, 2014, from $7.8 million for the three months ended September 30, 2013 because of higher average debt balances. Debt balances averaged $266.6 million and $250.0 million during the three months ended September 30, 2014 and 2013, respectively. Effective annual interest rates averaged 12.2% and 12.5% during the three months ended September 30, 2014 and 2013, respectively. In both the third quarter of 2014 and 2013, the Company had $250.0 million of senior secured notes outstanding with a 12.5% interest rate. On September 12, 2014, the Company borrowed $85.0 million under its Term Loan Facility. At September 30, 2014 the effective interest rate was 7.5% on the Term Loan Facility. For additional information on the Term Loan Facility, see the “-Financing Facilities” below.

 

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Income tax benefit. For the three months ended September 30, 2014, the Company recorded an income tax benefit of $3.1 million as compared to income tax benefit of $109.2 million for the three months ended September 30, 2013. Income tax benefits recognized were the result of effective tax rate calculations of approximately 163.0% at September 30, 2014 and approximately 37.1% at September 30, 2013. The difference in the rates for the third quarters of 2014 and 2013 is primarily due to the recording of a valuation allowance against deferred tax assets in 2014. The valuation allowance is recorded based on our current assessment that it is more likely than not that certain of our deferred tax assets will not be realized in the foreseeable future.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Revenues

Oil and natural gas production. Oil and natural gas production for the nine months ended September 30, 2014 decreased to 2.1 MMBoe from 2.6 MMBoe for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, natural gas production decreased 16% and oil production decreased 19%, resulting in a 17% decrease in Boe production as compared to the nine months ended September 30, 2013. Wells drilled during the last 12 months have predominantly been replacement wells for the wells that failed due to a formation collapse that led to the shearing of the casing in several of our Texas wells. The additional well drilled in the shallow waters offshore did not offset production declines from the more mature wells located in that area and in federal waters.

Total revenues. Total revenues for the nine months ended September 30, 2014 decreased to $99.8 million from $120.1 million for the nine months ended September 30, 2013. Natural gas revenues (exclusive of derivatives) increased $0.7 million or 1% due to higher natural gas prices offsetting lower natural gas production for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Natural gas prices increased by 21% period over period, to an average price of $5.06 for the nine months ended September 30, 2014 from an average natural gas price of $4.19 for the nine months ended September 30, 2013.

Oil revenues (exclusive of derivatives) decreased $19.3 million or 26%, as compared to the prior year period due to lower oil volumes and lower oil prices. The average oil price of $101.05 for the nine months ended September 30, 2014 represented an 8% decrease from the average oil price of $109.77 for the nine months ended September 30, 2013.

Operating costs and expenses

Production and delivery costs. Production and delivery costs for the nine months ended September 30, 2014 decreased to $20.2 million from $23.2 million for the same period in 2013. Production and delivery costs per Boe increased to $9.44 per Boe for the nine months ended September 30, 2014 from $9.00 per Boe for the same period in 2013 primarily as a result of decreased oil and natural gas production described above in the first nine months of 2014. During 2014 the Company also experienced lower contract pumping services, insurance, lift boat and labor costs than those during the same period in 2013.

Production taxes. Production taxes were $6.0 million for the nine months ended September 30, 2014, and $5.9 million for the comparable period in 2013. The Company pays production taxes to state governments at rates specified by geographic location and commodity. Production taxes on gas increased by $0.5 million due to higher natural gas prices for the nine months ended September 30, 2014 while production taxes on oil decreased by $0.4 million due to lower oil prices for the nine months ended September 30, 2014.

Workover costs. Workover costs for the nine months ended September 30, 2014 decreased to $2.1 million from $2.6 million for the same period in 2013. Workovers are performed on wells that need certain mechanical changes or enhancements to maintain or increase production. Due to fewer mechanical needs during the first nine months of 2014, the Company performed fewer workovers in that period than were necessary during the same period in 2013. Also, workover projects performed during the first nine months of 2014 had lower equipment rental, lift boat and transportation costs than those performed during the same period of 2013.

