Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - Energy XXI Ltd | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - Energy XXI Ltd | v396092_ex32x1.htm |
EX-31.1 - EXHIBIT 31.1 - Energy XXI Ltd | v396092_ex31x1.htm |
EX-31.2 - EXHIBIT 31.2 - Energy XXI Ltd | v396092_ex31x2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
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
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33628
ENERGY XXI LTD
(Exact name of registrant as specified in its charter)
Bermuda | 98-0499286 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
Canons Court, 22 Victoria Street, PO Box HM 1179, Hamilton HM EX, Bermuda |
N/A | |
(Address of principal executive offices) |
(Zip Code) |
(441) 295-2244
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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. (Check one):
Large accelerated filer þ | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 31, 2014, there were 93,869,865 shares outstanding of the registrants common stock, par value $0.005 per share.
ENERGY XXI LTD
TABLE OF CONTENTS
Page | ||||
PART I FINANCIAL INFORMATION |
||||
ITEM 1. Financial Statements |
1 | |||
SIGNATURES | 40 | |||
EXHIBIT INDEX | 41 |
i
EXPLANATORY NOTE
This Amendment No. 1 (Amendment No. 1) to the Quarterly Report of Energy XXI Ltd (the Company) on Form 10-Q for the quarter year ended September 30, 2014 (the Quarterly Report) is filed with the Securities and Exchange Commission (the SEC) to amend Item 1 Financial Statements to include a new Note 20 Supplemental Guarantor Information (the Consolidating Footnote), which includes condensed consolidating financial statements for the Company, combined guarantor subsidiaries and combined non-guarantor subsidiaries in accordance with the requirements of Regulation S-X. The primary purpose of the Consolidating Footnote is to allow investors to determine the assets, results of operations and comprehensive income (loss) and cash flows of each of the consolidating groups.
This Amendment solely modifies Part I, Item 1, Note 20 of the Quarterly Report. All of the information in this Amendment No. 1 is as of November 6, 2014, the date the Company filed the Quarterly Report with the SEC. This Amendment No. 1 continues to speak as of the date of the Quarterly Report and does not reflect any subsequent information or events other than the amendment to Item 1 discussed above. Accordingly, this Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to the filing of the Quarterly Report, including any amendments to those filings. Among other things, forward-looking statements made in the Quarterly Report have not been revised to reflect events, results or developments that occurred or facts that became known to us after the date of the Quarterly Report.
The certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed as Exhibits 31.1, 31.2 and 32.1 to the Quarterly Report, have been re-executed and re-filed as of the date of this Amendment No. 1.
The Companys management has considered whether the addition of the Consolidating Footnote to conform to the requirements of Rule 3-10 of Regulation S-X under the Exchange Act affects managements conclusion, set forth in the Quarterly Report, regarding the effectiveness, as of September 30, 2014, of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Management continues to believe that, as of September 30, 2014, the Companys disclosure controls and procedures were functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SECs rules and forms and (ii) accumulated and communicated to the Companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
ENERGY XXI LTD
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share information)
September 30, 2014 |
June 30, 2014 |
|||||||
(Unaudited) | ||||||||
Current Assets |
||||||||
Cash and cash equivalents | $ | 119,500 | $ | 145,806 | ||||
Accounts receivable |
||||||||
Oil and natural gas sales | 145,821 | 167,075 | ||||||
Joint interest billings | 14,426 | 12,898 | ||||||
Insurance and other | 5,615 | 5,438 | ||||||
Prepaid expenses and other current assets | 64,631 | 72,530 | ||||||
Deferred income taxes | 24,587 | 52,587 | ||||||
Derivative financial instruments | 23,815 | 1,425 | ||||||
Total Current Assets | 398,395 | 457,759 | ||||||
Property and Equipment |
||||||||
Oil and natural gas properties full cost method of accounting, including $1,167.6 million and $1,165.7 million of unevaluated properties not being amortized at September 30, 2014 and June 30, 2014, respectively | 6,637,292 | 6,524,602 | ||||||
Other property and equipment | 23,400 | 19,760 | ||||||
Total Property and Equipment, net of accumulated depreciation, depletion, amortization and impairment | 6,660,692 | 6,544,362 | ||||||
Other Assets |
||||||||
Goodwill | 329,293 | 329,293 | ||||||
Derivative financial instruments | 6,713 | 3,035 | ||||||
Equity investments | 40,320 | 40,643 | ||||||
Restricted Cash | 325 | 6,350 | ||||||
Other assets and debt issuance costs, net of accumulated amortization | 60,845 | 57,394 | ||||||
Total Other Assets | 437,496 | 436,715 | ||||||
Total Assets | $ | 7,496,583 | $ | 7,438,836 | ||||
LIABILITIES |
||||||||
Current Liabilities |
||||||||
Accounts payable | $ | 472,108 | $ | 417,776 | ||||
Accrued liabilities | 115,509 | 133,526 | ||||||
Notes payable | 19,368 | 21,967 | ||||||
Asset retirement obligations | 79,614 | 79,649 | ||||||
Derivative financial instruments | 1,446 | 31,957 | ||||||
Current maturities of long-term debt | 15,612 | 15,020 | ||||||
Total Current Liabilities | 703,657 | 699,895 | ||||||
Long-term debt, less current maturities | 3,800,417 | 3,744,624 | ||||||
Deferred income taxes | 685,121 | 701,038 | ||||||
Asset retirement obligations | 482,339 | 480,185 | ||||||
Derivative financial instruments | | 4,306 | ||||||
Other liabilities | 8,009 | 10,958 | ||||||
Total Liabilities | 5,679,543 | 5,641,006 |
See accompanying Notes to Consolidated Financial Statements
1
ENERGY XXI LTD
CONSOLIDATED BALANCE SHEETS (continued)
(In Thousands, except share information)
September 30, 2014 |
June 30, 2014 |
|||||||
(Unaudited) | ||||||||
Commitments and Contingencies (Note 16) |
||||||||
Stockholders Equity |
||||||||
Preferred stock, $0.001 par value, 7,500,000 shares authorized at September 30, 2014 and June 30, 2014, respectively | ||||||||
7.25% Convertible perpetual preferred stock, 8,000 shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively | | | ||||||
5.625% Convertible perpetual preferred stock, 812,760 shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively | 1 | 1 | ||||||
Common stock, $0.005 par value, 200,000,000 shares authorized and 93,867,405 and 93,719,570 shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively | 469 | 468 | ||||||
Additional paid-in capital | 1,841,457 | 1,837,462 | ||||||
Accumulated deficit | (40,165 | ) | (19,626 | ) | ||||
Accumulated other comprehensive income (loss), net of income taxes | 15,278 | (20,475 | ) | |||||
Total Stockholders Equity | 1,817,040 | 1,797,830 | ||||||
Total Liabilities and Stockholders Equity | $ | 7,496,583 | $ | 7,438,836 |
See accompanying Notes to Consolidated Financial Statements
2
ENERGY XXI LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share information)
(Unaudited)
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Revenues |
||||||||
Crude oil sales | $ | 368,501 | $ | 289,229 | ||||
Natural gas sales | 34,730 | 35,363 | ||||||
Total Revenues | 403,231 | 324,592 | ||||||
Costs and Expenses |
||||||||
Lease operating | 142,585 | 85,763 | ||||||
Production taxes | 3,093 | 1,398 | ||||||
Gathering and transportation | 9,188 | 5,345 | ||||||
Depreciation, depletion and amortization | 161,266 | 100,216 | ||||||
Accretion of asset retirement obligations | 12,819 | 7,326 | ||||||
General and administrative expense | 26,424 | 23,672 | ||||||
(Gain) loss on derivative financial instruments | (3,283 | ) | 1,441 | |||||
Total Costs and Expenses | 352,092 | 225,161 | ||||||
Operating Income | 51,139 | 99,431 | ||||||
Other Income (Expense) |
||||||||
Income (loss) from equity method investees | 881 | (1,793 | ) | |||||
Other income net | 951 | 522 | ||||||
Interest expense | (66,263 | ) | (29,685 | ) | ||||
Total Other Expense | (64,431 | ) | (30,956 | ) | ||||
Income (Loss) Before Income Taxes | (13,292 | ) | 68,475 | |||||
Income Tax Expense (Benefit) | (6,889 | ) | 25,336 | |||||
Net Income (Loss) | (6,403 | ) | 43,139 | |||||
Preferred Stock Dividends | 2,872 | 2,873 | ||||||
Net Income (Loss) Available for Common Stockholders | $ | (9,275 | ) | $ | 40,266 | |||
Earnings (Loss) per Share |
||||||||
Basic | $ | (0.10 | ) | $ | 0.53 | |||
Diluted | $ | (0.10 | ) | $ | 0.51 | |||
Weighted Average Number of Common Shares Outstanding |
||||||||
Basic | 93,833 | 75,782 | ||||||
Diluted | 93,833 | 84,073 |
See accompanying Notes to Consolidated Financial Statements
3
ENERGY XXI LTD
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
Three Months September 30, | ||||||||
2014 | 2013 | |||||||
Net Income (Loss) | $ | (6,403 | ) | $ | 43,139 | |||
Other Comprehensive Income (Loss) |
||||||||
Crude Oil and Natural Gas Cash Flow Hedges |
||||||||
Unrealized change in fair value net of ineffective portion | 56,993 | (22,971 | ) | |||||
Effective portion reclassified to earnings during the period | (1,988 | ) | (7,348 | ) | ||||
Total Other Comprehensive Income (Loss) | 55,005 | (30,319 | ) | |||||
Income Tax (Expense) Benefit | (19,252 | ) | 10,611 | |||||
Net Other Comprehensive Income (Loss) | 35,753 | (19,708 | ) | |||||
Comprehensive Income | $ | 29,350 | $ | 23,431 |
See accompanying Notes to Consolidated Financial Statements
4
ENERGY XXI LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Cash Flows From Operating Activities |
||||||||
Net income (loss) | $ | (6,403 | ) | $ | 43,139 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Depreciation, depletion and amortization | 161,266 | 100,216 | ||||||
Deferred income tax expense (benefit) | (7,169 | ) | 22,480 | |||||
Change in derivative financial instruments |
||||||||
Proceeds from derivative instruments | 3,364 | | ||||||
Other net | (5,938 | ) | (2,357 | ) | ||||
Accretion of asset retirement obligations | 12,819 | 7,326 | ||||||
Loss (income) from equity method investees | (881 | ) | 1,793 | |||||
Amortization and write-off of debt issuance costs and other | 5,277 | 1,455 | ||||||
Stock-based compensation | 1,779 | 3,532 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable | 23,313 | (2,131 | ) | |||||
Prepaid expenses and other current assets | 7,661 | (6,270 | ) | |||||
Settlement of asset retirement obligations | (14,907 | ) | (18,063 | ) | ||||
Accounts payable and accrued liabilities | 23,769 | (43,221 | ) | |||||
Net Cash Provided by Operating Activities | 203,950 | 107,899 | ||||||
Cash Flows from Investing Activities |
||||||||
Acquisitions | (287 | ) | (15 | ) | ||||
Capital expenditures | (280,010 | ) | (198,358 | ) | ||||
Change in equity method investments | 1,282 | (16,694 | ) | |||||
Proceeds from the sale of properties | 6,947 | 1,748 | ||||||
Other | (80 | ) | (51 | ) | ||||
Net Cash Used in Investing Activities | (272,148 | ) | (213,370 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds from the issuance of common and preferred stock, net of offering costs | 2,217 | 3,267 | ||||||
Repurchase of company common stock | | (35,210 | ) | |||||
Dividends to shareholders common | (11,264 | ) | (9,096 | ) | ||||
Dividends to shareholders preferred | (2,872 | ) | (2,873 | ) | ||||
Proceeds from long-term debt | 510,120 | 1,040,697 | ||||||
Payments on long-term debt | (454,042 | ) | (865,231 | ) | ||||
Debt issuance costs | (2,250 | ) | (8,720 | ) | ||||
Other | (17 | ) | (1 | ) | ||||
Net Cash Provided by Financing Activities | 41,892 | 122,833 | ||||||
Net Increase (Decrease) in Cash and Cash Equivalents | (26,306 | ) | 17,362 | |||||
Cash and Cash Equivalents, beginning of period | 145,806 | | ||||||
Cash and Cash Equivalents, end of period | $ | 119,500 | $ | 17,362 |
See accompanying Notes to Consolidated Financial Statements
5
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Organization and Summary of Significant Accounting Policies
Nature of Operations. Energy XXI Ltd (Energy XXI) was incorporated in Bermuda on July 25, 2005. With our principal operating subsidiary headquartered in Houston, Texas, we are engaged in the acquisition, exploration, development and operation of oil and natural gas properties onshore in Louisiana and Texas and in the Gulf of Mexico Shelf (GoM Shelf). Energy XXI is the largest publicly traded independent operator on the GoM Shelf operating seven of the largest GoM Shelf fields.
At the Annual General Meeting of our Shareholders held on November 4, 2014, our Shareholders approved changing the name of the Company from Energy XXI (Bermuda) Limited to Energy XXI Ltd and authorized our Board of Directors, at its discretion, to effect a cancellation of the admission of our common shares, par value $0.005 per share to the Alternative Investment Market of the London Stock Exchange (AIM), to be effective any time on or before March 13, 2015.
References in this report to us, we, our, the Company, or Energy XXI are to Energy XXI Ltd and its wholly-owned subsidiaries. We use the equity method of accounting for investments in entities that we do not control, but over which we exert significant influence.
Principles of Consolidation and Reporting. The accompanying consolidated financial statements include the accounts of Energy XXI and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). All significant intercompany transactions have been eliminated in consolidation.
Interim Financial Statements. The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2014 Annual Report.
Use of Estimates. The preparation of consolidated 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 dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates of proved reserves are key components of our depletion rate for our proved oil and natural gas properties and the full cost ceiling test limitation. Accordingly, our accounting estimates require exercise of judgment by management in preparing such estimates. While we believe that the estimates and assumptions used in preparation of our consolidated financial statements are appropriate, actual results could differ from those estimates, and any such differences may be material.
Note 2 Recent Accounting Pronouncements
In July 2013 the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU-2013-11). ASU 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is
6
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 Recent Accounting Pronouncements (continued)
effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. We have no unrecognized tax benefits as defined in the literature; as such, issuance of ASU 2013-11 has no effect on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the provisions of ASU 2014-09 and assessing the impact, if any, it may have on our consolidated financial position, results of operations or cash flows.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires management to assess an entitys ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the provisions of ASU 2014-15 and assessing the impact, if any, it may have on our consolidated financial position, results of operations or cash flows.
Note 3 Acquisitions and Dispositions
Black Elk Interest
On December 20, 2013, we closed on the acquisition of certain offshore Louisiana interests in West Delta 30 field (West Delta 30 Interests) from Black Elk Energy Offshore Operations, LLC for a total cash consideration of $10.4 million. This acquisition was effective as of October 1, 2013. We are the operator of these properties.
