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EX-32 - EXHIBIT 32 - RIDGEWOOD ENERGY S FUND LLCex32.htm
EX-31.2 - EXHIBIT 31.2 - RIDGEWOOD ENERGY S FUND LLCex31_2.htm
EX-31.1 - EXHIBIT 31.1 - RIDGEWOOD ENERGY S FUND LLCex31_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended September 30, 2015
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 No. 000-52576

Ridgewood Energy S Fund, LLC
(Exact name of registrant as specified in its charter)

 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
20-4077773
(I.R.S. Employer
Identification No.)
 

14 Philips Parkway, Montvale, NJ  07645
(Address of principal executive offices) (Zip code)

(800) 942-5550
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
  Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 x     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.

Large accelerated filer
  o
Accelerated filer
  o
Non-accelerated filer
(Do not check if a smaller reporting company)
  o
Smaller reporting company
 
  x

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

As of November 3, 2015 the Fund had 839.5395 shares of LLC Membership Interest outstanding.



 
 

 
 

 
PAGE
PART I - FINANCIAL INFORMATION
 
   1
 
 
   1
 
 
   2
 
 
   3
 
 
   4
  10
  15
  15
 
 
PART II - OTHER INFORMATION
 
  16
  16
  16
  16
  16
  16
  17
 
 
 
 
  18
 

 PART I – FINANCIAL INFORMATION


RIDGEWOOD ENERGY S FUND, LLC
(in thousands, except share data)

   
September 30, 2015
   
December 31, 2014
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 6,549     $ 8,266  
Production receivable
    234       702  
Other current assets
    -       94  
Total current assets
    6,783       9,062  
Salvage fund
    2,059       2,058  
Other assets
    426       568  
Oil and gas properties:
               
Proved properties
    61,089       58,546  
Less:  accumulated depletion and amortization
    (48,079 )     (46,272 )
Total oil and gas properties, net
    13,010       12,274  
Total assets
  $ 22,278     $ 23,962  
                 
Liabilities and Members' Capital
               
Current liabilities:
               
Due to operators
  $ 1,979     $ 1,605  
Accrued expenses
    311       34  
Total current liabilities
    2,290       1,639  
Long-term borrowings
    5,650       4,300  
Asset retirement obligations
    1,277       1,850  
Other liabilities
    308       184  
Total liabilities
    9,525       7,973  
Commitments and contingencies (Note 4)
               
Members' capital:
               
Manager:
               
Distributions
    (6,478 )     (6,378 )
Retained earnings
    5,390       5,518  
Manager's total
    (1,088 )     (860 )
Shareholders:
               
Capital contributions (1,000 shares authorized;
               
839.5395 issued and outstanding)
    124,401       124,401  
Syndication costs
    (14,236 )     (14,236 )
Distributions
    (38,806 )     (38,242 )
Accumulated deficit
    (57,518 )     (55,074 )
Shareholders' total
    13,841       16,849  
Total members' capital
    12,753       15,989  
Total liabilities and members' capital
  $ 22,278     $ 23,962  
 
The accompanying notes are an integral part of these unaudited condensed financial statements.
 
 
RIDGEWOOD ENERGY S FUND, LLC
(in thousands, except per share data)

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Revenue
                       
Oil and gas revenue
  $ 337     $ 2,494     $ 1,909     $ 8,663  
                                 
Expenses
                               
Depletion and amortization
    56       540       597       2,049  
Impairment of oil and gas properties
    1,210       -       1,210       -  
Management fees to affiliate (Note 2)
    438       438       1,314       1,313  
Operating expenses
    314       431       1,255       876  
General and administrative expenses
    42       37       112       108  
Total expenses
    2,060       1,446       4,488       4,346  
(Loss) income from operations
    (1,723 )     1,048       (2,579 )     4,317  
Interest income
    2       3       7       8  
Net (loss) income
  $ (1,721 )   $ 1,051     $ (2,572 )   $ 4,325  
                                 
Manager Interest
                               
Net (loss) income
  $ (81 )   $ 234     $ (128 )   $ 937  
                                 
Shareholder Interest
                               
Net (loss) income
  $ (1,640 )   $ 817     $ (2,444 )   $ 3,388  
Net (loss) income per share
  $ (1,954 )   $ 974     $ (2,912 )   $ 4,035  
 
The accompanying notes are an integral part of these unaudited condensed financial statements.