 

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Depreciation, depletion and amortization. Depreciation, depletion and amortization for the nine months ended September 30, 2014 decreased to $58.9 million from $346.3 million for the nine months ended September 30, 2013. Excluding the effects of the ceiling test write-down in each period depreciation, depletion and amortization for the nine months ended September 30, 2014 decreased to $24.84 per Boe down from $26.91 per Boe for the nine months ended September 30, 2013. The decrease in depreciation, depletion and amortization was primarily due to a $276.9 million ceiling test write-down to eliminate the proved reserves in the Ewing Bank 920 Project during the third quarter of 2013. The Company had ceiling test write-downs of $0.4 million in the third quarter of 2014 and $5.3 million in the second quarter of 2014. The depletion rates for the first three quarters of 2014 were higher than the depletion rates for the same periods in 2013 due to lower future gross revenues at March 31, 2014, June 30, 2014 and September 30, 2014 resulting from the effects of the downward revisions to eliminate the Ewing Banks 920 Project proved undeveloped reserves during the third quarter of 2013.

General and administrative expenses. General and administrative expenses decreased to $9.2 million for the nine months ended September 30, 2014 from $14.2 million for the nine months ended September 30, 2013. The decrease in general and administrative expenses was mainly due to lower consultant compensation, data processing and repairs and maintenance costs during the first nine months of 2014 as compared to the same period of 2013.

Interest expense, net. Net interest expense increased to $24.6 million for the nine months ended September 30, 2014, from $22.4 million for the nine months ended September 30, 2013 because of higher average debt balances and higher average interest rates. Debt balances averaged $255.6 million and $250.0 million during the nine months ended September 30, 2014 and 2013, respectively. Effective annual interest rates averaged 12.4% and 11.7% during the nine months ended September 30, 2014 and 2013, respectively. In the first nine months of 2014, the Company had $250.0 million of senior secured notes outstanding with a 12.5% interest rate. On September 12, 2014, the Company also borrowed $85.0 million under its Term Loan Facility. At September 30, 2014 the effective interest rate was 7.5% on the Term Loan Facility. For additional information on the Term Loan Facility, see the “-Financing Facilities” below.

Income tax benefit. For the nine months ended September 30, 2014, the Company recorded an income tax benefit of $7.0 million as compared to an income tax benefit of $109.3 million for the nine months ended September 30, 2013. Income tax benefits recognized were the result of effective tax rate calculations of approximately 33.3% at September 30, 2014 and approximately 37.1% at September 30, 2013. The difference in the rates for the first nine months of 2014 and 2013 is primarily due to the recording of a valuation allowance against deferred tax assets in 2014. The valuation allowance is recorded based on our current assessment that it is more likely than not that certain of our deferred tax assets will not be realized in the foreseeable future.

Liquidity and Capital Resources

Our primary sources of liquidity to date have been capital contributions from shareholders, borrowings under our Amended Revolving Credit Facility, debt financings, sales of non-core assets and cash flows from operations. Our primary use of capital has been for the acquisition, development and exploration of oil and natural gas properties. We continually monitor potential capital sources, including equity and debt financings, in order to meet our planned capital expenditures and liquidity requirements.

Capital Expenditures

The Company spent approximately $54 million on capital expenditures during the first nine months of 2014. After obtaining new funding from the Term Loan Facility discussed later in this section, we have increased our capital budget for 2014 to $124 million, which is an approximate $60 million increase over earlier plans. Our capital budget may be adjusted as business conditions warrant. The amount, timing and allocation of capital expenditures is largely discretionary and within our control. If oil and natural gas prices decline or costs increase significantly, we could defer a significant portion of our budgeted capital expenditures until later periods to prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flows. We routinely monitor and adjust our capital expenditures in response to changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, success or lack of success in drilling activities, contractual obligations, internally generated cash flows and other factors both within and outside our control.