Revenues and expenses related to the West Delta 30 Interests are included in our consolidated statements of operations from December 20, 2013. The acquisition of West Delta 30 Interests was accounted for under the acquisition method of accounting. Transaction, transition and integration costs associated with this acquisition were expensed as incurred. The following table presents the preliminary purchase price allocation to the assets acquired and liabilities assumed, based on their fair values on December 20, 2013 (in thousands):
Oil and natural gas properties evaluated | $ | 15,821 | ||
Oil and natural gas properties unevaluated | 6,586 | |||
Asset retirement obligations | (10,503 | ) | ||
Net working capital* | (1,500 | ) | ||
Cash paid | $ | 10,404 |
* | Net working capital includes payables. |
Walter Oil & Gas Corporation oil and gas properties interests acquisition
On March 7, 2014, we closed on the acquisition of certain interests in the South Timbalier 54 Block (South Timbalier 54 Interests) from Walter Oil & Gas Corporation for a total cash consideration of approximately $22.8 million. This acquisition was effective as of January 1, 2014 and we are the operator of these properties.
Revenues and expenses related to the South Timbalier 54 Interests are included in our consolidated statements of operations from March 7, 2014. The acquisition of South Timbalier 54 Interests was accounted for under the acquisition method of accounting. Transaction, transition and integration costs associated with
7
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 Acquisitions and Dispositions (continued)
this acquisition were expensed as incurred. The following table presents the preliminary purchase price allocation to the assets acquired and liabilities assumed, based on their fair values on March 7, 2014 (in thousands):
Oil and natural gas properties evaluated | $ | 23,497 | ||
Asset retirement obligations | (705 | ) | ||
Cash paid | $ | 22,792 |
The fair values of evaluated and unevaluated oil and natural gas properties and asset retirement obligations for the above acquisitions were measured using valuation techniques that convert future cash flows to a single discounted amount. Inputs to the valuation of oil and gas properties include estimates of: (1) oil and gas reserves; (2) future operating and development costs; (3) future oil and natural gas prices; and (4) the discount factor used to calculate the discounted cash flow amount. Inputs into the valuation of the asset retirement obligations include estimates of: (1) plugging and abandonment costs per well and related facilities; (2) remaining life per well and facilities; and (3) a credit adjusted risk-free interest rate.
Apache Joint Venture
On February 1, 2013, we entered into an Exploration Agreement (the Exploration Agreement) with Apache Corporation (Apache) to jointly participate in exploration of oil and gas pay sands associated with salt dome structures on the central GoM Shelf. We have a 25% participation interest in the Exploration Agreement, which expires on February 1, 2018.
The area of mutual interest under this Exploration Agreement includes several salt domes within a 135 block area. Our share of cost to acquire seismic data over a two-year seismic shoot phase is currently estimated to be approximately $37.5 million of which approximately $33.7 million was incurred through September 30, 2014. Drilling on the first well commenced in May 2013 on the southern flank of the salt dome, penetrating eight oil sands and one gas bearing sand. In February 2014 we commenced drilling an offset well which also encountered multiple hydrocarbon bearing sands. Presently both the wellbores have been suspended for future utility and we expect to complete 3D wide azimuth (WAZ) seismic data analysis in December 2014. As of September 30, 2014, our share of costs related to these wells was approximately $28.6 million.
Acquisition of EPL Oil & Gas, Inc. (EPL)
We acquired EPL on June 3, 2014 (the EPL Acquisition). The acquisition was accounted for under the acquisition method, with Energy XXI as the acquirer. EPL is now a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (EGC). Subsequent to the merger, we elected to change EPLs fiscal year end to June 30 to coincide with our fiscal year end.
In the EPL acquisition, each EPL stockholder had the right to elect to receive, for each share of EPL common stock held by that stockholder, $39.00 in cash (Cash Election), or 1.669 shares of Energy XXI common stock (Stock Election) or a combination of $25.35 in cash and 0.584 of a share of Energy XXI common stock (Mixed Election) and collectively the (Merger Consideration), subject to proration with respect to the Stock Election and the Cash Election so that approximately 65% of the aggregate Merger Consideration was paid in cash and approximately 35% was paid in Energy XXI common stock. Accordingly, EPL stockholders making a timely Cash Election received $25.92 in cash and 0.5595 of a share of Energy XXI common stock for each EPL common share. Under the merger agreement, EPL stockholders who did not make an election prior to the May 30th deadline were treated as having made a Mixed Election. In addition to the outstanding EPL shares shown below, each outstanding stock option to purchase shares of EPL common stock was deemed exercised pursuant to a cashless exercise and was converted into the right to receive the cash portion of the Merger Consideration pursuant to the Cash Election, without being subject to proration. As a result, in accordance with the merger agreement, 836,311 net exercise shares were converted into $39.00 in
8
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 Acquisitions and Dispositions (continued)
cash, without proration. Based on the final results of the Merger Consideration elections and as set forth in the merger agreement, we issued 23.3 million shares of our common stock and paid approximately $1,012 million in cash.
The following table summarizes the preliminary purchase price allocation for EPL as of June 3, 2014 (in thousands):
EPL Historical | Fair Value Adjustment |
Total | ||||||||||
(Unaudited) | ||||||||||||
Current assets (excluding deferred income taxes) | $ | 301,592 | $ | 1,274 | $ | 302,866 | ||||||
Oil and natural gas properties(a) |
||||||||||||
Evaluated (Including net ARO assets) | 1,919,699 | 112,624 | 2,032,323 | |||||||||
Unevaluated | 41,896 | 859,886 | 901,782 | |||||||||
Other property and equipment | 7,787 | | 7,787 | |||||||||
Other assets | 16,227 | (9,002 | ) | 7,225 | ||||||||
Current liabilities (excluding ARO) | (314,649 | ) | (2,058 | ) | (316,707 | ) | ||||||
ARO (current and long-term) | (260,161 | ) | (13,211 | ) | (273,372 | ) | ||||||
Debt (current and long-term) | (973,440 | ) | (52,967 | ) | (1,026,407 | ) | ||||||
Deferred income taxes(b) | (118,359 | ) | (340,645 | ) | (459,004 | ) | ||||||
Other long-term liabilities | (2,242 | ) | 797 | (1,445 | ) | |||||||
Total fair value, excluding goodwill | 618,350 | 556,698 | 1,175,048 | |||||||||
Goodwill(c),(d) | | 329,293 | 329,293 | |||||||||
Less cash acquired | 206,075 | |||||||||||
Total purchase price | $ | 618,350 | $ | 885,991 | $ | 1,298,266 |
(a) | EPL oil and gas properties were accounted for under the successful efforts method of accounting prior to the merger. After the merger, we are accounting for these oil and gas properties under the full cost method of accounting, which is consistent with our accounting policy. |
(b) | Deferred income taxes have been recognized based on the estimated fair value adjustments to net assets using a 37% tax rate, which reflected the 35% federal statutory rate and a 2% weighted-average of the applicable statutory state tax rates (net of federal benefit). |
(c) | At September 30, 2014, we conducted a qualitative goodwill impairment assessment by examining relevant events and circumstances that could have a negative impact on our goodwill, such as macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, dispositions and acquisitions, and any other relevant events or circumstances. After assessing the relevant events and circumstances for the qualitative impairment assessment, we determined that performing a quantitative goodwill impairment test was unnecessary, and no goodwill impairment was recognized. |
(d) | On April 2, 2013, EPL sold certain shallow water GoM shelf oil and natural gas interests located within the non-operated Bay March and field to Chevron U.S.A. Inc. (Chevron) with an effective date of January 1, 2013. In September 2014, we were informed by Chevron that the final settlement statement did not reflect a portion of the related production in the months of January 2013 and February 2013 totaling to approximately $2.1 million. After review of relevant supporting documents, we agreed to reimburse Chevron approximately $2.1 million. This resulted in an increase in liabilities assumed in the EPL Acquisition and a corresponding increase in goodwill of approximately $2.1 million; accordingly the June 30, 2014 comparative information is retrospectively adjusted to increase the value of goodwill. |
Costs associated with the EPL Acquisition totaled $13.6 million in the year ended June 30, 2014. EPLs operating revenues and net income of $174.1 million and $10.7 million for the quarter ended September 30, 2014 are included in the Consolidated Statement of Operations for the quarter ended September 30, 2014.
9
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 Acquisitions and Dispositions (continued)
In accordance with the acquisition method of accounting, the purchase price from our acquisition of EPL has been allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The fair value estimates were based on, but not limited to quoted market prices, where available; expected future cash flows based on estimated reserve quantities; costs to produce and develop reserves; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; appropriate discount rates and growth rates, and crude oil and natural gas forward prices. The excess of the total consideration over the estimated fair value of the amounts initially assigned to the identifiable assets acquired and liabilities assumed has been recorded as goodwill. Goodwill recorded in connection with the acquisition is not deductible for income tax purposes.
The final valuation of assets acquired and liabilities assumed is not complete and the net adjustments to those values may result in changes to goodwill and other carrying amounts initially assigned to the assets and liabilities based on the preliminary fair value analysis. The principal remaining items to be valued are tax assets and liabilities, and any related valuation allowances, which will be finalized in connection with the filing of related tax returns.
The fair value measurements of the oil and natural gas properties and the asset retirement obligations included in other long-term liabilities were based, in part, on significant inputs not observable in the market and thus represent Level 3 measurements. The fair value measurement of long-term debt was based on prices obtained from a readily available pricing source and thus represents a Level 2 measurement.
Goodwill arose subsequent to the EPL Acquisition primarily because the combined company resulted in a significantly increased enterprise value and this increased scale provided us with opportunities to increase our equity market liquidity, lower insurance costs, achieve operating efficiencies by utilizing EPLs existing infrastructure and lower costs through optimization of offshore transport vehicles and consolidation of shore bases, lowering general and administrative functions by consolidating corporate support functions and utilizing complementary strengths and expertise of the technical staff of the two companies to timely identify and drill prospects. We can utilize the latest drilling and seismic acquisition technologies, namely dump-floods, horizontal drilling, WAZ and Full Azimuth Nodal (FAN) seismic technologies licensed by EPL, that enhance production and assist in identifying deep-seated structures in the shallow waters over a significantly broader asset portfolio concentrated in the GoM Shelf. In addition, goodwill also resulted from the requirement to recognize deferred taxes on the difference between the fair value and the tax basis of the acquired assets.
Sales of Oil and Natural Gas properties interests
On April 1, 2014, Energy XXI GOM, LLC (EXXI GOM), our wholly owned indirect subsidiary closed on the sale of its interests in Eugene Island 330 and South Marsh Island 128 fields to M21K, LLC, which is a wholly owned subsidiary of our equity method investee, Energy XXI M21K, LLC (EXXI M21K), for cash consideration of approximately $122.9 million. Revenues and expenses related to these two fields were included in our results of operations through March 31, 2014. The proceeds were recorded as a reduction to our oil and natural gas properties with no gain or loss being recognized. The net reduction to the full cost pool related to this sale was $124.4 million.
On June 3, 2014, EXXI GOM, closed on the sale of its 100% interests in South Pass 49 field to EPL, which is our wholly owned indirect subsidiary, for cash consideration of approximately $230 million. As this transaction is between our two wholly owned indirect subsidiaries, there is no impact on a consolidated basis to our revenues and expenses or the full cost pool related to this transaction.
10
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 Property and Equipment
Property and equipment consists of the following (in thousands):
September 30, 2014 |
June 30, 2014 |
|||||||
Oil and gas properties |
||||||||
Proved properties | $ | 8,518,475 | $ | 8,247,352 | ||||
Less: accumulated depreciation, depletion, amortization and impairment | 3,048,820 | 2,888,451 | ||||||
Proved properties | 5,469,655 | 5,358,901 | ||||||
Unevaluated properties | 1,167,637 | 1,165,701 | ||||||
Oil and gas properties | 6,637,292 | 6,524,602 | ||||||
Other property and equipment | 44,051 | 39,272 | ||||||
Less: accumulated depreciation | 20,651 | 19,512 | ||||||
Other property and equipment | 23,400 | 19,760 | ||||||
Total property and equipment, net of accumulated depreciation, depletion, amortization and impairment | $ | 6,660,692 | $ | 6,544,362 |
The Companys investment in unevaluated properties primarily relates to the fair value of unproved oil and gas properties acquired in oil and gas property acquisitions, exploratory wells in progress, Bureau of Ocean Energy Management (BOEM) lease sales and costs to acquire seismic data. Costs associated with unproved properties are transferred to evaluated properties upon the earlier of 1) when a determination is made whether there are any proved reserves related to the properties, or 2) amortized over a period of time of not more than four years.
Exploratory wells in progress include $197.7 million in costs related to our participation with Freeport-McMoRan, Inc. who operates several prospects in the ultra-deep shelf and onshore area in the Gulf of Mexico. Activities related to certain of these well operations are controlled by the operator and these wells may have continued drilling and completion activities or, may require development of specialized equipment necessary to complete and test these wells for production.
As of September 30, 2014, the costs associated with our major projects and their status was as follows (in millions):
Project Name | Cost | Status | ||||||
Davy Jones Facilities | $ | 22.0 | Facilities cost in Davy Jones field for well operations. | |||||
Davy Jones Offset Appraisal Well | 70.2 | Davy Jones Offset Appraisal Well is awaiting test of Wilcox sands. | ||||||
Blackbeard East | 51.4 | Plans to complete into the Miocene Sands in late 2015. | ||||||
Lomond North | 54.1 | Completion operations in progress to test lower Wilcox and Cretaceous objectives | ||||||
Total | $ | 197.7 |
Note 5 Equity Method Investments
20% interest in Energy XXI M21K, LLC
We own a 20% interest in EXXI M21K, which engages in the acquisition, exploration, development and operation of oil and natural gas properties offshore in the Gulf of Mexico, through its wholly owned subsidiary, M21K, LLC (M21K).
Since its inception in February 2012, M21K has completed three acquisitions for aggregate cash consideration of approximately $328.9 million. In July 2012, it acquired oil and gas interests from EP Energy E&P Company, L.P. for approximately $80.4 million. In August 2013, it acquired oil and gas interests from LLOG Exploration Offshore, L.L.C. for approximately $80.8 million and in April 2014, it acquired oil and gas interests from EXXI GOM for approximately $122.9 million.
11
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 Equity Method Investments (continued)
EXXI M21K is a guarantor of a $100 million first lien credit facility agreement entered into by M21K. We have provided a guarantee related to the payment of asset retirement obligations and other liabilities by M21K related to the three acquisitions noted above. Further, Energy XXI Gulf Coast, Inc. (EGC), an indirect wholly owned subsidiary of Energy XXI receives a management fee from M21K for providing administrative assistance in carrying out its operations. See Note 14 Related Party Transactions of Notes to Consolidated Financial Statements in this Quarterly Report.
The provisions of the M21K Limited Liability Company Agreement (LLC Agreement) provide that M21K can make acquisitions subject to the commitment of its partners. While it is envisioned that M21K will be sold eventually to a third party to monetize returns from the investments, the M21K LLC Agreement does provide for a put and a call that can occur starting July 19, 2016; subject to an earlier option if there is a change of control of Energy XXI.
As of September 30, 2014, our investment in EXXI M21K was approximately $40.3 million and for the three months ended September 30, 2014 and 2013, we had equity income of $0.9 million and had incurred an equity loss of $0.6 million, respectively.