 
RIDGEWOOD ENERGY S FUND, LLC
(in thousands)

   
Nine months ended September 30,
 
   
2015
   
2014
 
Cash flows from operating activities
           
Net (loss) income
  $ (2,572 )   $ 4,325  
Adjustments to reconcile net (loss) income to net cash
               
   provided by operating activities:
               
Depletion and amortization
    597       2,049  
Impairment of oil and gas properties
    1,210       -  
Accretion expense
    35       -  
Changes in assets and liabilities:
               
Decrease in production receivable
    468       229  
Decrease (increase) in other current assets
    94       (119 )
Increase (decrease) in due to operators
    160       (164 )
Increase (decrease) in accrued expenses
    65       (7 )
Net cash provided by operating activities
    57       6,313  
                 
Cash flows from investing activities
               
Capital expenditures for oil and gas properties
    (2,459 )     (4,004 )
Investments in salvage fund
    (1 )     (299 )
Net cash used in investing activities
    (2,460 )     (4,303 )
                 
Cash flows from financing activities
               
Long-term borrowings
    1,350       3,000  
Distributions
    (664 )     (4,436 )
Net cash provided by (used in) financing activities
    686       (1,436 )
                 
Net (decrease) increase in cash and cash equivalents
    (1,717 )     574  
Cash and cash equivalents, beginning of period
    8,266       7,450  
Cash and cash equivalents, end of period
  $ 6,549     $ 8,024  
 
The accompanying notes are an integral part of these unaudited condensed financial statements.
 
 
RIDGEWOOD ENERGY S FUND, LLC

1.           Organization and Summary of Significant Accounting Policies

Organization
The Ridgewood Energy S Fund, LLC (the “Fund”), a Delaware limited liability company, was formed on December 19, 2005 and operates pursuant to a limited liability company agreement (the “LLC Agreement”) dated as of February 1, 2006 by and among Ridgewood Energy Corporation (the “Manager”) and the shareholders of the Fund, which addresses matters such as the authority and voting rights of the Manager and shareholders, capitalization, transferability of membership interests, participation in costs and revenues, distribution of assets and dissolution and winding up.  The Fund was organized to primarily acquire interests in oil and gas properties located in the United States offshore waters of Texas, Louisiana, and Alabama in the Gulf of Mexico.

The Manager has direct and exclusive control over the management of the Fund’s operations. With respect to project investments, the Manager locates potential projects, conducts due diligence, and negotiates and completes the transactions in which the investments are made. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for Fund operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations and the preparation, review and dissemination of tax and other financial information.  In addition, the Manager provides office space, equipment and facilities and other services necessary for Fund operations. The Manager also engages and manages the contractual relations with unaffiliated custodians, depositories, accountants, attorneys, broker-dealers, corporate fiduciaries, insurers, banks and others as required. See Notes 2, 3 and 4.

Basis of Presentation
These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements.  The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results.  These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 2014 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).  The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, property balances, determination of proved reserves, impairments and asset retirement obligations. Actual results may differ from those estimates.

Fair Value Measurements
The fair value measurement guidance provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consists of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority. Cash and cash equivalents approximate fair value based on Level 1 inputs.

Cash and Cash Equivalents
All highly liquid investments with maturities, when purchased, of three months or less, are considered cash and cash equivalents. At times, deposits may be in excess of federally insured limits, which are $250 thousand per insured financial institution.  At September 30, 2015, the Fund’s bank balances were maintained in uninsured bank accounts at Wells Fargo Bank, N.A.
 

Salvage Fund
The Fund deposits in a separate interest-bearing account, or salvage fund, money to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives in accordance with applicable federal and state laws and regulations.  Interest earned on the account will become part of the salvage fund.  There are no restrictions on withdrawals from the salvage fund.

Debt Discounts and Deferred Financing Costs
Debt discounts and deferred financing costs include lender fees and other costs of acquiring debt (see Note 3. “Credit Agreement – Beta Project Financing”) such as the conveyance of override royalty interests related to the Beta Project. These costs are deferred and amortized over the term of the debt period or until the redemption of the debt and are included on the balance sheet within “Other assets”.  At September 30, 2015 and December 31, 2014, $0.4 million and $0.6 million, respectively, of debt discounts and deferred financing costs were unamortized. Amortization expense was $47 thousand for each of the three months ended September 30, 2015 and 2014.  Amortization expense was $0.1 million for each of the nine months ended September 30, 2015 and 2014.  During the period of asset construction, amortization expense, as a component of interest, is capitalized and included on the balance sheet within “Oil and gas properties”.