 

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Our total 2014 capital expenditure budget is now approximately $124 million, of which approximately $54 million was expended in the first nine months of 2014. The Company expects the remaining capital budget of $70 million to consist of:

 

    $5 million for geological and geophysical costs, including leasing;

 

    $32 million for Louisiana state water drilling and development;

 

    $8 million for Offshore Federal water drilling and development;

 

    $12 million for Onshore conventional and development; and

 

    $13 million for California drilling and development.

In addition to the capital expenditure budget presented above, the Company also expects to incur approximately $5 million of costs for plugging and abandonment activities during the fourth quarter of 2014. Asset retirement obligations expected to be settled over the next 12 months are classified as a current liability in the accompanying condensed consolidated balance sheet.

While we have budgeted $70 million for capital expenditures and $5 million for plugging and abandonment activities for the remainder of 2014, the ultimate amount of capital we will expend for the remainder of the year may fluctuate materially based on market conditions and the success of our drilling results as the year progresses. Through the first nine months of 2014, our 2014 capital budget was funded by existing cash and cash flows from operations. For the remainder of 2014, our capital budget will be funded by existing cash and cash flow from operations.

Under certain of the Company’s leasing agreements, there are requirements to obtain surety bonds for the performance of abandonment activities when certain criteria are met. The Company is now required by the Bureau of Ocean Energy Management (“BOEM”) to obtain these surety bonds. On November 5, 2014, the Company entered into an escrow agreement to fund a portion of the ARO of the Company. The Company transferred approximately $10 million into the escrow account for plugging and abandonment work. This will be accounted for as restricted cash.

Consolidated Cash Flows

The table below discloses the net cash provided by (used in) operating activities, investing activities, and financing activities for the nine months ended September 30, 2014 and 2013:

 

     Nine Months Ended September 30,  
     2014     2013  
In thousands             

Net cash provided by operating activities

   $     41,474     $     67,146  

Net cash used in investing activities

     (57,931     (74,039

Net cash provided by financing activities

     78,070        167   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 61,613     $ (6,726
  

 

 

   

 

 

 

Cash flows provided by operating activities

Operating activities provided cash totaling $41.5 million during the nine months ended September 30, 2014 as compared to cash provided by operating activities of $67.1 million during the nine months ended September 30, 2013. The decrease in operating cash flows during the nine months ended September 30, 2014 was primarily due to the net loss recorded for the period, the increase in accounts and revenues receivable and the increase in settlements of asset retirement obligations.

 

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Our operating cash flows are sensitive to a number of variables, the most significant of which is the volatility of oil and natural gas prices. Regional and worldwide economic activity, weather, infrastructure capacity to reach markets and other variable factors significantly impact the prices of these commodities. These factors are beyond our control and are difficult to predict. For additional information on the impact of changing commodity prices on our financial position, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” below.

Cash flows used in investing activities

Investing activities used cash totaling $57.9 million during the nine months ended September 30, 2014 as compared to cash used in investing activities of $74.0 million during the same period in 2013. Cash used in investing activities during the nine months ended September 30, 2014 decreased as compared to the same period of 2013 primarily because of decreased drilling onshore Texas as well as the joint venture arrangement for drilling in shallow state waters under which the Company has minor working interests for the drilling phases of projects. Also, proceeds from asset sales occurring in the first nine months of 2014 and 2013 generated $0.5 million and $17.3 million, respectively, of additional cash which offset capital expenditures during the periods.