80% interest in Ping Energy XXI Limited (Ping Energy)
On October 18, 2013, Energy XXI International Limited (EXXI International) amended the Joint Development Agreement (JDA) and increased its ownership interest to 80% from 49% in Ping Energy, subsequent to which all the operations in Ping Energy were consolidated in our financial statements, effective October 1, 2013. In January 2014, EXXI International terminated the JDA with Ping Energy and is in the process of dissolving Ping Energy.
Subsequent to our EPL Acquisition, as disclosed in Note 3 Acquisitions and Dispositions of Notes to Consolidated Financial Statements in this Quarterly Report, we have no present intention to pursue any international opportunities to acquire exploratory, development or producing oil and natural gas properties.
Note 6 Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30, 2014 |
June 30, 2014 |
|||||||
Revolving credit facility | $ | 748,264 | $ | 689,000 | ||||
9.25% Senior Notes due 2017 | 750,000 | 750,000 | ||||||
8.25% Senior Notes due 2018 | 510,000 | 510,000 | ||||||
7.75% Senior Notes due 2019 | 250,000 | 250,000 | ||||||
7.5% Senior Notes due 2021 | 500,000 | 500,000 | ||||||
6.875% Senior Notes due 2024 | 650,000 | 650,000 | ||||||
3.0% Senior Convertible Notes due 2018 | 400,000 | 400,000 | ||||||
Original issue discount, 3.0% Senior Convertible Notes due 2018 | (54,259 | ) | (57,014 | ) | ||||
4.14% Promissory Note due 2017 | 4,670 | 4,774 | ||||||
Debt premium, 8.25% Senior Notes due 2018(1) | 38,033 | 40,566 | ||||||
Derivative instruments premium financing | 18,044 | 21,000 | ||||||
Capital lease obligations | 1,277 | 1,318 | ||||||
Total debt | 3,816,029 | 3,759,644 | ||||||
Less current maturities | 15,612 | 15,020 | ||||||
Total long-term debt | $ | 3,800,417 | $ | 3,744,624 |
(1) | Represents unamortized premium on the 8.25% Senior Notes assumed in the EPL Acquisition. |
12
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Long-Term Debt (continued)
Maturities of long-term debt as of September 30, 2014 are as follows (in thousands):
Twelve Months Ended September 30, | ||||
2015 | $ | 15,612 | ||
2016 | 4,227 | |||
2017 | 755 | |||
2018 | 2,049,694 | |||
2019 | 595,741 | |||
Thereafter | 1,150,000 | |||
Total | $ | 3,816,029 |
Revolving Credit Facility
The second amended and restated first lien credit agreement (First Lien Credit Agreement) was entered into by EGC in May 2011 and underwent its Ninth Amendment on September 5, 2014. This facility, as amended, has a borrowing base of $1,500 million and lender commitments of $1,700 million and matures on April 9, 2018, provided that the facility will accelerate if the 9.25% Senior Notes are not retired or refinanced by June 15, 2017 or the 8.25% Senior Notes are not retired or refinanced by August 15, 2017. Borrowings are limited to a borrowing base based on oil and gas reserve values which are re-determined on a periodic basis. Currently, the facility bears interest based on the borrowing base usage, at the applicable London Interbank Offered Rate (LIBOR), plus applicable margins ranging from 1.75% to 2.75% or an alternate base rate, based on the federal funds effective rate plus applicable margins ranging from 0.75% to 1.75%. The revolving credit facility is secured by mortgages on at least 85% of the value of our proved reserves. Under the First Lien Credit Agreement, EGC is allowed to pay us a limited amount of distributions, subject to certain terms and conditions. The First Lien Credit Agreement, as amended, requires the consolidated EGC to maintain certain financial covenants. Specifically, as of the end of each fiscal quarter, EGC may not permit the following: (a) EGCs total leverage ratio to be more than 4.25 to 1.0 through the quarter ending March 31, 2015 and 4.0 to 1.0 from the quarter ending June 30, 2015 and beyond, (b) EGCs interest coverage ratio to be less than 3.0 to 1.0, (c) EGCs current ratio to be less than 1.0 to 1.0, and (d) EGCs secured debt leverage ratio to be more than 1.75 to 1.0 through the quarter ending March 31, 2015 and 1.5 to 1.0 from the quarter ending June 30, 2015 and beyond (in each case as defined in our First Lien Credit Agreement). In addition, EGC is subject to various other covenants including, but not limited to, those limiting its ability to declare and pay dividends or other payments, its ability to incur debt, restrictions on change of control, the ability to enter into certain hedging agreements, as well as a covenant to maintain John D. Schiller, Jr. in his current executive position, subject to certain exceptions in the event of his death or disability.
As of September 30, 2014, EGC was in compliance with all covenants and had $748.3 million in borrowings and $226 million in letters of credit issued under our First Lien Credit Agreement.
High Yield Facilities
8.25% Senior Notes Due 2018
On June 3, 2014, EGC assumed the 8.25% senior notes due 2018 (the 8.25% Senior Notes) in the EPL Acquisition, which consist of $510 million in aggregate principal amount issued under an indenture dated as of February 14, 2011 (the 2011 Indenture). The 8.25% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis initially by each of EPLs existing direct and indirect domestic subsidiaries. The 8.25% Senior Notes will mature on February 15, 2018. On April 18, 2014, EPL entered into a supplemental indenture (the Supplemental Indenture) to the 2011 Indenture, by and among EPL, the guarantors party thereto, and U.S. Bank National Association, as trustee, governing EPLs 8.25% Senior Notes. EPL entered into the Supplemental Indenture after the receipt of consents from the requisite holders of the 8.25% Senior Notes in accordance with the terms and conditions of the Consent
13
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Long-Term Debt (continued)
Solicitation Statement dated April 7, 2014, pursuant to which we had solicited consents (the Consent Solicitation) from the holders of the 8.25% Senior Notes to make certain proposed amendments to certain definitions set forth in the Indenture (the Proposed COC Amendments), as reflected in the Supplemental Indenture. The Consent Solicitation was made as permitted by the merger agreement. On April 18, 2014, we had received valid consents from holders of an aggregate principal amount of $484.1 million of the 8.25% Senior Notes and that those consents had not been revoked prior to the consent time. As a result, the requisite holders of the 8.25% Senior Notes had consented to the Proposed COC Amendments, upon the terms and subject to the conditions set forth in the Consent Solicitation Statement. Accordingly, EPL, the guarantors party thereto and the Trustee entered into the Supplemental Indenture. Subject to the terms and conditions set forth in the Statement, we paid an aggregate cash payment equal to $2.50 per $1,000 principal amount of 8.25% Senior Notes for which consents to the Proposed COC Amendments were validly delivered and unrevoked. The 8.25% Senior Notes are callable at 104.125% starting February 15, 2015 with such premium declining to zero by February 15, 2017.
EGC believes that the fair value of the $510 million of 8.25% Senior Notes outstanding as of September 30, 2014 was $519.1 million based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2.
6.875% Senior Notes Due 2024
On May 27, 2014, EGC issued $650 million face value of 6.875%, unsecured senior notes due March 15, 2024 at par (the 6.875% Senior Notes). Presently, the 6.875% Senior Notes are not registered under the Securities Act of 1933, as amended (the Securities Act), however EGC and its guarantors have agreed, pursuant to a registration rights agreement with the initial purchasers of the 6.875% Senior Notes, to file a registration statement with the Securities and Exchange Commission (SEC) with respect to an offer to exchange a new series of freely tradable notes having substantially identical terms as the 6.875% Senior Notes and use its reasonable best efforts to cause that registration statement to be declared effective within 365 days after the issue date of the 6.875% Senior Notes. EGC incurred underwriting and direct offering costs of approximately $11 million which have been capitalized and will be amortized over the life of the 6.875% Senior Notes.
On or after March 15, 2019, EGC will have the right to redeem all or some of the 6.875% Senior Notes at specified redemption prices specified in the indenture, plus accrued and unpaid interest. Prior to March 15, 2017, EGC may redeem up to 35% of the aggregate principal amount of the 6.875% Senior Notes originally issued at a price equal to 106.875% of the aggregate principal amount, plus accrued and unpaid interest, in an amount not greater than the proceeds of certain equity offerings and provided that (i) at least 65% of the aggregate principal amount of the Notes remains outstanding immediately after giving effect to such redemption; and (ii) any such redemption shall be made within 180 days of the date of closing of such equity offering. In addition, prior to March 15, 2019, EGC may redeem all or part of the 6.875% Senior Notes at a price equal to 100% of their aggregate principal amount plus a make-whole premium and accrued and unpaid interest. EGC is required to make an offer to repurchase the 6.875% Senior Notes upon a change of control at a purchase price in cash equal to 101% of the aggregate principal amount of 6.875% Senior Notes repurchased plus accrued and unpaid interest and from the net proceeds of the certain asset sales under specified circumstances each of which as defined in the indenture governing the 6.875% Senior Notes.
The indenture governing the 6.875% Senior Notes will, among other things, limit EGCs ability and the ability of our restricted subsidiaries to transfer or sell assets, make loans or investments, pay dividends, redeem subordinated indebtedness or make other restricted payments, incur or guarantee additional indebtedness or issue disqualified capital stock, create or incur certain liens, incur dividend or other payment restrictions affecting certain subsidiaries, consummate a merger, consolidation or sale of all or substantially all of our assets, enter into transactions with affiliates and engage in business other than the oil and gas business.
14
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Long-Term Debt (continued)
EGC believes that the fair value of the $650 million of 6.875% Senior Notes outstanding as of September 30, 2014 was $617.5 million based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2.
3.0% Senior Convertible Notes Due 2018
On November 18, 2013, the Company sold $400 million face value of 3.0% Senior Convertible Notes due 2018 (the 3.0% Senior Convertible Notes). The Company incurred underwriting and direct offering costs of $7.6 million which have been capitalized and will be amortized over the life of the 3.0% Senior Convertible Notes. The 3.0% Senior Convertible Notes are convertible into cash, shares of common stock or a combination of cash and shares of common stock, at the Companys election, based on an initial conversion rate of 24.7523 shares of common stock per $1,000 principal amount of the 3.0% Senior Convertible Notes (equivalent to an initial conversion price of approximately $40.40 per share of common stock). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the 3.0% Senior Convertible Notes.
Upon conversion, the Company will be obligated to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value (as described in the indenture governing the 3.0% Senior Convertible Notes) calculated on a proportionate basis for each trading day in a 25 consecutive trading-day conversion period (as described in the indenture governing the 3.0% Senior Convertible Notes). Upon any conversion, subject to certain exceptions, holders of the 3.0% Senior Convertible Notes will not receive any cash payment representing accrued and unpaid interest. Instead, interest will be paid by the cash, shares of common stock or a combination of cash and shares of common stock paid or delivered, as the case may be, upon conversion of a convertible note.
If holders elect to convert the notes in connection with certain fundamental change transactions described in the indenture governing the 3.0% Senior Convertible Notes, the Company will increase the conversion rate by a number of additional shares determined by reference to the provisions contained in the indenture governing the 3.0% Senior Convertible Notes based on the effective date of, and the price paid (or deemed paid) per share of common stock in, such make-whole fundamental change. If holders of common stock receive only cash in connection with certain make-whole fundamental changes, the price paid (or deemed paid) per share will be the cash amount paid per share. Otherwise, the price paid (or deemed paid) per share will be equal to the average of the closing sale prices of common stock on the five trading days prior to, but excluding, the effective date of such make-whole fundamental change.
If the Company undergoes a fundamental change (as defined in the indenture governing the 3.0% Senior Convertible Notes) prior to maturity, holders of the 3.0% Senior Convertible Notes will have the right, at their option, to require the Company to repurchase for cash some or all of their notes at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest (including additional interest, if any) to, but excluding, the fundamental change repurchase date.
For accounting purposes, the $400 million aggregate principal amount of 3.0% Senior Convertible Notes for which we received cash was recorded at fair market value by applying the implied straight debt rate of 6.75% to allocate the proceeds between the debt component and the convertible equity component of the 3.0% Senior Convertible Notes. Based on applying the implied straight debt rate, the $400 million aggregate principal amount of the 3.0% Senior Convertible Notes was recorded at $336.6 million and the $63.4 million original issue discount will be amortized as an increase in interest expense over the life of the 3.0% Senior Convertible Notes.
15
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Long-Term Debt (continued)
The Company believes that the fair value of the $400 million of 3.0% Senior Convertible Notes, net of the equity conversion feature, as of September 30, 2014 was $326.5 million based on quoted prices. The market is not an active market; therefore, the fair value is classified within Level 2.
7.5% Senior Notes Due 2021
On September 26, 2013, EGC issued $500 million face value of 7.5%, unsecured senior notes due December 15, 2021 at par (the 7.5% Senior Notes). In April 2014, we filed Amendment No. 1 to the registration statement for an offer to exchange the 7.5% Senior Notes with a new series of freely tradable notes having substantially identical terms as the 7.5% Senior Notes with the SEC. The registration statement was declared effective by the SEC on April 25, 2014 and we completed the exchange on May 23, 2014. EGC incurred underwriting and direct offering costs of $8.6 million which have been capitalized and will be amortized over the life of the 7.5% Senior Notes.
On or after December 15, 2016, EGC will have the right to redeem all or some of the 7.5% Senior Notes at specified redemption prices, plus accrued and unpaid interest. Prior to December 15, 2016, EGC may redeem up to 35% of the aggregate principal amount of the 7.5% Senior Notes originally issued at a price equal to 107.5% of the aggregate principal amount in an amount not greater than the proceeds of certain equity offerings. In addition, prior to December 15, 2016, EGC may redeem all or part of the 7.5% Senior Notes at a price equal to 100% of their aggregate principal amount plus a make-whole premium and accrued and unpaid interest. EGC is required to make an offer to repurchase the 7.5% Senior Notes upon a change of control and from the net proceeds of the certain asset sales under specified circumstances each of which as defined in the indenture governing the 7.5% Senior Notes.
The indenture governing the 7.5% Senior Notes limits, among other things, EGCs ability and the ability of our restricted subsidiaries to transfer or sell assets, make loans or investments, pay dividends, redeem subordinated indebtedness or make other restricted payments, incur or guarantee additional indebtedness or issue disqualified capital stock, create or incur certain liens, incur dividend or other payment restrictions affecting certain subsidiaries, consummate a merger, consolidation or sale of all or substantially all of our assets, enter into transactions with affiliates and engage in business other than the oil and gas business.
EGC believes that the fair value of the $500 million of 7.5% Senior Notes outstanding as of September 30, 2014 was $494.3 million based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2.
9.25% Senior Notes Due 2017
On December 17, 2010, EGC issued $750 million face value of 9.25%, unsecured senior notes due December 15, 2017 at par (the 9.25% Old Senior Notes). It exchanged $749 million aggregate principal of the 9.25% Old Senior Notes for $749 million aggregate principal amount of newly issued notes (the 9.25% Senior Notes) registered under the Securities Act, on July 8, 2011. The 9.25% Senior Notes bear identical terms and conditions as the 9.25% Old Senior Notes. The trading restrictions on the remaining $1 million face value of the 9.25% Old Senior Notes were lifted on December 17, 2011.
The 9.25% Senior Notes are callable at 104.625% starting December 15, 2014, with such premium declining to zero by December 15, 2016. The 9.25% Senior Notes also provide for the redemption of up to 35% of the 9.25% Senior Notes outstanding at 109.25% prior to December 15, 2013 with the proceeds from any equity raised. EGC incurred underwriting and direct offering costs of $15.4 million which were capitalized and are being amortized over the life of the notes.