Oil and Gas Properties
The Fund invests in oil and gas properties, which are operated by unaffiliated entities that are responsible for drilling, administering and producing activities pursuant to the terms of the applicable operating agreements with working interest owners. The Fund’s portion of exploration, drilling, operating and capital equipment expenditures is billed by operators.

Exploration, development and acquisition costs are accounted for using the successful efforts method. Costs of acquiring unproved and proved oil and natural gas leasehold acreage, including lease bonuses, brokers’ fees and other related costs are capitalized. Costs of drilling and equipping productive wells and related production facilities are capitalized. Exploratory costs are capitalized pending determination of whether proved reserves have been found.  If proved commercial reserves are not found, exploratory costs are expensed as dry-hole costs.  At times, the Fund receives adjustments to certain wells from their respective operators upon review and audit of the wells’ costs.  Interest costs related to the Credit Agreement (see Note 3. “Credit Agreement – Beta Project Financing”) are capitalized during the period of asset construction.  Annual lease rentals and exploration expenses are expensed as incurred.  All costs related to production activity and workover efforts are expensed as incurred.  Insurance expense related to operating wells has been reclassified from “General and administrative expense” in prior year to “Operating expense” to correct prior period presentation.

Once a well has been determined to be fully depleted or upon the sale, retirement or abandonment of a property, the cost and related accumulated depletion and amortization, if any, is eliminated from the property accounts, and the resultant gain or loss is recognized.

At September 30, 2015 and December 31, 2014, amounts recorded in due to operators totaling $1.1 million and $0.9 million, respectively, related to capital expenditures for oil and gas properties.

Advances to Operators for Working Interests and Expenditures
The Fund may be required to advance its share of the estimated succeeding month’s expenditures to the operator for its oil and gas properties. The Fund accounts for such payments as advances to operators for working interests and expenditures.  As the costs are incurred, the advances are reclassified to proved properties.

Asset Retirement Obligations
For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. When a project reaches drilling depth and is determined to be either proved or dry, an asset retirement obligation is incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs.  The following table presents changes in asset retirement obligations for the nine months ended September 30, 2015 and the year ended December 31, 2014.
 
 
5

 
   
2015
   
2014
 
   
(in thousands)
 
Balance, beginning of period
  $ 1,850     $ 1,815  
Accretion expense
    35       35  
Revisions in estimated cash flows
    (608 )     -  
Balance, end of period
  $ 1,277     $ 1,850  

As indicated above, the Fund maintains a salvage fund to provide for the funding of future asset retirement obligations.
 
Syndication Costs
Syndication costs are direct costs incurred by the Fund in connection with the offering of the Fund’s shares, including professional fees, selling expenses and administrative costs payable to the Manager, an affiliate of the Manager and unaffiliated broker-dealers, which are reflected on the Fund’s balance sheet as a reduction of shareholders’ capital.

Revenue Recognition and Imbalances
Oil and gas revenues are recognized when oil and gas is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. The Fund uses the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which the Fund is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the properties’ estimated remaining reserves net to the Fund will not be sufficient to enable the underproduced owner to recoup its entitled share through production. The Fund’s recorded liability, if any, would be reflected in other liabilities. No receivables are recorded for those wells where the Fund has taken less than its share of production.

Impairment of Long-Lived Assets
The Fund reviews the value of its oil and gas properties whenever management determines that events and circumstances indicate that the recorded carrying value of properties may not be recoverable. Impairments of proved properties are determined by comparing future net undiscounted cash flows to the net book value at the time of the review. If the net book value exceeds the future net undiscounted cash flows, the carrying value of the property is written down to fair value, which is determined using net discounted future cash flows from the property. The Fund provides for impairments on unproved properties when it determines that the property will not be developed or a permanent impairment in value has occurred. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. Given the volatility of oil and natural gas prices, it is reasonably possible that the Fund’s estimate of discounted future net cash flows from proved oil and natural gas reserves could change in the near term. If oil and natural gas prices decline significantly, even if only for a short period of time, it is possible that write-downs of oil and gas properties could occur.