Our capital expenditures for drilling, development and acquisition costs during the nine month periods ended September 30, 2014 and 2013 are summarized in the following table (in thousands):

 

     Nine Months Ended September 30,  
     2014      2013  

Project Area

     

Federal

   $ 4,805      $ 8,377  

Shallow State Waters

     10,998         37,019   

Onshore Texas, Louisiana and Mississippi

     24,431         36,425   

California, Oklahoma and Mid-Continent

     13,786         16,214   
  

 

 

    

 

 

 

Total

   $     54,020      $     98,035  
  

 

 

    

 

 

 

Cash flows provided by financing activities

Financing activities provided cash totaling $78.1 million during the nine months ended September 30, 2014 as compared to cash provided by financing activities of $0.2 million during the same period in 2013. Cash flows provided by financing activities during the first nine months of 2014 consisted of $84.2 million of financing (net of original issue discount) obtained pursuant to a new credit agreement, $4.5 million of borrowings for our insurance premium financing, offset partially by payments of $4.6 million on borrowings and $2.7 million of deferred loan costs on the new financing. Cash flows provided by financing activities during the first nine months of 2013 consisted primarily of a $51.5 million issuance of New Additional Notes and $6.8 million in borrowings for our insurance premium financing offset by payments of $55.0 million on our revolving credit facility and other borrowings, $1.5 million of deferred bond costs and $1.6 million for shareholder dividends.

Off-Balance Sheet Arrangements

As of September 30, 2014, the Company had no off-balance sheet arrangements or guarantees of third party obligations. The Company has no plans to enter into any off-balance sheet arrangements in the foreseeable future.

Oil and Gas Derivatives

As part of our risk management program, we utilize derivative transactions to reduce the variability in cash flows associated with a portion of our anticipated oil and natural gas production to reduce our exposure to fluctuations in oil and natural gas prices. Reducing our exposure to price volatility helps ensure that we have adequate funds available for our capital programs and more price sensitive drilling programs. Our decision on the quantity and price at which we choose to hedge our future production is based in part on our view of current and future market conditions.

 

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While the use of these derivative arrangements limits the downside risk of adverse price movements, their use also may limit future revenues from favorable price movements. In addition, the use of derivative transactions may involve basis risk. The use of derivative transactions also involves the risk that the counterparties will be unable to meet the financial terms of such transactions. As required by our Fifth Amended and Restated Credit Agreement, our derivative counterparties are limited to our secured lenders, which helps to minimize any potential non-performance risk. All of our derivative transactions are settled based upon reported settlement prices on the NYMEX.

At September 30, 2014, on a Boe basis, commodity derivative instruments were in place covering approximately 50% of our projected oil and natural gas sales for 2014, approximately 43% of our projected oil and natural gas sales for 2015 and approximately 36% of our projected oil and natural gas sales for 2016. Approximately 49% of the our 2014 natural gas production, approximately 41% of our 2015 natural gas production, approximately 36% of our 2016 natural gas production, approximately 53% of our 2014 oil production, approximately 50% of our 2015 oil production, and approximately 37% of our 2016 oil production will yield minimum prices under the contracts as discussed in Item 1, Note 5, “Commodity Derivative Instruments and Derivative Activities.” Future oil and natural gas sales prices on other production will fluctuate according to market conditions.

As of September 30, 2014, the Company had entered into the following oil derivative instruments:

 

     NYMEX Contract Price  
     Swaps  
     Volume in Bbls/Mo      Weighted Average
Strike Price
 

Period

     

2014(1)

     30,338       $ 90.86   

2015

     22,338       $ 89.44   

2016

     15,335       $ 88.12   

 

(1)  Average volume is calculated for the remainder of the 2014 year.

As of September 30, 2014, the Company had entered into the following natural gas derivative instruments:

 

     NYMEX Contract Price  
     Swaps  
     Volume in MMBtus/Mo      Weighted Average
Strike Price
 

Period

     

2014(1)

     501,663       $ 4.05   

2015

     375,806       $ 4.01   

 

(1)  Average volume is calculated for the remainder of the 2014 year.