EGC has the right to redeem the 9.25% Senior Notes under various circumstances and is required to make an offer to repurchase the 9.25% Senior Notes upon a change of control and from the net proceeds of asset sales under specified circumstances each of which as defined in the indenture governing the 9.25% Senior Notes.
16
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Long-Term Debt (continued)
EGC believes that the fair value of the $750 million of 9.25% Senior Notes outstanding as of September 30, 2014 was $775.8 million based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2.
7.75% Senior Notes Due 2019
On February 25, 2011, EGC issued $250 million face value of 7.75%, unsecured senior notes due June 15, 2019 at par (the 7.75% Old Senior Notes). It exchanged the full $250 million aggregate principal of the 7.75% Old Senior Notes for $250 million aggregate principal amount of newly issued notes registered under the Securities Act (the 7.75% Senior Notes) on July 7, 2011. The 7.75% Senior Notes bear identical terms and conditions as the 7.75% Old Senior Notes.
The 7.75% Senior Notes are callable at 103.875% starting June 15, 2015, with such premium declining to zero on June 15, 2017. The 7.75% Senior Notes also provide for the redemption of up to 35% of the 7.75% Senior Notes outstanding at 107.75% prior to June 15, 2014 with the proceeds from any equity raised. EGC incurred underwriting and direct offering costs of $3.1 million which have been capitalized and will be amortized over the life of the notes.
EGC has the right to redeem the 7.75% Senior Notes under various circumstances and is required to make an offer to repurchase the 7.75% Senior Notes upon a change of control and from the net proceeds of asset sales under specified circumstances each of which as defined in the indenture governing the 7.75% Senior Notes.
EGC believes that the fair value of the $250 million of 7.75% Senior Notes outstanding as of September 30, 2014 was $250.4 million based on quoted prices and the market is not an active market; therefore, the fair value is classified within Level 2.
Guarantee of Securities Issued by EGC
Our indirect, wholly-owned subsidiary, EGC, is the issuer of each of the 6.875% Senior Notes, 7.5% Senior Notes, 9.25% Senior Notes and 7.75% Senior Notes, which are fully and unconditionally guaranteed by us and each of EGCs existing and future material domestic subsidiaries other than EPL and its subsidiaries. We and our subsidiaries, other than EGC, do not have significant independent assets or operations. EGC is permitted to make dividends and other distributions subject to certain limitations as more fully disclosed in this note above under the caption Revolving Credit Facility.
4.14% Promissory Note
In September 2012, we entered into a promissory note of $5.5 million to acquire other property and equipment. Under this note we are required to make a monthly payment of approximately $52,000 and one lump-sum payment of $3.3 million at maturity, in October 2017. This note carries an interest rate of 4.14% per annum.
Derivative Instruments Premium Financing
We finance premiums on derivative instruments that we purchase with our hedge counterparties. Substantially all of our hedges are done with lenders under our revolving credit facility. Derivative instruments premium financing is accounted for as debt and this indebtedness is pari passu with borrowings under the revolving credit facility. The derivative instruments premium financing is structured to mature when the derivative instrument settles so that we realize the value net of derivative instrument premium financing. As of September 30, 2014 and June 30, 2014, our outstanding derivative instruments premium financing discounted at our approximate borrowing cost of 2.5% per annum totaled $18 million and $21 million, respectively.
17
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Long-Term Debt (continued)
Interest Expense
For the three months ended September 30, 2014 and 2013, interest expense consisted of the following (in thousands):
Three Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
Revolving credit facility | $ | 6,893 | $ | 5,219 | ||||
9.25% Senior Notes due 2017 | 17,344 | 17,344 | ||||||
8.25% Senior Notes due 2018 | 10,519 | | ||||||
7.75% Senior Notes due 2019 | 4,844 | 4,844 | ||||||
7.50% Senior Notes due 2021 | 9,375 | 521 | ||||||
6.875% Senior Notes due 2024 | 11,172 | | ||||||
3.0% Senior Convertible Notes due 2018 | 3,025 | | ||||||
4.14% Promissory Note due 2017 | 52 | 52 | ||||||
Amortization of debt issue cost Revolving credit facility | 977 | 806 | ||||||
Amortization of debt issue cost 9.25% Senior Notes due 2017 | 552 | 552 | ||||||
Amortization of fair value premium 8.25% Senior Notes due 2018 | (2,534 | ) | | |||||
Amortization of debt issue cost 7.75% Senior Notes due 2019 | 97 | 97 | ||||||
Amortization of debt issue cost 7.50% Senior Notes due 2021 | 263 | | ||||||
Amortization of debt issue cost 6.875% Senior Notes due 2024 | 281 | | ||||||
Accretion of original debt issue discount, 3.0% Senior Convertible Notes due 2018 | 2,755 | | ||||||
Amortization of debt issue cost 3.0% Senior Convertible Notes due 2018 | 353 | | ||||||
Derivative instruments financing and other | 295 | 250 | ||||||
$ | 66,263 | $ | 29,685 |
Note 7 Notes Payable
In November 2012, we entered into a note with AFCO Credit Corporation to finance a portion of our director and officer insurance premiums. The note was for a total face amount of $0.6 million and bore interest at an annual rate of 1.774%. The note matured and was repaid on October 23, 2013.
In May 2013, we entered into a note with AFCO Credit Corporation to finance a portion of our insurance premiums. The note was for a total face amount of $24.8 million and bore interest at an annual rate of 1.623%. The note matured and was repaid on April 26, 2014.
On June 3, 2014, we entered into a note with AFCO Credit Corporation to finance a portion of our insurance premiums. The note was for a total face amount of $22.0 million and bears interest at an annual rate of 1.723%. The note amortizes over the remaining term of the insurance, which matures May 3, 2015. The balance outstanding as of September 30, 2014 was $16.0 million.
On July 1, 2014 and on August 1, 2014, we entered into two notes with AFCO Credit Corporation to finance a portion of our insurance premiums. The notes were for a total face amount of $4.2 million and bear interest at an annual rate of 1.923%. The notes amortize over the remaining term of the insurance, which mature May 1, 2015. The balance outstanding as of September 30, 2014 was $3.4 million.
18
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 Asset Retirement Obligations
The following table describes the changes to our asset retirement obligations (in thousands):
Balance at June 30, 2014 | $ | 559,834 | ||
Liabilities incurred | 5,372 | |||
Liabilities settled | (14,907 | ) | ||
Liabilities sold | (1,165 | ) | ||
Accretion expense | 12,819 | |||
Total balance at September 30, 2014 | 561,953 | |||
Less current portion | 79,614 | |||
Long-term balance at September 30, 2014 | $ | 482,339 |
Note 9 Derivative Financial Instruments
We enter into hedging transactions with a diversified group of investment-grade rated counterparties, primarily financial institutions, for our derivative transactions to reduce the concentration of exposure to any individual counterparty and to reduce exposure to fluctuations in the price of crude oil and natural gas. We use financially settled crude oil and natural gas puts, swaps, zero-cost collars and three-way collars. The Company designates a majority of its derivative financial instruments as cash flow hedges. No components of the cash flow hedging instruments are excluded from the assessment of hedge ineffectiveness. Any gains or losses resulting from the change in fair value from hedging transactions that are determined to be ineffective are recorded as a loss (gain) on derivative financial instruments, whereas gains and losses from the settlement of cash flow hedging contracts are recorded in crude oil and natural gas revenue in the same period during which the hedged transactions are settled.
When the Company discontinues cash flow hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, changes to fair value accumulated in other comprehensive income are recognized immediately into earnings.
With a financially settled purchased put, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the hedged price of the transaction. With a swap, the counterparty is required to make a payment to us if the settlement price for a settlement period is below the hedged price for the transaction, and we are required to make a payment to the counterparty if the settlement price for any settlement period is above the hedged price for the transaction. With a zero-cost collar, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price of the collar, and we are required to make a payment to the counterparty if the settlement price for any settlement period is above the cap price for the collar. A three-way collar is a combination of options consisting of a sold call, a purchased put and a sold put. The sold call establishes a maximum price we will receive for the volumes under contract. The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be the reference price (i.e., NYMEX WTI and/or BRENT, IPE) plus the difference between the purchased put and the sold put strike price.
Most of our crude oil production is Heavy Louisiana Sweet (HLS). During the quarter ended September 30, 2011, the Company began including ICE Brent Futures (Brent) collars and three-way collars in our hedging portfolio. By including Brent benchmarks in our crude hedging, we can appropriately manage our exposure and price risk. In April 2014 we began including Argus-LLS futures collars in our hedging portfolio to appropriately align and manage our exposure and price risk to market conditions.
Subsequent to the EPL Acquisition, we assumed EPLs existing hedges and expect to carry those hedges through the end of contract term beginning from June 2014 through December 2015. EPLs oil contracts are primarily swaps and benchmarked to Argus-LLS and Brent.
19
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 Derivative Financial Instruments (continued)
The energy markets have historically been very volatile, and there can be no assurances that crude oil and natural gas prices will not be subject to wide fluctuations in the future. While the use of hedging arrangements helps to limit the downside risk of adverse price movements, they may also limit future gains from favorable price movements.
We have monetized certain hedge positions at various times since the quarter ended March 31, 2009 through the quarter ended June 30, 2013, and received $181.3 million. During the quarter ended September 30, 2014; we monetized certain of our hedge positions and received $3.4 million. These monetized amounts were recorded in stockholders equity as part of other comprehensive income (OCI) and are recognized in income over the contract life of the underlying hedge contracts. As of September 30, 2014, we had $3.4 million of monetized amounts remaining in OCI of which $1.2 million, $1 million, $0.9 million and $0.3 million will be recognized in income during the quarters ending in December 31, 2014, March 31, 2015, June 30, 2015 and September 30, 2015, respectively.
During the year ended June 30, 2013, we repositioned certain hedge positions by selling puts on certain existing calendar year 2013 hedge collar contracts and purchasing new put spread contracts. The $2.2 million received from the sale of puts were recorded as deferred hedge revenue and were recognized in income over the life of the underlying hedge contracts through December 31, 2013. As of December 31, 2013, all of the amounts remaining in deferred hedge revenue were recognized in income.
As of September 30, 2014, we had the following net open crude oil derivative positions:
Weighted Average Contract Price | ||||||||||||||||||||||||||||
Swaps | Collars/Put Spreads | |||||||||||||||||||||||||||
Period | Type of Contract | Index | Volumes (MBbls) | Fixed Price | Sub Floor | Floor | Ceiling | |||||||||||||||||||||
October 2014 December 2014 | Three-Way Collars | Oil-Brent-IPE | 490 | $ | 68.44 | $ | 88.44 | $ | 128.56 | |||||||||||||||||||
October 2014 December 2014 | Put Spreads | Oil-Brent-IPE | 109 | 66.43 | 86.43 | |||||||||||||||||||||||
October 2014 December 2014 | Collars | Oil-Brent-IPE | 184 | 90.00 | 108.38 | |||||||||||||||||||||||
October 2014 December 2014 | Put Spreads | NYMEX-WTI | 310 | 70.00 | 90.00 | |||||||||||||||||||||||
October 2014 December 2014 | Three-Way Collars | NYMEX-WTI | 610 | 70.00 | 90.00 | 137.20 | ||||||||||||||||||||||
October 2014 December 2014 | Swaps | ARGUS-LLS | 712 | $ | 91.95 | |||||||||||||||||||||||
January 2015 December 2015 | Three-Way Collars | Oil-Brent-IPE | 3,650 | 71.00 | 91.00 | 113.75 | ||||||||||||||||||||||
January 2015 December 2015 | Swaps | Oil-Brent-IPE | 548 | 97.70 | ||||||||||||||||||||||||
January 2015 December 2015 | Collars | ARGUS-LLS | 1,825 | 80.00 | 123.38 | |||||||||||||||||||||||
January 2015 December 2015 | Put Spreads | NYMEX-WTI | 2,728 | 89.18 |
20
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 Derivative Financial Instruments (continued)
As of September 30, 2014, we had the following net open natural gas derivative positions:
Weighted Average Contract Price | ||||||||||||||||||||||||||||
Swaps | Collars/Put Spreads | |||||||||||||||||||||||||||
Period | Type of Contract | Index | Volumes (MMBtu) | Fixed Price | Sub Floor | Floor | Ceiling | |||||||||||||||||||||
October 2014 December 2014 | Three-Way Collars | NYMEX-HH | 4,197 | $ | 3.36 | $ | 4.00 | $ | 4.60 | |||||||||||||||||||
October 2014 December 2014 | Put Spreads | NYMEX-HH | 403 | 3.25 | 4.00 | |||||||||||||||||||||||
October 2014 December 2014 | Swaps | NYMEX-HH | 460 | $ | 4.01 | |||||||||||||||||||||||
January 2015 December 2015 | Swaps | NYMEX-HH | 1,570 | 4.31 |
The fair values of derivative instruments in our consolidated balance sheets were as follows (in thousands):
Asset Derivative Instruments | Liability Derivative Instruments | |||||||||||||||||||||||||||||||
September 30, 2014 | June 30, 2014 | September 30, 2014 | June 30, 2014 | |||||||||||||||||||||||||||||
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value |
|||||||||||||||||||||||||
Commodity Derivative Instruments designated as hedging instruments: |
||||||||||||||||||||||||||||||||
Derivative financial instruments | Current | $ | 31,043 | Current | $ | 16,829 | Current | $ | 8,769 | Current | $ | 47,912 | ||||||||||||||||||||
Non-Current | 9,140 | Non-Current | 9,595 | Non-Current | 2,397 | Non-Current | 10,866 | |||||||||||||||||||||||||
Commodity Derivative Instruments not designated as hedging instruments: |
||||||||||||||||||||||||||||||||
Derivative financial instruments | Current | 95 | Current | 551 | Current | | Current | | ||||||||||||||||||||||||
Non-Current | | Non-Current | | Non-Current | | Non-Current | | |||||||||||||||||||||||||
Total Gross Derivative Commodity Instruments subject to enforceable master netting agreement | 40,248 | 26,975 | 11,166 | 58,778 | ||||||||||||||||||||||||||||
Derivative financial instruments | Current | (7,323 | ) | Current | (15,955 | ) | Current | (7,323 | ) | Current | (15,955 | ) | ||||||||||||||||||||
Non-Current | (2,397 | ) | Non-Current | (6,560 | ) | Non-Current | (2,397 | ) | Non-Current | (6,560 | ) | |||||||||||||||||||||
Gross amounts offset in Balance Sheets | (9,720 | ) | (22,515 | ) | (9,720 | ) | (22,515 | ) | ||||||||||||||||||||||||
Net amounts presented in Balance Sheets | Current | 23,815 | Current | 1,425 | Current | 1,446 | Current | 31,957 | ||||||||||||||||||||||||
Non-Current | 6,713 | Non-Current | 3,035 | Non-Current | | Non-Current | 4,306 | |||||||||||||||||||||||||
$ | 30,528 | $ | 4,460 | $ | 1,446 | $ | 36,263 |
21
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 Derivative Financial Instruments (continued)
The effect of derivative instruments on our consolidated statements of operations was as follows (in thousands):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Location of (Gain) Loss in Income Statement |
||||||||
Cash Settlements, net of amortization of purchased put premiums: |
||||||||
Oil sales | $ | 1,654 | $ | 1,736 | ||||
Natural gas sales | (169 | ) | (2,779 | ) | ||||
Total cash settlements | 1,485 | (1,043 | ) | |||||
Commodity Derivative Instruments designated as hedging instruments: |
||||||||
(Gain) loss on derivative financial instruments Ineffective portion of commodity derivative instruments |
(3,749 | ) | 1,562 | |||||
Commodity Derivative Instruments not designated as hedging instruments: |
||||||||
(Gain) loss on derivative financial instruments Realized mark to market (gain) loss |
248 | (574 | ) | |||||
Unrealized mark to market (gain) loss | 218 | 453 | ||||||
Total (gain) loss on derivative financial instruments | (3,283 | ) | 1,441 | |||||
Total (gain) loss | $ | (1,798 | ) | $ | 398 |
The cash flow hedging relationship of our derivative instruments was as follows (in thousands):
Location of (Gain) Loss | Amount of (Gain) Loss on Derivative Instruments Recognized in Other Comprehensive (Income) Loss, net of tax (Effective Portion) |
Amount of (Gain) Loss on Derivative Instruments Reclassified from Other Comprehensive (Income) Loss, net of tax (Effective Portion) |
Amount of (Gain) Loss on Derivative Instruments Reclassified from Other Comprehensive (Income) Loss (Ineffective Portion) |
|||||||||
Three Months Ended September 30, 2014 |
||||||||||||
Commodity Derivative Instruments | $ | (35,753 | ) | |||||||||
Revenues | $ | (1,292 | ) | |||||||||
(Gain) loss on derivative financial instruments | $ | (3,749 | ) | |||||||||
Total (gain) loss | $ | (35,753 | ) | $ | (1,292 | ) | $ | (3,749 | ) | |||
Three Months Ended September 30, 2013 |
||||||||||||
Commodity Derivative Instruments | $ | 19,708 | ||||||||||
Revenues | $ | (4,776 | ) | |||||||||
(Gain) loss on derivative financial instruments | $ | 1,562 | ||||||||||
Total (gain) loss | $ | 19,708 | $ | (4,776 | ) | $ | 1,562 |
22
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 Derivative Financial Instruments (continued)
Components of Accumulated Other Comprehensive Income (AOCI) representing all of the reclassifications out of AOCI to income for the periods presented (in thousands):
Before Tax |
After Tax |
Location Where Consolidated Net Income is Presented |
||||||||||
Three months ended September 30, 2014 |
||||||||||||
Unrealized loss on derivatives at beginning of period | $ | 31,500 | $ | 20,475 | ||||||||
Unrealized change in fair value | (53,244 | ) | (34,609 | ) | ||||||||
Ineffective portion reclassified to earnings during the period | (3,749 | ) | (2,436 | ) | (Gain) Loss on derivative financial instruments |
|||||||
Realized amounts reclassified to earnings during the period | 1,988 | 1,292 | Revenues | |||||||||
Unrealized gain on derivatives at end of period | $ | (23,505 | ) | $ | (15,278 | ) | ||||||
Three months ended September 30, 2013 |
||||||||||||
Unrealized gain on derivatives at beginning of period | $ | (40,851 | ) | $ | (26,552 | ) | ||||||
Unrealized change in fair value | 21,409 | 13,916 | ||||||||||
Ineffective portion reclassified to earnings during the period | 1,562 | 1,016 | (Gain) Loss on derivative financial instruments |
|||||||||
Realized amounts reclassified to earnings during the period | 7,348 | 4,776 | Revenues | |||||||||
Unrealized gain on derivatives at end of period | $ | (10,532 | ) | $ | (6,844 | ) |
The amount expected to be reclassified from other comprehensive income to income in the next 12 months is a gain of $20.4 million ($13.3 million net of tax) on our commodity hedges. The estimated and actual amounts are likely to vary significantly due to changes in market conditions.