During third quarter 2015, South Marsh Island 111 and West Delta 68 produced at nominal rates and are nearing the end of their productive lives.  Accordingly, during the three and nine months ended September 30, 2015, the Fund recorded an impairment of oil and gas properties totaling $1.2 million, representing the remaining net book values of the wells at the date of impairment.  There were no impairments of oil and gas properties during the three and nine months ended September 30, 2014.

Depletion and Amortization
Depletion and amortization of the cost of proved oil and gas properties are calculated using the units-of-production method. Proved developed reserves are used as the base for depleting capitalized costs associated with successful exploratory well costs, development costs and related facilities. The sum of proved developed and proved undeveloped reserves is used as the base for depleting or amortizing leasehold acquisition costs.
 

Income Taxes
No provision is made for income taxes in the financial statements. The Fund is a limited liability company, and as such, the Fund’s income or loss is passed through and included in the tax returns of the Fund’s shareholders.

Income and Expense Allocation
Profits and losses are allocated to shareholders and the Manager in accordance with the LLC Agreement.

Distributions
Distributions to shareholders are allocated in proportion to the number of shares held. The Manager determines whether available cash from operations, as defined in the LLC Agreement, will be distributed. Such distributions are allocated 85% to the shareholders and 15% to the Manager, as required by the LLC Agreement.

Available cash from dispositions, as defined in the LLC Agreement, will be paid 99% to shareholders and 1% to the Manager until the shareholders have received total distributions equal to their capital contributions. After shareholders have received distributions equal to their capital contributions, 85% of available cash from dispositions will be distributed to shareholders and 15% to the Manager.

Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to the presentation of debt issuance costs in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts, rather than as an asset.  Amortization of debt issuance costs will continue to be reported as interest expense.  Debt issuance costs related to revolving credit arrangements, however, will continue to be presented as an asset and amortized ratably over the term of the arrangement.  In August 2015, the FASB issued accounting guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements which clarifies that companies may continue to present unamortized debt issuance costs associated with line of credit arrangements as an asset.  These pronouncements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.  The Fund will not early adopt this new guidance and it will not have a significant impact on the Fund’s financial statements.
 
2.           Related Parties

Pursuant to the terms of the LLC Agreement, the Manager renders management, administrative and advisory services to the Fund.  For such services, the Manager is paid an annual management fee, payable monthly, of 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund.  Management fees for each of the three and nine months ended September 30, 2015 and 2014 were $0.4 million and $1.3 million, respectively.

The Manager is entitled to receive a 15% interest in cash distributions from operations made by the Fund.  Distributions paid to the Manager for the three and nine months ended September 30, 2015 were $33 thousand and $0.1 million, respectively.  Distributions paid to the Manager for the three and nine months ended September 30, 2014 were $0.3 million and $0.7 million, respectively.

At times, short-term payables and receivables, which do not bear interest, arise from transactions with affiliates in the ordinary course of business.

None of the amounts paid to the Manager have been derived as a result of arm’s length negotiations.

The Fund has working interest ownership in certain projects to acquire and develop oil and natural gas projects with other entities that are likewise managed by the Manager.

3.           Credit Agreement – Beta Project Financing

In November 2012, the Fund entered into a credit agreement (the “Credit Agreement”) with Rahr Energy Investments LLC, as Administrative Agent and Lender (and any other banks or financial institutions that may in the future become a party thereto, collectively “Lenders”) that provides for an aggregate loan commitment to the Fund of approximately $12.8 million (“Loan”), to provide capital toward the funding of the Fund’s share of development costs on the Beta Project.
 

The Loan bears interest at 8% compounded annually and accrues only on Loan proceeds as they are drawn.  Principal and interest will not be payable until such time that initial production has commenced for the Beta Project, which is currently expected in 2016. At that time, if certain revenue production levels are met, principal and interest will be repaid at a monthly rate of 1.25% of the Fund’s total principal outstanding at the date the Beta Project commences production for the first seven months of production, and a monthly rate of 4.5% of the Fund’s total principal outstanding at the date the Beta Project commences production thereafter until the Loan is repaid in full, in no event later than December 31, 2020.  The Loan may be prepaid by the Fund without premium or penalty.  As of September 30, 2015 and December 31, 2014, the Fund had borrowings of $5.7 million and $4.3 million, respectively, under the Credit Agreement.  As of September 30, 2015 and December 31, 2014, interest costs of $0.5 million and $0.2 million, respectively, were capitalized and included on the balance sheet within “Oil and gas properties”.  Such amounts are accrued on the balance sheet within “Accrued expenses” and “Other liabilities” at September 30, 2015 and “Other liabilities” at December 31, 2014.