 

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     NYMEX Contract Price  
     Sell Call      Buy Call  
     Volume in MMBtus/Mo      Weighted Average
Strike Price
     Volume in MMBtus/Mo      Weighted Average
Strike Price
 

Period

           

2014(1)

     312,800       $ 5.00         312,800       $ 4.50   

2015

     —         $ —           —         $ —     

2016

     240,397       $ 4.73         —         $ —     

 

(1)  Average volume is calculated for the remainder of the 2014 year.

 

     NYMEX Contract Price  
     Sell Put      Buy Put  
     Volume in MMBtus/Mo      Weighted Average
Strike Price
     Volume in MMBtus/Mo      Weighted Average
Strike Price
 

Period

           

2015

     316,430       $ 3.50         —         $ —     

2016

     240,397       $ 3.50         240,397       $ 4.00   

Please see Item 1, Note 2, “Basis of Presentation and Significant Accounting Policies” included in Part I for additional discussion regarding the accounting applicable to our derivative program.

Subsequent to September 30, 2014, the Company entered into the following commodity derivative instruments shown below related to the forecasted sale of its U.S. Gulf Coast natural gas production for 2015 and 2016:

 

Remaining Contract Term

   Contract
Type
   Volume in
MMBtus/
Month
     NYMEX
Strike
Price
 

January 2015—March 2015

   Swap      212,973       $ 4.09   

January 2016

   Swap      81,354       $ 4.02   

January 2016—March 2016

   Swap      120,675       $ 4.10   

Financing Facilities

Senior Secured Notes

On September 24, 2010, the Company completed an offering of $150.0 million senior secured notes at a coupon rate of 12.5% (the “Original Notes”) with a maturity date of October 1, 2015. Interest on the Original Notes is payable in cash semi-annually in arrears on April 1 and October 1 of each year, which commenced on April 1, 2011, to holders of record at the close of business on the preceding March 15 or September 15. Interest on the Original Notes is computed on the basis of a 360-day year of twelve 30-day months. The Original Notes were sold at 99.086% of their face amount and were recorded at their discounted amount, with the discount to be amortized over the life of the notes. The Company used a portion of the net proceeds from the offering to repay all outstanding indebtedness under its previous credit facility and the remainder of the proceeds was used to fund a portion of our planned capital expenditures for development and drilling. On May 10, 2011, the Company closed an exchange offer registering substantially all of the Original Notes.

 

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On July 15, 2011, the Company completed the issuance and sale of $50.0 million aggregate principal amount of additional 12.5% Senior Notes due 2015 (the “Additional Notes,” collectively with the Original Notes, the “Existing Notes”). The Additional Notes are additional notes permitted under the indenture dated as of September 24, 2010, pursuant to which the Company initially issued the Original Notes, as supplemented by the First Supplemental Indenture dated as of July 15, 2011. The Additional Notes were sold at 102.5% of their face amount and were recorded at their premium amount, with the premium to be amortized over the life of the notes. The Additional Notes have identical terms, other than the issue date and issue price, and constitute part of the same series as the Original Notes. On November 18, 2011, the Company closed an exchange offer registering all of the Additional Notes.

On April 11, 2013, the Company successfully completed the issuance and sale of $50.0 million aggregate principal amount of additional 12.5% Senior Notes due 2015 (the “New Additional Notes,” and together with the Original and Additional Notes, the “Notes”). The New Additional Notes are additional notes issued pursuant to the indenture dated as of September 24, 2010, pursuant to which the Company issued the Original and Additional Notes, as supplemented by the First Supplemental Indenture dated as of July 15, 2011 (the “First Supplemental Indenture”), the Second Supplemental Indenture dated as of April 11, 2013 (the “Second Supplemental Indenture”) and the Third Supplemental Indenture dated as of April 11, 2013 (the “Third Supplemental Indenture,” and together with the Base Indenture, First Supplemental Indenture and the Second Supplemental Indenture, the “Indenture”). The New Additional Notes have identical terms, other than the issue date and issue price, and constitute part of the same series as the Original and Additional Notes. The Company used the net proceeds from the offering to repay existing indebtedness under the Company’s previous credit facility and for general corporate purposes. On November 5, 2013, the Company closed an exchange offer registering all of the New Additional Notes.