We monitor the creditworthiness of our counterparties. However, we are not able to predict sudden changes in counterparties creditworthiness. In addition, even if such changes are not sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative instruments under lower commodity prices, and could incur a loss. At September 30, 2014, we had no deposits for collateral with our counterparties.
Note 10 Income Taxes
We are a Bermuda company and are generally not subject to income tax in Bermuda. We operate through our various subsidiaries in the United States; accordingly, income taxes have been provided based upon U.S. tax laws and rates as they apply to our current ownership structure. We estimate our annual effective tax rate for the current fiscal year and apply it to interim periods. Currently, our estimated annual effective tax rate is approximately 52%. The variance from the U.S. statutory rate of 35% is primarily due to non-U.S. activity in our Bermuda parent that is ineligible for U.S. tax benefit and the presence of common permanent difference items (such as non-deductible compensation, meals and entertainment expenses). Our Bermuda companies continue to report a tax provision reflecting accrued 30% U.S. withholding tax required on any interest (and interest equivalent) payments made from the U.S. companies to the Bermuda companies. We have accrued an additional withholding obligation of $2.6 million for the three months ended September 30, 2014.
Under Louisiana law, companies are required to file tax returns on a separate company basis; as such, EPL and Gulf Coast will not file a combined nor consolidated Louisiana income tax return. Our valuation allowance of $22.5 million relates to Energy XXIs separate company Louisiana net operating loss (NOL) carryovers that we do not currently believe, on a more likely-than-not basis, will be realized in future years due to the companys current focus on offshore operations. No valuation allowance has been (or is expected to be) recorded with respect to any Louisiana NOLs generated by EPL, or on consolidated U.S. federal NOL
23
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 Income Taxes (continued)
carryovers. Management believes that there is sufficient future taxable income available arising from the future reversal of existing temporary differences recorded due to the excess of the book carrying value of oil and gas properties over their corresponding tax bases. Management is not relying on other sources of taxable income in concluding that no valuation allowance is needed.
In this quarter, we made a cash withholding tax payment of $0.3 million on management fees paid to our Bermuda entities. While we have not made a cash income tax payment during this quarter, in light of expected income in this fiscal year and subsequent years, estimated tax payments for Alternative Minimum Tax (AMT) in subsequent quarters may be required. We expect any AMT payment to be fully creditable against future regular tax obligations; thus, these AMT payments have no impact on our estimated annual effective tax rate.
On May 13, 2014, the U.S. Internal Revenue Service (IRS) notified the Company of their intent to examine the Companys U.S. federal income tax return (Form 1120) for the year ended June 30, 2013. Subsequently, on October 16, 2014, the Company was notified by the IRS that their review was complete and that they were proposing no changes for the tax year ended June 30, 2013. While the Company is awaiting final, formal notification from the IRS as to this conclusion, it believes that it has adequately provided for income taxes and any related interest for all open tax years.
Note 11 Stockholders Equity
Common Stock
On August 1, 2007, our common stock was admitted for trading on The NASDAQ Capital Market, and on August 12, 2011, our common stock was admitted for trading on The NASDAQ Global Select Market (NASDAQ). Our common stock trades on the NASDAQ and on the Alternative Investment Market of the London Stock Exchange (AIM) under the symbol EXXI. Our shareholders are entitled to one vote for each share of common stock held on all matters to be voted on by shareholders. We have 200,000,000 authorized common shares, par value of $0.005 per share.
At the Annual General Meeting of our Shareholders held on November 4, 2014, our Shareholders approved changing the name of the Company from Energy XXI (Bermuda) Limited to Energy XXI Ltd and authorized our Board of Directors, at its discretion, to effect a cancellation of the admission of our common shares, par value $0.005 per share to the Alternative Investment Market of the London Stock Exchange (AIM), to be effective any time on or before March 13, 2015.
We paid quarterly cash dividends of $0.12 per share to holders of our common stock on June 14, 2013, September 13, 2013, December 13, 2013, March 14, 2014, June 13, 2014 and September 12, 2014, to shareholders of record on May 31, 2013, August 30, 2013, November 29, 2013, February 28, 2014, May 30, 2014 and August 29, 2014, respectively.
Pursuant to the stock repurchase program approved by our Board of Directors in May 2013, through September 30, 2014, we paid $166.8 million to repurchase 6,639,363 shares of our common stock at a weighted average price per share, excluding fees, of $25.14. As of September 30, 2014, $83.2 million remains available for repurchase under the share repurchase program.
In addition, concurrently with the offering of our 3.0% Senior Convertible Notes in November 2013, one of the Companys wholly-owned subsidiary repurchased 2,776,200 shares of the Companys common stock for approximately $76 million, at a weighted average price per share, excluding fees of $27.39.
In February 2014, we retired 2,087,126 shares of our common stock, resulting in 7,329,100 shares of common stock being held in treasury. The entire 7,329,100 shares of common stock in treasury were reissued on June 3, 2014 as part of our common stock issued to EPL stockholders upon merger.
24
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Stockholders Equity (continued)
As discussed in Note 6 Long-Term Debt of Notes to Consolidated Financial Statements in this Quarterly Report, in November 2013, we sold $400 million of 3.0% Senior Convertible Notes. The $63.4 million allocated to the equity portion of the 3.0% Senior Convertible Notes, less offering costs of $1.4 million, were recorded as an increase in additional paid in capital.
As discussed in Note 3 Acquisitions and Dispositions of Notes to Consolidated Financial Statements in this Quarterly Report, upon closing of the EPL Acquisition, we issued 23,320,955 of our common stock, including the reissue of our common stock held in treasury, as noted above, towards the stock component of the EPL purchase price.
Preferred Stock
Our bye-laws authorize the issuance of 7,500,000 shares of preferred stock. Our board of directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. Shares of previously issued preferred stock that have been cancelled are available for future issuance.
Dividends on both the 5.625% Perpetual Convertible Preferred Stock (5.625% Preferred Stock) and the 7.25% Perpetual Convertible Preferred Stock (7.25% Preferred Stock) are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year.
Dividends on both the 5.625% Preferred Stock and the 7.25% Preferred Stock may be paid in cash or, where freely transferable by any non-affiliate recipient thereof, shares of our common stock, or a combination thereof. If we elect to make payment in shares of common stock, such shares shall be valued for such purposes at 95% of the market value of our common stock as determined on the second trading day immediately prior to the record date for such dividend.
The 5.625% preferred stock is callable beginning December 15, 2013 if the trading price exceeds $32.45 per share for 20 of 30 consecutive trading days.
Conversion of Preferred Stock
During the three months ended September 30, 2013, we canceled and converted a total of 28 shares of our 5.625% Preferred Stock into a total of 281 shares of common stock using a conversion rate of 10.0147 common shares per preferred share.
Note 12 Supplemental Cash Flow Information
The following table represents our supplemental cash flow information (in thousands):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Cash paid for interest | $ | 41,827 | $ | 5,766 | ||||
Cash paid for income taxes | 280 | 2,856 |
The following table represents our non-cash investing and financing activities (in thousands):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Financing of insurance premiums | $ | 3,358 | $ | 2,355 | ||||
Derivative instruments premium financing | | 698 | ||||||
Additions to property and equipment by recognizing asset retirement obligations | 4,207 | 14,151 |
25
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 Employee Benefit Plans
The Energy XXI Services, LLC 2006 Long-Term Incentive Plan (Incentive Plan). We maintain an incentive and retention program for our employees. Participation shares (or Restricted Stock Units) are issued from time to time at a value equal to our common share price at the time of issue. The Restricted Stock Units generally vest equally over a three-year period. When vesting occurs, we pay the employee an amount equal to the then current common share price times the number of Restricted Stock Units.
Performance Units
For fiscal 2014, 2013 and 2012, we also awarded performance units. Of the total performance units awarded, 25% are time-based performance units (Time-Based Performance Units) and 75% are Total Shareholder Return Performance-Based Units (TSR Performance-Based Units). Both the Time-Based Performance Units and TSR Performance-Based Units vest equally over a three-year period.
Time-Based Performance Units. The amount due the employee at the vesting date is equal to the grant date unit value of $5.00 plus the appreciation in the stock price over the performance period, multiplied by the number of units that vest. For the fiscal year 2012 grant the initial stock price was $34.40 and for the fiscal year 2013 grant the initial stock price was $33.20 and for the fiscal year 2014 grant the initial stock price was $24.50.
TSR Performance-Based Units. For each 2014, 2013 and 2012 TSR Performance-Based Unit, the executive will receive a cash payment equal to the grant date unit value of $5.00 multiplied by (a) the cumulative percentage change in the price per share of the Companys common stock from the date on which the TSR Performance-Based Units were granted (the Total Shareholder Return) and (b) the TSR Unit Number Modifier.
In addition, the employee may have the opportunity to earn additional compensation based on the Companys Total Shareholder Return at the end of the third Performance Period for the 2014, 2013 and 2012 grants.
At our discretion, at the time the Restricted Stock Units and Performance Units vest, the amount due employees will be settled in either common shares or cash. Historically, we have settled all vesting Restricted Stock Units awards in cash. The July 21, 2014 vesting of the July 21, 2013, 2012 and 2011 Performance Unit awards were settled 50% in common stock and future vesting of the Performance Units may be settled in stock at the discretion of our board of directors. Upon a change in control of the Company, as defined in the Incentive Plan, all outstanding Restricted Stock Units and Performance Units become immediately vested and payable.
Changes for Fiscal 2015 Performance Unit Grants. For the performance unit awards granted in fiscal 2015, the Remuneration Committee of the Board of Directors has determined to change the performance measure within the long-term incentive plan from absolute TSR to relative TSR compared to a performance peer group. Under this plan, executives will receive no payout for TSR performance below the 25th percentile, a 50% payout for TSR performance at the 25th percentile, a 100% payout for TSR performance at the median, and 200% payout for performance at or above the 75th percentile. Payouts under this plan will be capped at target if absolute total shareholder return is negative. In addition, the Remuneration Committee has decided to eliminate the use of a $5 notional unit and instead will denominate units based on the stock price on the grant date. The Remuneration Committee also decided to eliminate the make-up feature for the fiscal 2015 awards. The awards for fiscal 2015 have continued to be granted 25% in the form of Time-Based Performance Unit awards and 75% in the form of TSR Performance-Based Unit awards.
26
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 Employee Benefit Plans (continued)
We recognized compensation expense (benefit) related to our outstanding Restricted Stock Units and Performance Units as follows (in thousands):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Restricted Stock Units | $ | 970 | $ | 5,436 | ||||
Performance Units | (5,175 | ) | 12,352 | |||||
Total compensation expense (benefit) recognized | $ | (4,205 | ) | $ | 17,788 |
As of September 30, 2014, we had 1,782,704 unvested Restricted Stock Units and 3,199,250 unvested $5 Performance Based Units and 1,025,000 stock price valued Performance Based Units.
Stock Purchase Plan
Effective as of July 1, 2008, we adopted the Energy XXI Services, LLC 2008 Fair Market Value Stock Purchase Plan (2008 Purchase Plan), which allows eligible employees, directors, and other service providers of ours and our subsidiaries to purchase from us shares of our common stock that have either been purchased by us on the open market or that have been newly issued by us. During the three months ended September 30, 2014 and 2013, we issued 93,776 shares and 117,902 shares, respectively, under the 2008 Purchase Plan.