As additional consideration to the Lenders, the Fund has agreed to convey an overriding royalty interest (“ORRI”) in its working interest in the Beta Project to the Lenders.  The Credit Agreement contains customary covenants, for which the Fund believes it was in compliance at September 30, 2015 and December 31, 2014.
 
4.           Commitments and Contingencies

Capital Commitments
The Fund has entered into multiple agreements for the acquisition, drilling and development of its oil and gas properties. The estimated capital expenditures associated with these agreements vary depending on the stage of development on a property-by-property basis. Currently, the Fund has one non-producing property, the Beta Project, for which additional development costs must be incurred in order to commence production. The Fund currently anticipates such development will include a four-well development with related platform and pipeline infrastructure.

As of September 30, 2015, the Fund’s estimated capital commitments related to its oil and gas properties were $10.9 million (which include asset retirement obligations for the Fund’s projects of $2.4 million and projected interest costs of $0.6 million for the Beta Project), of which $5.3 million is expected to be spent during the next twelve months. These expected capital commitments exceed available working capital and salvage fund by $4.3 million at September 30, 2015.  The Fund has entered into a credit agreement to provide capital for the Beta Project.  See Note 3. “Credit Agreement – Beta Project Financing” for additional information.
 
Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations and borrowings to be sufficient to cover its commitments, as well as ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision.

Environmental Considerations
The exploration for and development of oil and natural gas involves the extraction, production and transportation of materials which, under certain conditions, can be hazardous or cause environmental pollution problems.  The Manager and operators of the Fund’s properties are continually taking action they believe appropriate to satisfy applicable federal, state and local environmental regulations and do not currently anticipate that compliance with federal, state and local environmental regulations will have a material adverse effect upon capital expenditures, results of operations or the competitive position of the Fund in the oil and gas industry.  However, due to the significant public and governmental interest in environmental matters related to those activities, the Manager cannot predict the effects of possible future legislation, rule changes, or governmental or private claims.  At September 30, 2015 and December 31, 2014, there were no known environmental contingencies that required the Fund to record a liability.

During the past several years, the United States Congress, as well as certain regulatory agencies with jurisdiction over the Fund’s business, have considered or proposed legislation or regulation relating to the upstream oil and gas industry both onshore and offshore.  If any such proposals were to be enacted or adopted they could potentially materially impact the Fund’s operations.  It is not possible at this time to predict whether such legislation or regulation, if proposed, will be adopted as initially written, if at all, or how legislation or new regulation that may be adopted would impact the Fund’s business. Any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which could have a material adverse effect on the Fund’s operating results and cash flows.
 
8

 
Insurance Coverage
The Fund is subject to all risks inherent in the exploration for and development of oil and natural gas. Insurance coverage as is customary for entities engaged in similar operations is maintained, but losses may occur from uninsurable risks or amounts in excess of existing insurance coverage.  The occurrence of an event that is not insured or not fully insured could have a material adverse impact upon earnings and financial position.  Moreover, insurance is obtained as a package covering all of the funds managed by the Manager.  Claims made by other funds managed by the Manager can reduce or eliminate insurance for the Fund.
 

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the documents Ridgewood Energy S Fund, LLC (the “Fund”) has incorporated by reference into this Quarterly Report, other than purely historical information, including estimates, projections, statements relating to the Fund’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995 that are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. You are therefore cautioned against relying on any such forward-looking statements. Forward-looking statements can generally be identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will,” “will likely result,” and similar expressions and references to future periods.  Examples of events that could cause actual results to differ materially from historical results or those anticipated include weather conditions, such as hurricanes, changes in market conditions affecting the pricing and production of oil and natural gas, the cost and availability of equipment, and changes in governmental regulations.  Examples of forward-looking statements made herein include statements regarding projects, investments, insurance, capital expenditures and liquidity.  Forward-looking statements made in this document speak only as of the date on which they are made.  The Fund undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Critical Accounting Policies and Estimates