As of September 30, 2014, a total of $250.0 million notional amount of the Notes was outstanding. The carrying amount of the Notes including unamortized premium and discount was $250.6 million as of September 30, 2014.

The Notes are guaranteed on a senior secured basis by each of our existing and future domestic subsidiaries that guarantee indebtedness under our Term Loan Facility. The Notes and the guarantees are secured by a security interest in substantially all of our existing and future domestic subsidiaries’ (other than certain future unrestricted subsidiaries’) assets to the extent they constitute collateral under our Term Loan Facility, subject to certain exceptions. Pursuant to an Intercreditor Agreement, the lien securing the Notes is subordinated and junior to liens securing our Term Loan Facility.

The Company is actively working with investment banking advisors to prepare for refinancing the Notes in 2015. In conjunction with these advisors, the Company has developed and is executing a robust drilling program. The Company has established a timetable in which a significant number of wells will be drilled and completed prior to the refinancing. The Company believes that the addition of these wells will increase production and reserves and will lead to future drilling opportunities in our core project areas.

Term Loan Facility

On September 12, 2014, the Company entered into the Fifth Amended and Restated Credit Agreement. The Fifth Amended and Restated Credit Agreement provides the Borrowers with an $85.0 million term loan facility (the “Term Loan Facility”) which is secured by a first lien on substantially all of the Borrowers’ and the Company’s real and personal property. As of September 30, 2014, $85.0 million was outstanding under the Term Loan Facility. The maturity date for the Term Loan Facility is the earlier of September 12, 2016 or 91 days prior to the maturity date of the Senior Secured Notes. The annual interest rate on the Term Loan Facility is 6.5%, plus the greater of the LIBOR rate for the interest period or 1%. At September 30, 2014, the interest rate was 7.5%. Interest is payable quarterly on September 30, December 31, March 31, and June 30 of each year, which commenced on September 30, 2014.

 

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The proceeds of the term loans incurred under the Fifth Amended and Restated Credit Agreement were or will be used by the Subsidiaries to (a) repay all expenses, fees or indemnitees outstanding under the Fourth Amended and Restated Credit Agreement dated as of November 29, 2011, (b) finance capital expenditures associated with the Subsidiaries’ oil and gas properties, (c) provide working capital for the Company’s operations and (d) pay transaction fees and expenses incurred in connection with the transactions contemplated by the Fifth Amended and Restated Credit Agreement. The Fifth Amended and Restated Credit Agreement contains customary restrictions on, among other things the Company’s ability to incur debt, grant liens on their property, make dispositions or investments, enter into mergers or issue new securities, make distributions, enter into affiliate transactions, enter into hedging contracts, amend their organizational documents and create new subsidiaries. In addition, the Fifth Amended and Restated Credit Agreement requires the Borrowers and the Company to maintain the following financial covenants as defined in the agreement: (i) a minimum Current Ratio of 1.0:1.0 as of the end of each fiscal quarter, (ii) a maximum First Lien Leverage Ratio of 2.0:1.0 as of the end of each fiscal quarter for the four immediately preceding fiscal quarters and (iii) a minimum PDP Asset Coverage Ratio of 1.0:1.0 as of January 1, 2015 and 1.1:1.0 as of April 1, 2015, July 1, 2015, January 1, 2016 and July 1, 2016. As of September 30, 2014, the Company was in compliance with all of these debt covenants.

Critical Accounting Policies and Estimates

This Quarterly Report on Form 10-Q has been prepared pursuant to the rules and regulations of the SEC applicable to interim financial information. Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.