In November 2008 we adopted the Energy XXI Services, LLC Employee Stock Purchase Plan (the Employee Stock Purchase Plan) which allows employees to purchase common stock at a 15% discount from the lower of the common stock closing price on the first or last day of the offering period. The current offering period is from July 1, 2014 to December 31, 2014. We use Black-Scholes Model to determine fair value, which incorporates assumptions to value stock-based awards. The shares issuable under Employee Stock Purchase Plan are included in calculating diluted earnings per share, if dilutive. As of September 30, 2014 we had $196,000 in unrecognized compensation. The compensation expense recognized and shares issued under Employee Stock Purchase Plan were as follows (in thousands, except for shares):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Compensation expense | $ | 241 | $ | 196 | ||||
Shares issued | | |
Stock Options
In September 2008, our Board of Directors granted 300,000 stock options to certain officers. These options to purchase our common stock were granted with an exercise price of $17.50 per share. These options vested over a three year period and may be exercised any time prior to September 10, 2018. We utilized the Black-Scholes model to determine the fair value of these stock options. As of September 30, 2014, 100,000 of the vested options have been exercised and the remaining 200,000 vested options have not been exercised.
Defined Contribution Plans
Our employees are covered by a discretionary noncontributory profit sharing plan. The plan provides for annual employer contributions that can vary from year to year. We also sponsor a qualified 401(k) Plan that provides for matching. The contributions under these plans were as follows (in thousands):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Profit Sharing Plan | $ | 1,480 | $ | 1,279 |
27
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 Employee Benefit Plans (continued)
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
401(k) Plan | 477 | 677 | ||||||
Total contributions | $ | 1,957 | $ | 1,956 |
Note 14 Related Party Transactions
We have a 20% interest in EXXI M21K and account for this investment using the equity method. EXXI M21K is the guarantor of a $100 million line of credit entered into by M21K. See Note 5 Equity Method Investments of Notes to Consolidated Financial Statements in this Quarterly Report.
We have provided a guarantee related to the payment of asset retirement obligations and other liabilities by M21K for EP Energy Property acquisition estimated at $65 million and $1.8 million, respectively. For the LLOG Exploration acquisition, we guaranteed payment of asset retirement obligations by M21K estimated at $36.7 million. For the Eugene Island 330 and South Marsh Island 128 properties purchase, we guaranteed payment of asset retirement obligation by M21K estimated at $18.6 million. For these guarantees, M21K has agreed to pay us $6.3 million, $3.3 million and $1.7 million, respectively, over a period of three years from the respective acquisition dates. For the three months ended September 30, 2014 and 2013, we have received $0.9 million and $0.6 million, respectively, related to such guarantees.
Prior to the LLOG Exploration acquisition, EGC received a management fee of $0.83 per BOE produced for the EP Energy property acquisition for providing administrative assistance in carrying out M21K operations. In conjunction with the LLOG Exploration acquisition, on September 1, 2013, this fee was increased to $1.15 per BOE produced. However, after the Eugene Island 330 and South Marsh Island 128 properties purchase on April 1, 2014, this fee was reduced to $0.98 per BOE produced. For the three months ended September 30, 2014 and 2013, EGC received management fees of $0.9 million and $0.7 million, respectively.
On April 1, 2014, EXXI GOM closed on sale of its interest in Eugene Island 330 and South Marsh Island 128 properties to M21K and on June 3, 2014, it closed on the sale of its 100% interests in South Pass 49 field to EPL. See Note 3 Acquisitions and Dispositions of Notes to Consolidated Financial Statements in this Quarterly Report.
Note 15 Earnings (Loss) per Share
Basic earnings (loss) per share of common stock is computed by dividing net income (loss) available for common stockholders by the weighted average number of shares of common stock outstanding during the year. Except when the effect would be anti-dilutive, the diluted earnings per share include the impact of convertible preferred stock, restricted stock and other common stock equivalents. The following table sets forth the calculation of basic and diluted earnings (loss) per share (EPS) (in thousands, except per share data):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Net income (loss) | $ | (6,403 | ) | $ | 43,139 | |||
Preferred stock dividends | 2,872 | 2,873 | ||||||
Net income (loss) available for common stockholders | $ | (9,275 | ) | $ | 40,266 | |||
Weighted average shares outstanding for basic EPS | 93,833 | 75,782 | ||||||
Add dilutive securities | | 8,291 | ||||||
Weighted average shares outstanding for diluted EPS | 93,833 | 84,073 |
28
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 15 Earnings (Loss) per Share (continued)
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Earnings (loss) per share |
||||||||
Basic | $ | (0.10 | ) | $ | 0.53 | |||
Diluted | $ | (0.10 | ) | $ | 0.51 |
For the three months ended September 30, 2014, 8,396,463 common stock equivalents were excluded from the diluted average shares due to an anti-dilutive effect. For the three months ended September 30, 2013, no common stock equivalents were excluded from the diluted average shares due to an anti-dilutive effect.
Note 16 Commitments and Contingencies
Litigation. We are involved in various legal proceedings and claims, which arise in the ordinary course of our business. We do not believe the ultimate resolution of any such actions will have a material effect on our consolidated financial position, results of operations or cash flows.
Litigation Related to Merger. In March and April, 2014, three alleged EPL stockholders (the plaintiffs) filed three separate class action lawsuits in the Court of Chancery of the State of Delaware on behalf of EPL stockholders against EPL, its directors, Energy XXI, Energy XXI Gulf Coast, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Energy XXI (OpCo), and Clyde Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of OpCo (Merger Sub and collectively, the defendants). The Court of Chancery of the State of Delaware consolidated these lawsuits on May 5, 2014. The consolidated lawsuit is styled In re EPL Oil & Gas Inc. Shareholders Litigation, C.A. No. 9460-VCN, in the Court of Chancery of the State of Delaware (the lawsuit).
Plaintiffs allege a variety of causes of action challenging the Agreement and Plan of Merger between Energy XXI, OpCo, Merger Sub, and EPL (the merger agreement), which provides for the acquisition of EPL by Energy XXI. Plaintiffs allege that (a) EPLs directors have allegedly breached fiduciary duties in connection with the merger and (b) Energy XXI, OpCo, Merger Sub, and EPL have allegedly aided and abetted in these alleged breaches of fiduciary duties. Plaintiffs causes of action are based on their allegations that (i) the merger allegedly provided inadequate consideration to EPL stockholders for their shares of EPL common stock; (ii) the merger agreement contains contractual terms including, among others, the (A) no solicitation, (B) competing proposal, and (C) termination fee provisions that allegedly dissuaded other potential acquirers from making competing offers for shares of EPL common stock; (iii) certain of EPLs officers and directors allegedly received benefits including (A) an offer for one of EPLs directors to join the Energy XXI board of directors and (B) the triggering of change-in-control provisions in notes held by EPLs executive officers that were not equally shared by EPLs stockholders; (iv) Energy XXI required EPLs officers and directors to agree to vote their shares of EPL common stock in favor of the merger; and (v) EPL provided, and Energy XXI obtained, non-public information that allegedly allowed Energy XXI to acquire EPL for inadequate consideration. Plaintiffs also allege that the Registration Statement filed on Form S-4 by EPL and Energy XXI on April 1, 2014 omits information concerning, among other things, (i) the events leading up to the merger, (ii) EPLs efforts to attract offers from other potential acquirors, (iii) EPLs evaluation of the merger; (iv) negotiations between EPL and Energy XXI, and (v) the analysis of EPLs financial advisor. Based on these allegations, plaintiffs seek to have the merger agreement rescinded. Plaintiffs also seek damages and attorneys fees.
Defendants date to answer, move to dismiss, or otherwise respond to the lawsuit has been indefinitely extended. Neither Energy XXI nor EPL can predict the outcome of the lawsuit or any others that might be filed subsequent to the date of the filing of this quarterly report; nor can either Energy XXI or EPL predict the amount of time and expense that will be required to resolve the lawsuit. The defendants intend to vigorously defend the lawsuit.
29
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16 Commitments and Contingencies (continued)
Lease Commitments. We have non-cancelable operating leases for office space and other that expire through December 31, 2022. Future minimum lease commitments as of September 30, 2014 under the operating leases are as follows (in thousands):
Year Ending September 30, | ||||
2015 | $ | 4,262 | ||
2016 | 5,107 | |||
2017 | 4,433 | |||
2018 | 4,190 | |||
2019 | 4,312 | |||
Thereafter | 12,880 | |||
Total | $ | 35,184 |
Rent expense, including rent incurred on short-term leases, for the three months ended September 30, 2014 and 2013 was approximately $1,159,000 and $937,000, respectively.
Letters of Credit and Performance Bonds. We had $226 million in letters of credit and $170.5 million of performance bonds outstanding as of September 30, 2014.
Guarantee. EXXI M21K is the guarantor of a $100 million line of credit entered into by M21K. See Note 5 Equity Method Investments of Notes to Consolidated Financial Statements in this Quarterly Report. We have provided guarantees related to the payment of asset retirement obligations and other liabilities by M21K for the EP Energy, LLOG Exploration and Eugene Island 330 and South Marsh Island 128 properties acquisitions. For these guarantees, M21K has agreed to pay us $6.3 million, $3.3 million and $1.7 million, respectively, over a period of three years from the respective acquisition dates. See Note 14 Related Party Transactions of Notes to Consolidated Financial Statements in this Quarterly Report.
Drilling Rig Commitments. The drilling rig commitments represent minimum future expenditures for drilling rig services. The expenditures for drilling rig services will exceed such minimum amounts to the extent we utilize the drilling rigs subject to a particular contractual commitment for a period greater than the period set forth in the governing contract. As of September 30, 2014, we have the following drilling rig commitments
1) | April 10, 2014 to October 27, 2014 at $54,448 per day. |
2) | September 1, 2013 to November 30, 2014 at $130,000 per day. |
3) | March 10, 2014 to March 9, 2015 at $53,175 per day. |
4) | February 15, 2014 to December 29, 2014 at $111,380 per day. |
5) | April 11, 2014 to October 12, 2014 at $112,000 per day. |
6) | July 1, 2014 to October 21, 2014 at $107,500 per day. |
7) | October 4, 2014 to November 4, 2014 at $107,500 per day. |
At September 30, 2014, future minimum commitments under these contracts totaled $34.8 million.
Note 17 Fair Value of Financial Instruments
Certain assets and liabilities are measured at fair value on a recurring basis in our consolidated balance sheets. The following methods and assumptions were used to estimate the fair values:
30
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17 Fair Value of Financial Instruments (continued)
The carrying amounts approximate fair value for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities and notes payable due to the short-term nature or maturity of the instruments.
Our commodity derivative instruments consist of financially settled crude oil and natural gas puts, swaps, zero-cost collars and three way collars. We estimate the fair values of these instruments based on published forward commodity price curves, market volatility and contract terms as of the date of the estimate. The discount rate used in the discounted cash flow projections is based on published LIBOR rates. The fair values of commodity derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published issuer-weighted corporate default rates. See Note 9 Derivative Financial Instruments of Notes to Consolidated Financial Statements in this Quarterly Report.
The fair values of our stock based units are based on period-end stock price for our Restricted Stock Units and Time-Based Performance Units and the results of the Monte Carlo simulation model is used for our TSR Performance-Based Units. The Monte Carlo simulation model uses inputs relating to stock price, unit value expected volatility and expected rate of return. A change in any input can have a significant effect on TSR Performance-Based Units valuation.
Valuation techniques are generally classified into three categories: the market approach, the income approach and the cost approach. The selection and application of one or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:
| Level 1 quoted prices in active markets for identical assets or liabilities. |
| Level 2 inputs other than quoted prices that are observable for an asset or liability. These include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). |
| Level 3 unobservable inputs that reflect our own expectations about the assumptions that market participants would use in measuring the fair value of an asset or liability. |
31
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17 Fair Value of Financial Instruments (continued)
During the quarter ended September 30, 2014, we did not have any transfers from or to Level 3. The following table presents the fair value of our Level 1 and Level 2 financial instruments (in thousands):
Level 1 | Level 2 | |||||||||||||||
As of September 30, 2014 |
As of June 30, 2014 |
As of September 30, 2014 |
As of June 30, 2014 |
|||||||||||||
Assets: |
||||||||||||||||
Oil and natural gas derivatives | $ | 40,248 | $ | 26,975 | ||||||||||||
Liabilities: |
||||||||||||||||
Oil and natural gas derivatives | $ | 11,166 | $ | 58,778 | ||||||||||||
Restricted stock units | $ | 2,493 | $ | 9,425 | ||||||||||||
Time-based performance units | 686 | 3,698 | ||||||||||||||
Total liabilities | $ | 3,179 | $ | 13,123 | $ | 11,166 | $ | 58,778 |
The following table describes the changes to our Level 3 financial instruments (in thousands):
Three Months Ended September 30, |
||||||||
2014 | 2013 | |||||||
Liabilities: |
||||||||
Performance-based performance units |
||||||||
Balance at beginning of period | $ | 6,910 | $ | 6,778 | ||||
Vested | | (7,188 | ) | |||||
Grants charged to general and administrative expense | (6,069 | ) | 11,046 | |||||
Balance at end of period | $ | 841 | $ | 10,636 |
Note 18 Prepayments and Accrued Liabilities
Prepayments and accrued liabilities consist of the following (in thousands):
September 30, 2014 |
June 30, 2014 |
|||||||
Prepaid expenses and other current assets |
||||||||
Advances to joint interest partners | $ | 10,821 | $ | 10,336 | ||||
Insurance | 29,739 | 37,088 | ||||||
Inventory | 7,168 | 7,020 | ||||||
Royalty deposit | 11,832 | 12,262 | ||||||
Other | 5,071 | 5,824 | ||||||
Total prepaid expenses and other current assets | $ | 64,631 | $ | 72,530 | ||||
Accrued liabilities |
||||||||
Advances from joint interest partners | $ | 2,831 | $ | 2,667 | ||||
Employee benefits and payroll | 18,193 | 43,480 | ||||||
Interest payable | 48,216 | 26,490 | ||||||
Accrued hedge payable | 1,761 | 7,874 | ||||||
Undistributed oil and gas proceeds | 31,345 | 34,473 | ||||||
Severance taxes payable | 2,021 | 8,014 | ||||||
Other | 11,142 | 10,528 | ||||||
Total accrued liabilities | $ | 115,509 | $ | 133,526 |
32
ENERGY XXI LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 19 Subsequent Events
In October 2014 and in November 2014, we monetized certain WTI put contracts and certain Brent swap contracts related to calendar year 2015 and realized $21.3 million and $7.5 million, respectively. These monetized amounts will be recorded in stockholders equity as part of OCI and will be recognized in income over the contract life of the underlying hedge contracts during calendar year 2015.
On November 4, 2014, our Board of Directors approved payment of a quarterly cash dividend of $0.12 per share to the holders of our common stock. The quarterly dividend will be paid on December 12, 2014 to shareholders of record on November 28, 2014.
At the Annual General Meeting of our Shareholders held on November 4, 2014, our Shareholders approved changing the name of the Company from Energy XXI (Bermuda) Limited to Energy XXI Ltd and authorized our Board of Directors, at its discretion, to effect a cancellation of the admission of our common shares, par value $0.005 per share to the Alternative Investment Market of the London Stock Exchange (AIM), to be effective any time on or before March 13, 2015.