There have been no changes to our critical accounting policies from those disclosed in our Form 10-K for the year ended December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following market risk disclosures should be read in conjunction with the quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

We are exposed to a variety of market risks including commodity price risk, credit risk and interest rate risk. We address these risks through a program of risk management which may include the use of derivative instruments. We do not enter into derivative or other financial instruments for speculative or trading purposes.

Commodity Price Risk

Our primary market risk exposure is in the pricing applicable to our crude oil and natural gas production. Realized pricing is primarily driven by the West Texas Intermediate (“WTI”) price for crude oil and spot market prices applicable to our United States natural gas production. Pricing for crude oil and natural gas production 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 including volatility in the differences between product prices at sales points and the applicable index price. Hypothetical changes in commodity prices chosen for the following estimated sensitivity analysis are considered to be reasonably possible near-term changes generally based on consideration of past fluctuations. However, since it is not possible to accurately predict future changes in commodity prices, this hypothetical change may not necessarily be an indicator of probable future fluctuations. Based on our average daily production for the nine months ended September 30, 2014, our annual oil sales would increase or decrease by approximately $7.3 million for each $10.00 per barrel change in crude oil prices and our annual gas sales would increase or decrease by approximately $12.8 million for each $1.00 per MMBtu change in natural gas prices.

 

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To partially reduce price risk caused by these market fluctuations, we utilize derivative contracts to reduce the variability in cash flows associated with a portion of our anticipated crude oil and natural gas production as part of our risk management program. Reducing our exposure to price volatility helps ensure that we have adequate funds available for our capital programs and more price sensitive drilling programs. Our decision on the quantity and price at which we choose to hedge our production is based in part on our view of current and future market conditions. While hedging limits the downside risk of adverse price movements, it also may limit future revenues from favorable price movements. The use of derivative transactions also involves the risk that counterparties will be unable to meet the financial terms of such transactions. As required by our Fifth Amended and Restated Credit Agreement, our derivative counterparties are limited to our secured lenders, which helps to minimize any potential non-performance risk.

For a further discussion of our derivative activities, including a list of the commodity derivatives held by the Company, please see Item 1, Note 3, “Fair Value Measurements” and Item 1, Note 5, “Commodity Derivative Instruments and Derivative Activities” included in this report.

Credit Risk

We monitor our risk of loss due to non-performance by counterparties of their contractual obligations. Our principal exposure to credit risk is through joint interest receivables ($1.4 million at September 30, 2014) and the sale of our crude oil and natural gas production, which we market to energy marketing companies, refineries and transmission companies ($15.8 million in receivables at September 30, 2014). Joint interest receivables arise from billing entities who own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we wish to drill. In order to minimize our exposure to credit risk we request prepayment of drilling costs where it is allowed by contract or state law. For such prepayments, a liability is recorded and subsequently reduced as the associated work is performed. In this manner, we reduce credit risk. We also have the right to place a lien on our co-owners interest in the well to redirect production proceeds in order to secure payment or, if necessary, foreclose on the interest. Historically, our credit losses on joint interest receivables have been immaterial.

We monitor our exposure to counterparties on crude oil and natural gas sales primarily by reviewing credit ratings, financial statements and payment history. We extend credit terms based on our evaluation of each counterparty’s credit worthiness. We have not generally required our counterparties to provide collateral to support crude oil and natural gas sales receivables owed to us.