Note 20 Supplemental Guarantor Information
Our indirect, 100%-owned subsidiary, EGC, issued $650 million of its 6.875% Senior Notes due 2024 on May 27, 2014, $500 million of its 7.5% Senior Notes due 2021 on September 26, 2013, $750 million of its 9.25% Senior Notes due 2017 on December 17, 2010 and $250 million of its 7.75% Senior Notes due 2019 on February 25, 2011. These notes are jointly, severally, fully and unconditionally guaranteed by the Bermuda parent company and each of EGCs existing and future material domestic subsidiaries other than EPL and its subsidiaries, except that a guarantor can be automatically released and relieved of its obligations under certain customary circumstances contained in the above senior note indentures. These customary circumstances include: when a guarantor is declared unrestricted for covenant purposes, when the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, when the guarantor is sold or sells all of its assets or the guarantor no longer guarantees any obligations under EGCs revolving credit facility. When securities that are guaranteed are issued in a registered offering, Rule 3-10 of Regulation S-X of the SEC requires the issuer and guarantors to file separate financial statements. The Company meets the conditions in Rule 3-10 to report information about the assets, results of operations and comprehensive income (loss) and cash flows of the parent, subsidiary issuer and subsidiary guarantors using an alternative approach, which is to include in a footnote to the parent company's financial statements condensed consolidating financial information for the same periods as those presented for the parent company financial statements.
The information is presented using the equity method of accounting for investments in subsidiaries. Transactions between entities are presented on a gross basis in the Bermuda parent company, EGC, the guarantor subsidiaries, and non-guarantor subsidiaries columns with consolidating entries presented in the eliminations column. The principal consolidating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. The following supplemental condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include all disclosures included in annual financial statements and should be read in conjunction with our consolidated financial statements and notes thereto included in the 2014 Annual Report.
33
ENERGY XXI LTD
CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)
September 30, 2014 | ||||||||||||||||||||||||
EXXI Bermuda Parent |
EGC Issuer |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Reclassifications & Eliminations |
Consolidated | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current Assets |
||||||||||||||||||||||||
Cash and cash equivalents | $ | 121,359 | $ | | $ | | $ | 723 | $ | (2,582 | ) | $ | 119,500 | |||||||||||
Accounts receivable |
||||||||||||||||||||||||
Oil and natural gas sales | 107,416 | 44,373 | (5,968 | ) | 145,821 | |||||||||||||||||||
Joint interest billings | 2,064 | 12,362 | 14,426 | |||||||||||||||||||||
Insurance and other | 505 | 2,482 | 333 | 2,295 | 5,615 | |||||||||||||||||||
Prepaid expenses and other current assets | 58 | 30,682 | 491 | 33,400 | 64,631 | |||||||||||||||||||
Deferred income taxes | 24,587 | 24,587 | ||||||||||||||||||||||
Derivative financial instruments | 21,553 | 2,262 | 23,815 | |||||||||||||||||||||
Total Current Assets | 121,922 | 56,781 | 108,240 | 120,002 | (8,550 | ) | 398,395 | |||||||||||||||||
Property and Equipment |
||||||||||||||||||||||||
Oil and natural gas properties | 3,352,867 | 3,278,212 | 6,213 | 6,637,292 | ||||||||||||||||||||
Other property and equipment | 23,400 | 23,400 | ||||||||||||||||||||||
Total Property and Equipment, net | | | 3,352,867 | 3,301,612 | 6,213 | 6,660,692 | ||||||||||||||||||
Other Assets |
||||||||||||||||||||||||
Goodwill | 329,293 | 329,293 | ||||||||||||||||||||||
Derivative financial instruments | 6,550 | 163 | 6,713 | |||||||||||||||||||||
Equity investments | 1,777,906 | 2,979,014 | 2,109,529 | (6,826,129 | ) | 40,320 | ||||||||||||||||||
Intercompany receivables | 110,116 | 1,704,334 | (1,814,450 | ) | | |||||||||||||||||||
Restricted cash | 325 | 325 | ||||||||||||||||||||||
Other assets and debt issuance costs, net | 177,946 | 42,265 | 11,634 | (171,000 | ) | 60,845 | ||||||||||||||||||
Total Other Assets | 2,065,968 | 4,732,163 | 325 | 2,450,619 | (8,811,579 | ) | 437,496 | |||||||||||||||||
Total Assets | $ | 2,187,890 | $ | 4,788,944 | $ | 3,461,432 | $ | 5,872,233 | $ | (8,813,916 | ) | $ | 7,496,583 | |||||||||||
LIABILITIES |
||||||||||||||||||||||||
Current Liabilities |
||||||||||||||||||||||||
Accounts payable | $ | | $ | 93,451 | $ | 144,590 | $ | 242,808 | $ | (8,741 | ) | $ | 472,108 | |||||||||||
Accrued liabilities | 4,664 | 42,061 | 25,494 | 111,441 | (68,151 | ) | 115,509 | |||||||||||||||||
Notes payable | 19,368 | 19,368 | ||||||||||||||||||||||
Asset retirement obligations | 39,783 | 39,831 | 79,614 | |||||||||||||||||||||
Derivative financial instruments | 1,446 | 1,446 | ||||||||||||||||||||||
Current maturities of long-term debt | 14,591 | 1,021 | 15,612 | |||||||||||||||||||||
Total Current Liabilities | 4,664 | 169,471 | 209,867 | 396,547 | (76,892 | ) | 703,657 | |||||||||||||||||
Long-term debt, less current maturities | 345,741 | 2,361,717 | 1,263,959 | (171,000 | ) | 3,800,417 | ||||||||||||||||||
Deferred income taxes | 20,445 | 188,497 | 476,179 | 685,121 | ||||||||||||||||||||
Asset retirement obligations | 50 | 249,871 | 232,418 | 482,339 | ||||||||||||||||||||
Intercompany payables | 1,674,648 | 5,671 | (1,680,319 | ) | | |||||||||||||||||||
Other liabilities | 8,009 | 8,009 | ||||||||||||||||||||||
Total Liabilities | 370,850 | 2,719,735 | 2,134,386 | 2,382,783 | (1,928,211 | ) | 5,679,543 | |||||||||||||||||
Stockholders Equity |
||||||||||||||||||||||||
Preferred stock |
||||||||||||||||||||||||
7.25% Convertible perpetual preferred stock | | |||||||||||||||||||||||
5.625% Convertible perpetual preferred stock | 1 | 1 | ||||||||||||||||||||||
Common stock | 469 | 1 | 11 | (12 | ) | 469 | ||||||||||||||||||
Additional paid-in capital | 1,841,457 | 2,054,645 | 339,400 | 3,367,862 | (5,761,907 | ) | 1,841,457 | |||||||||||||||||
Retained earnings (accumulated deficit) | (40,165 | ) | (706 | ) | 987,646 | 99,520 | (1,086,460 | ) | (40,165 | ) | ||||||||||||||
Accumulated other comprehensive (loss) income | 15,278 | 15,269 | 22,057 | (37,326 | ) | 15,278 | ||||||||||||||||||
Total Stockholders Equity | 1,817,040 | 2,069,209 | 1,327,046 | 3,489,450 | (6,885,705 | ) | 1,817,040 | |||||||||||||||||
Total Liabilities and Stockholders Equity | $ | 2,187,890 | $ | 4,788,944 | $ | 3,461,432 | $ | 5,872,233 | $ | (8,813,916 | ) | $ | 7,496,583 |
34
ENERGY XXI LTD
CONDENSED CONSOLIDATING BALANCE SHEET
(In Thousands)
June 30, 2014 | ||||||||||||||||||||||||
EXXI Bermuda Parent |
EGC Issuer |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Reclassifications & Eliminations |
Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current Assets |
||||||||||||||||||||||||
Cash and cash equivalents | $ | 135,703 | $ | 3,723 | $ | | $ | 6,380 | $ | | $ | 145,806 | ||||||||||||
Accounts receivable |
||||||||||||||||||||||||
Oil and natural gas sales | 127,773 | 50,990 | (11,688 | ) | 167,075 | |||||||||||||||||||
Joint interest billings | 1,833 | 11,065 | 12,898 | |||||||||||||||||||||
Insurance and other | 10 | 3,452 | 517 | 1,460 | (1 | ) | 5,438 | |||||||||||||||||
Prepaid expenses and other current assets | 230 | 27,705 | 350 | 44,245 | 72,530 | |||||||||||||||||||
Deferred income taxes | 27,424 | 25,163 | 52,587 | |||||||||||||||||||||
Derivative financial instruments | 1,425 | 1,425 | ||||||||||||||||||||||
Total Current Assets | 135,943 | 65,562 | 128,640 | 139,303 | (11,689 | ) | 457,759 | |||||||||||||||||
Property and Equipment |
||||||||||||||||||||||||
Oil and natural gas properties | 3,324,923 | 3,197,765 | 1,914 | 6,524,602 | ||||||||||||||||||||
Other property and equipment | 19,760 | 19,760 | ||||||||||||||||||||||
Total Property and Equipment, net | | | 3,324,923 | 3,217,525 | 1,914 | 6,544,362 | ||||||||||||||||||
Other Assets |
||||||||||||||||||||||||
Goodwill | 329,293 | 329,293 | ||||||||||||||||||||||
Derivative financial instruments | 3,035 | 3,035 | ||||||||||||||||||||||
Equity investments | 1,744,908 | 2,969,070 | 2,110,608 | (6,783,943 | ) | 40,643 | ||||||||||||||||||
Intercompany receivables | 102,489 | 1,627,931 | 60,562 | (1,790,982 | ) | | ||||||||||||||||||
Restricted cash | 325 | 6,025 | 6,350 | |||||||||||||||||||||
Other assets and debt issuance costs, net | 178,299 | 42,155 | 7,940 | (171,000 | ) | 57,394 | ||||||||||||||||||
Total Other Assets | 2,025,696 | 4,642,191 | 325 | 2,514,428 | (8,745,925 | ) | 436,715 | |||||||||||||||||
Total Assets | $ | 2,161,639 | $ | 4,707,753 | $ | 3,453,888 | $ | 5,871,256 | $ | (8,755,700 | ) | $ | 7,438,836 | |||||||||||
LIABILITIES |
||||||||||||||||||||||||
Current Liabilities |
||||||||||||||||||||||||
Accounts payable | $ | | $ | 64,533 | $ | 150,909 | $ | 214,215 | $ | (11,881 | ) | $ | 417,776 | |||||||||||
Accrued liabilities | 1,640 | 12,501 | 28,750 | 154,587 | (63,952 | ) | 133,526 | |||||||||||||||||
Notes payable | 21,967 | 21,967 | ||||||||||||||||||||||
Deferred income taxes | 19,185 | (19,185 | ) | | ||||||||||||||||||||
Asset retirement obligations | 39,819 | 39,830 | 79,649 | |||||||||||||||||||||
Derivative financial instruments | 5,517 | 26,440 | 31,957 | |||||||||||||||||||||
Current maturities of long-term debt | 14,093 | 927 | 15,020 | |||||||||||||||||||||
Total Current Liabilities | 20,825 | 118,611 | 219,478 | 435,999 | (95,018 | ) | 699,895 | |||||||||||||||||
Long-term debt, less current maturities | 342,986 | 2,305,906 | 1,266,732 | (171,000 | ) | 3,744,624 | ||||||||||||||||||
Deferred income taxes | 211,055 | 470,798 | 19,185 | 701,038 | ||||||||||||||||||||
Asset retirement obligations | 49 | 247,272 | 232,864 | 480,185 | ||||||||||||||||||||
Derivative financial instruments | 2,166 | 2,140 | 4,306 | |||||||||||||||||||||
Intercompany payables | 1,736,240 | (1,736,240 | ) | | ||||||||||||||||||||
Other liabilities | 10,958 | 10,958 | ||||||||||||||||||||||
Total Liabilities | 363,811 | 2,637,787 | 2,202,990 | 2,419,491 | (1,983,073 | ) | 5,641,006 | |||||||||||||||||
Stockholders Equity |
||||||||||||||||||||||||
Preferred stock |
||||||||||||||||||||||||
7.25% Convertible perpetual preferred stock | | |||||||||||||||||||||||
5.625% Convertible perpetual preferred stock | 1 | 1 | ||||||||||||||||||||||
Common stock | 468 | 1 | 10 | (11 | ) | 468 | ||||||||||||||||||
Additional paid-in capital | 1,837,462 | 2,092,439 | 273,129 | 3,580,005 | (5,945,573 | ) | 1,837,462 | |||||||||||||||||
Retained earnings (accumulated deficit) | (19,628 | ) | (2,040 | ) | 977,769 | (101,522 | ) | (874,205 | ) | (19,626 | ) | |||||||||||||
Accumulated other comprehensive (loss) income | (20,475 | ) | (20,434 | ) | (26,728 | ) | 47,162 | (20,475 | ) | |||||||||||||||
Total Stockholders Equity | 1,797,828 | 2,069,966 | 1,250,898 | 3,451,765 | (6,772,627 | ) | 1,797,830 | |||||||||||||||||
Total Liabilities and Stockholders Equity | $ | 2,161,639 | $ | 4,707,753 | $ | 3,453,888 | $ | 5,871,256 | $ | (8,755,700 | ) | $ | 7,438,836 |
35
ENERGY XXI LTD
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the Three Months Ended September 30, 2014 | ||||||||||||||||||||||||
EXXI Bermuda Parent |
EGC Issuer |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Reclassifications & Eliminations |
Consolidated | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Crude oil sales | $ | | $ | (3,667 | ) | $ | 211,840 | $ | 160,328 | $ | | $ | 368,501 | |||||||||||
Natural gas sales | 343 | 20,607 | 13,780 | 34,730 | ||||||||||||||||||||
Total Revenues | | (3,324 | ) | 232,447 | 174,108 | | 403,231 | |||||||||||||||||
Costs and Expenses |
||||||||||||||||||||||||
Lease operating | (86 | ) | 85,746 | 56,925 | 142,585 | |||||||||||||||||||
Production taxes | 14 | 1,121 | 1,958 | 3,093 | ||||||||||||||||||||
Gathering and transportation | 9,188 | 9,188 | ||||||||||||||||||||||
Depreciation, depletion and amortization | 93,190 | 74,483 | (6,407 | ) | 161,266 | |||||||||||||||||||
Accretion of asset retirement obligations | 6,638 | 6,181 | 12,819 | |||||||||||||||||||||
General and administrative expense | 1,147 | 1,771 | 4,610 | 18,896 | 26,424 | |||||||||||||||||||
Loss (gain) on derivative financial instruments | (3,313 | ) | 30 | (3,283 | ) | |||||||||||||||||||
Total Costs and Expenses | 1,147 | (1,614 | ) | 200,493 | 158,473 | (6,407 | ) | 352,092 | ||||||||||||||||
Operating Income (Loss) | (1,147 | ) | (1,710 | ) | 31,954 | 15,635 | 6,407 | 51,139 | ||||||||||||||||
Other Income (Expense) |
||||||||||||||||||||||||