Interest Rate Risk

Our exposure to changes in interest rates relates primarily to long-term debt obligations. Historically, we were exposed to changes in interest rates as a result of our revolving credit facility, and this exposure will remain under our Term Loan Facility. There was $85.0 million outstanding under the Term Loan Facility at September 30, 2014. We do not believe our interest rate exposure warrants entry into interest rate hedges and have, therefore, not hedged our interest rate exposure.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2014 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

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Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed, on January 25, 2011, the Company filed suit against the United States Government in United States Court of Federal Claims in Washington D.C. claiming a breach of contract and an uncompensated taking of property on the lease governing the EB 920 Project, an offshore lease located in the deep waters of the Gulf of Mexico. In March 2013, the United States Court of Federal Claims granted the U.S. Government’s motion for summary judgment on the breach of contract claim. On March 29, 2013, the Company filed an appeal of the grant of summary judgment in United States Court of Appeals for the Federal Circuit in Washington D.C., reasserting our claim of a breach of contract by the U.S. Government with respect to the EB 920 Project. There are a number of issues relative to the Government’s breach of the Company’s lease. A major claim of breach is that due to the post-lease change in the rules of calculation of the WCD under Notice to Lessees 2010-06 (“NTL06”), the Company can no longer receive a permit to drill EB 920. The Company cannot develop the lease or receive the benefit of the proved reserves which exist on the lease and for which the Company paid the Government $23.2 million. The new post-lease rules of calculation for WCD did not exist prior to the issuance of NTL06. The Company argues that the post-lease changes to the method of the calculation are substantive both in terms of volumes and financial responsibility. The Government argues they are not substantive. A panel of judges heard the appeal in early January 2014. In March 2014, the court of appeals affirmed the grant of summary judgment. On April 24, 2014, the Company filed a Combined Petition for Panel Rehearing and for Rehearing En Banc. In July 2014, our Combined Petition for Panel Rehearing and for Rehearing En Banc was denied. On October 17, 2014, the Company filed a Petition for a Writ of Certiorari with the Supreme Court of the United States seeking review of the court of appeals’ decision. The takings claim remains pending in the Court of Federal Claims.

In addition to the legal proceeding described above, the Company is subject to various legal proceedings and claims arising in the ordinary course of its business. While management is unable to predict the ultimate outcome of any of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows; however, because of the inherent uncertainty of litigation, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our financial position, results of operation or cash flows.

Item 1A. Risk Factors

In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 that was filed with the SEC on March 31, 2014, which could materially affect our business, financial condition or future results. You should also consider the matters addressed under “Cautionary Note Regarding Forward-Looking Statements.” Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

Item 6. Exhibits

The exhibits required to be filed pursuant to Item 601 of Regulation S-K are set forth in the Exhibit Index accompanying this report and are incorporated herein by reference.

 

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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.

 

RAAM Global Energy Company

     
November 13, 2014     By: RAAM Global Energy Company
      By: /s/ Jeffrey Craycraft
      Jeffrey Craycraft
      Chief Financial Officer
      (Duly Authorized Officer and Principal Financial Officer)

 

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Exhibit Index

 

3.1   Certificate of Incorporation of RAAM Global Energy Company, dated November 19, 2003 (incorporated by reference from Exhibit 3.1 to the Form S-4 filed on March 17, 2011 (File No. 333-172897)).
3.2
  Bylaws of RAAM Global Energy Company (incorporated by reference from Exhibit 3.2 to the Form S-4 filed on March 17, 2011 (File No. 333-172897)).
10.1   Forbearance Agreement, dated as of July 31, 2014, by and among Century Exploration New Orleans, LLC, Century Exploration Houston, LLC, Century Exploration Resources, LLC, RAAM Global Energy Company, Union Bank, N.A., as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on August 5, 2014 (File No. 333-172897)).
10.2
  Fifth Amended and Restated Credit Agreement, dated as of September 12, 2014, by and among RAAM Global Energy Company, Century Exploration New Orleans, LLC, Century Exploration Houston, LLC, Century Exploration Resources, LLC and Wilmington Trust, National Association, as administrative agent, and the lenders party thereto (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on September 16, 2014 (File No. 333-172897)).
31.1 *   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 *   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 **   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.2 **   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101*   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) our Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013; (ii) our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013; (iii) our Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (iv) the notes to our unaudited Condensed Consolidated Financial Statements.

 

* Filed herewith.
** Furnished herewith.

 

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