Income (loss) from equity method investees | (2,754 | ) | 46,787 | 2,965 | (46,117 | ) | 881 | |||||||||||||||||
Other income (expense) net | 5,172 | 484 | 5,349 | (10,054 | ) | 951 | ||||||||||||||||||
Interest expense | (6,133 | ) | (47,653 | ) | (1,495 | ) | (10,982 | ) | (66,263 | ) | ||||||||||||||
Total Other Expense | (3,715 | ) | (382 | ) | (1,495 | ) | (2,668 | ) | (56,171 | ) | (64,431 | ) | ||||||||||||
Income (Loss) Before Income Taxes | (4,862 | ) | (2,092 | ) | 30,459 | 12,967 | (49,764 | ) | (13,292 | ) | ||||||||||||||
Income Tax Expense (Benefit) | 1,541 | (4,177 | ) | (4,253 | ) | (6,889 | ) | |||||||||||||||||
Net Income (Loss) | (6,403 | ) | 2,085 | 30,459 | 17,220 | (49,764 | ) | (6,403 | ) | |||||||||||||||
Preferred Stock Dividends | 2,872 | 2,872 | ||||||||||||||||||||||
Net Income (Loss) Available for Common Stockholders | $ | (9,275 | ) | $ | 2,085 | $ | 30,459 | $ | 17,220 | $ | (49,764 | ) | $ | (9,275 | ) | |||||||||
Comprehensive Income (Loss) |
||||||||||||||||||||||||
Net Income (Loss) | $ | (6,403 | ) | $ | 2,085 | $ | 30,459 | $ | 17,220 | $ | (49,764 | ) | $ | (6,403 | ) | |||||||||
Other Comprehensive Income (Loss) | 35,753 | 22,672 | 13,081 | (35,753 | ) | 35,753 | ||||||||||||||||||
Comprehensive Income (Loss) | $ | 29,350 | $ | 24,757 | $ | 30,459 | $ | 30,301 | $ | (85,517 | ) | $ | 29,350 |
36
ENERGY XXI LTD
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the Three Months Ended September 30, 2013 | ||||||||||||||||||||||||
EXXI Bermuda Parent |
EGC Issuer |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Reclassifications & Eliminations |
Consolidated | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Crude oil sales | $ | | $ | (1,737 | ) | $ | 290,966 | $ | | $ | | $ | 289,229 | |||||||||||
Natural gas sales | 2,779 | 32,584 | 35,363 | |||||||||||||||||||||
Total Revenues | | 1,042 | 323,550 | | | 324,592 | ||||||||||||||||||
Costs and Expenses |
||||||||||||||||||||||||
Lease operating | (243 | ) | 86,006 | | 85,763 | |||||||||||||||||||
Production taxes | 15 | 1,383 | 1,398 | |||||||||||||||||||||
Gathering and transportation | 5,345 | 5,345 | ||||||||||||||||||||||
Depreciation, depletion and amortization | 99,461 | 755 | 100,216 | |||||||||||||||||||||
Accretion of asset retirement obligations | 7,326 | | 7,326 | |||||||||||||||||||||
General and administrative expense | 1,624 | (205 | ) | 21,534 | 719 | 23,672 | ||||||||||||||||||
Loss (gain) on derivative financial instruments | 1,441 | 1,441 | ||||||||||||||||||||||
Total Costs and Expenses | 1,624 | 1,008 | 221,055 | 1,474 | | 225,161 | ||||||||||||||||||
Operating Income (Loss) | (1,624 | ) | 34 | 102,495 | (1,474 | ) | | 99,431 | ||||||||||||||||
Other Income (Expense) |
||||||||||||||||||||||||
Income (loss) from equity method investees | 41,458 | 108,538 | 45,921 | (197,710 | ) | (1,793 | ) | |||||||||||||||||
Other income (expense) net | 4,723 | 483 | 4,488 | (9,172 | ) | 522 | ||||||||||||||||||
Interest expense | (1 | ) | (28,088 | ) | (1,516 | ) | (80 | ) | (29,685 | ) | ||||||||||||||
Total Other Income (Expense) | 46,180 | 80,933 | (1,516 | ) | 50,329 | (206,882 | ) | (30,956 | ) | |||||||||||||||
Income (Loss) Before Income Taxes | 44,556 | 80,967 | 100,979 | 48,855 | (206,882 | ) | 68,475 | |||||||||||||||||
Income Tax Expense (Benefit) | 1,417 | 33,254 | (9,335 | ) | 25,336 | |||||||||||||||||||
Net Income (Loss) | 43,139 | 47,713 | 100,979 | 58,190 | (206,882 | ) | 43,139 | |||||||||||||||||
Preferred Stock Dividends | 2,873 | 2,873 | ||||||||||||||||||||||
Net Income (Loss) Available for Common Stockholders | $ | 40,266 | $ | 47,713 | $ | 100,979 | $ | 58,190 | $ | (206,882 | ) | $ | 40,266 | |||||||||||
Comprehensive Income (Loss) |
||||||||||||||||||||||||
Net Income (Loss) | 43,139 | 47,713 | 100,979 | 58,190 | (206,882 | ) | 43,139 | |||||||||||||||||
Other Comprehensive Income (Loss) | (19,708 | ) | (19,503 | ) | (205 | ) | 19,708 | (19,708 | ) | |||||||||||||||
Comprehensive Income (Loss) | $ | 23,431 | $ | 28,210 | $ | 100,979 | $ | 57,985 | $ | (187,174 | ) | $ | 23,431 |
37
ENERGY XXI LTD
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended September 30, 2014 | ||||||||||||||||||||||||
EXXI Bermuda Parent |
EGC Issuer |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Reclassifications & Eliminations |
Consolidated | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Cash Flows From Operating Activities |
||||||||||||||||||||||||
Net income (loss) | $ | (6,403 | ) | $ | 2,085 | $ | 30,459 | $ | 17,220 | $ | (49,764 | ) | $ | (6,403 | ) | |||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||||||||||||||||
Depreciation, depletion and amortization | 93,190 | 74,483 | (6,407 | ) | 161,266 | |||||||||||||||||||
Deferred income tax expense | 1,260 | (4,177 | ) | (4,252 | ) | (7,169 | ) | |||||||||||||||||
Change in derivative financial instruments |
||||||||||||||||||||||||
Proceeds from sale of derivative instruments | 3,364 | 3,364 | ||||||||||||||||||||||
Other net | (3,409 | ) | (2,529 | ) | (5,938 | ) | ||||||||||||||||||
Accretion of asset retirement obligations | 6,638 | 6,181 | 12,819 | |||||||||||||||||||||
Loss (income) from equity method investees | 2,754 | (46,787 | ) | (2,965 | ) | 46,117 | (881 | ) | ||||||||||||||||
Amortization and write-off of debt issuance costs and other | 3,108 | 2,169 | 5,277 | |||||||||||||||||||||
Stock-based compensation | 1,779 | 1,779 | ||||||||||||||||||||||
Changes in operating assets and liabilities |
||||||||||||||||||||||||
Accounts receivable | (496 | ) | 4,463 | 20,541 | 4,525 | (5,720 | ) | 23,313 | ||||||||||||||||
Prepaid expenses and other current assets | 174 | (2,977 | ) | (141 | ) | 10,606 | (1 | ) | 7,661 | |||||||||||||||
Settlement of asset retirement obligations | (7,717 | ) | (7,190 | ) | (14,907 | ) | ||||||||||||||||||
Accounts payable and accrued liabilities | (4,601 | ) | (12,368 | ) | (25,479 | ) | (99,974 | ) | 166,191 | 23,769 | ||||||||||||||
Net Cash Provided by (Used in) Operating Activities | (2,425 | ) | (57,637 | ) | 117,491 | (3,895 | ) | 150,416 | 203,950 | |||||||||||||||
Cash Flows from Investing Activities |
||||||||||||||||||||||||
Acquisitions, net of cash acquired | (287 | ) | (287 | ) | ||||||||||||||||||||
Capital expenditures | (124,151 | ) | (155,859 | ) | (280,010 | ) | ||||||||||||||||||
Change in equity method investments | 154,282 | (153,000 | ) | 1,282 | ||||||||||||||||||||
Proceeds from the sale of properties | 6,947 | 6,947 | ||||||||||||||||||||||
Other | (80 | ) | (80 | ) | ||||||||||||||||||||
Net Cash (Used in) Investing Activities | | | (117,491 | ) | (1,657 | ) | (153,000 | ) | (272,148 | ) | ||||||||||||||
Cash Flows from Financing Activities |
||||||||||||||||||||||||
Proceeds from the issuance of common and preferred stock, net of offering costs | 2,217 | 2,217 | ||||||||||||||||||||||
Dividends to shareholders common | (11,264 | ) | (11,264 | ) | ||||||||||||||||||||
Dividends to shareholders preferred | (2,872 | ) | (2,872 | ) | ||||||||||||||||||||
Proceeds from long-term debt | 510,120 | 510,120 | ||||||||||||||||||||||
Payments on long-term debt | (453,937 | ) | (105 | ) | (454,042 | ) | ||||||||||||||||||
Debt issuance costs | (2,250 | ) | (2,250 | ) | ||||||||||||||||||||
Other | (19 | ) | 2 | (17 | ) | |||||||||||||||||||
Net Cash Provided by (Used in) Financing Activities | (11,919 | ) | 53,914 | | (105 | ) | 2 | 41,892 | ||||||||||||||||
Net Decrease in Cash and Cash Equivalents | (14,344 | ) | (3,723 | ) | | (5,657 | ) | (2,582 | ) | (26,306 | ) | |||||||||||||
Cash and Cash Equivalents, beginning of period | 135,703 | 3,723 | | 6,380 | | 145,806 | ||||||||||||||||||
Cash and Cash Equivalents, end of period | $ | 121,359 | $ | | $ | | $ | 723 | $ | (2,582 | ) | $ | 119,500 |
38
ENERGY XXI LTD
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended September 30, 2013 | ||||||||||||||||||||||||
EXXI Bermuda Parent |
EGC Issuer |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Reclassifications & Eliminations |
Consolidated | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Cash Flows From Operating Activities |
||||||||||||||||||||||||
Net income (loss) | $ | 43,139 | $ | 47,713 | $ | 100,979 | $ | 58,190 | $ | (206,882 | ) | $ | 43,139 | |||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||||||||||||||||
Depreciation, depletion and amortization | 99,461 | 755 | 100,216 | |||||||||||||||||||||
Deferred income tax expense | (1,439 | ) | 33,254 | (9,335 | ) | 22,480 | ||||||||||||||||||
Change in derivative financial instruments |
||||||||||||||||||||||||
Other net | (2,357 | ) | (2,357 | ) | ||||||||||||||||||||
Accretion of asset retirement obligations | 7,326 | 7,326 | ||||||||||||||||||||||
Loss (income) from equity method investees | (41,458 | ) | (108,538 | ) | (45,921 | ) | 197,710 | 1,793 | ||||||||||||||||
Amortization and write-off of debt issuance costs and other | 1,445 | 10 | 1,455 | |||||||||||||||||||||
Stock-based compensation | 3,532 | 3,532 | ||||||||||||||||||||||
Changes in operating assets and liabilities |
||||||||||||||||||||||||
Accounts receivable | 5,699 | (2,356 | ) | (1,049 | ) | (4,425 | ) | (2,131 | ) | |||||||||||||||
Prepaid expenses and other current assets | 158 | (4,070 | ) | (41 | ) | (2,318 | ) | 1 | (6,270 | ) | ||||||||||||||
Settlement of asset retirement obligations | (18,063 | ) | (18,063 | ) | ||||||||||||||||||||
Accounts payable and accrued liabilities | 5,850 | (152,054 | ) | 20,389 | 75,884 | 6,710 | (43,221 | ) | ||||||||||||||||
Net Cash Provided by (Used in) Operating Activities | 9,782 | (178,908 | ) | 207,695 | 76,216 | (6,886 | ) | 107,899 | ||||||||||||||||
Cash Flows from Investing Activities |
||||||||||||||||||||||||
Acquisitions, net of cash acquired | (15 | ) | (15 | ) | ||||||||||||||||||||
Capital expenditures | 12,059 | (209,428 | ) | (989 | ) | (198,358 | ) | |||||||||||||||||
Change in equity method investments | (16,694 | ) | (16,694 | ) | ||||||||||||||||||||
Intercompany investment | (1,000 | ) | 1,000 | | ||||||||||||||||||||
Proceeds from the sale of properties | 1,748 | 1,748 | ||||||||||||||||||||||
Other | (51 | ) | (51 | ) | ||||||||||||||||||||
Net Cash Used in (Provided by) Investing Activities | (1,000 | ) | 12,059 | (207,695 | ) | (17,734 | ) | 1,000 | (213,370 | ) | ||||||||||||||
Cash Flows from Financing Activities |
||||||||||||||||||||||||
Proceeds from the issuance of common and preferred stock, net of offering costs | 3,267 | 3,267 | ||||||||||||||||||||||
Repurchase of company common stock | (35,210 | ) | (35,210 | ) | ||||||||||||||||||||
Dividends to shareholders common | (9,096 | ) | (9,096 | ) | ||||||||||||||||||||
Dividends to shareholders preferred | (2,873 | ) | (2,873 | ) | ||||||||||||||||||||
Proceeds from long-term debt | 1,040,697 | 1,040,697 | ||||||||||||||||||||||
Payments on long-term debt | (865,128 | ) | (103 | ) | (865,231 | ) | ||||||||||||||||||
Debt issuance costs | (8,720 | ) | (8,720 | ) | ||||||||||||||||||||
Other | (1 | ) | (1 | ) | ||||||||||||||||||||
Net Cash Provided by (Used in) Financing Activities | (8,702 | ) | 166,849 | | (35,314 | ) | | 122,833 | ||||||||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 80 | | | 23,168 | (5,886 | ) | 17,362 | |||||||||||||||||
Cash and Cash Equivalents, beginning of period | 1,334 | | | 137 | (1,471 | ) | | |||||||||||||||||
Cash and Cash Equivalents, end of period | $ | 1,414 | $ | | $ | | $ | 23,305 | $ | (7,357 | ) | $ | 17,362 |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Energy XXI Ltd has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ENERGY XXI LTD | ||
By: /S/ BRUCE W. BUSMIRE | ||
By: /S/ HUGH A. MENOWN |
Date: December 23, 2014
40
EXHIBIT INDEX
Exhibit Number |
Exhibit Title | Incorporated by Reference to the Following | ||
3.1 | Altered Memorandum of Association of Energy XXI Ltd | 3.1 to the Companys Form 8-K filed on November 9, 2011 | ||
3.2 | Bye-Laws of Energy XXI Ltd | 3.2 to the Companys Form 8-K filed on November 9, 2011 | ||
10.1 | Ninth Amendment to Second Amended and Restated First Lien Credit Agreement, dated as of September 5, 2014. | 10.1 to the Companys Form 8-K filed on September 9, 2014 | ||
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a 14 of the Securities and Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | ||
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a 14 of the Securities and Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | ||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | ||
101.INS | XBRL Instance Document | Furnished herewith | ||
101.SCH | XBRL Schema Document | Furnished herewith | ||
101.CAL | XBRL Calculation Linkbase Document | Furnished herewith | ||
101.DEF | XBRL Definition Linkbase Document | Furnished herewith | ||
101.LAB | XBRL Label Linkbase Document | Furnished herewith | ||
101.PRE | XBRL Presentation Linkbase Document | Furnished herewith |
41