The discussion and analysis of the Fund’s financial condition and results of operations are based upon the Fund’s financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  In preparing these financial statements, the Fund is required to make certain estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of the Fund’s assets and liabilities, including the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of its revenues and expenses during the periods presented.  The Fund evaluates these estimates and assumptions on an ongoing basis. The Fund bases its estimates and assumptions on historical experience and on various other factors that the Fund believes to be reasonable at the time the estimates and assumptions are made. However, future events and actual results may differ from these estimates and assumptions and such differences may have a material impact on the results of operations, financial position or cash flows. See “Notes to Unaudited Condensed Financial Statements” in Part I of this Quarterly Report for a presentation of the Fund’s significant accounting policies. No changes have been made to the Fund’s critical accounting policies and estimates disclosed in its 2014 Annual Report on Form 10-K.

Overview of the Fund’s Business

The Fund is a Delaware limited liability company formed on December 19, 2005 to primarily acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico.  The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of exploratory or development oil and natural gas projects.  However, the Fund is not required to make distributions to shareholders except as provided in the Fund’s limited liability company agreement (the “LLC Agreement”).

Ridgewood Energy Corporation (the “Manager” or “Ridgewood Energy”) is the Manager, and as such, has direct and exclusive control over the management of the Fund’s operations.  The Manager performs certain duties on the Fund’s behalf including the evaluation of projects, including ongoing management, administrative and advisory services.  For these services, the Manager receives an annual management fee equal to 2.5% of capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, payable monthly.  The Fund does not currently, nor is there any plan to, operate any project in which the Fund participates.  The Manager enters into operating agreements with third-party operators for the management of all exploration, development and producing operations, as appropriate.  The Manager also participates in distributions.
 

Revenues are subject to market pricing for oil and natural gas, which has been volatile, and is likely to continue to be volatile in the future.  This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence. Therefore, it is impossible to predict the future price of oil and natural gas with any certainty. Low commodity prices could have an adverse effect on the Fund’s future profitability.  Factors affecting market pricing for oil and natural gas include:
 
 
·
weather conditions;
 
·
economic conditions, including demand for petroleum-based products;
 
·
actions by OPEC, the Organization of Petroleum Exporting Countries;
 
·
political instability in the Middle East and other major oil and gas producing regions;
 
·
governmental regulations, both domestic and foreign;
 
·
domestic and foreign tax policy;
 
·
the pace adopted by foreign governments for the exploration, development, and production of their national reserves;
 
·
the price of foreign imports of oil and gas;
 
·
the cost of exploring for, producing and delivering oil and gas;
 
·
the discovery rate of new oil and gas reserves;
 
·
the rate of decline of existing and new oil and gas reserves;
 
·
available pipeline and other oil and gas transportation capacity;
 
·
the ability of oil and gas companies to raise capital;
 
·
the overall supply and demand for oil and gas; and
 
·
the availability of alternate fuel sources.
 
Business Update
 
Information regarding the Fund’s current projects, all of which are located in the offshore waters of the Gulf of Mexico, is provided in the following table.  The budget for each project is inclusive of estimated asset retirement obligations.

         
Total Spent
   
Total
   
   
Working
   
through
   
Fund
   
Project
 
Interest
   
September 30, 2015
   
Budget
 
Status
(in thousands)
Non-producing Properties
                   
Beta Project
  2.5 %   $ 13,405     $ 22,939  
Well deemed to be a discovery in 2012. Completion efforts are ongoing and production is expected to commence in 2016.
Producing Properties
                       
Main Pass 275
  30.0 %   $ 5,768     $ 5,976  
Production commenced in 2007.  Well was shut-in from June 2015 through August 2015 due to repairs and maintenance.  Recompletion is planned for 2016.
South Marsh Island 111
  22.5 %   $ 7,092     $ 7,669  
Production commenced in 2009.  Well is currently producing at nominal rates and nearing the end of its productive life.  Accordingly, the Fund has fully impaired the net book value of the well as of September 30, 2015.
West Cameron 75
  20.0 %   $ 25,112     $ 25,266  
Production commenced in 2007.
West Delta 68
  22.5 %   $ 5,463     $ 5,849  
Production commenced in 2008.  Well is currently producing at nominal rates and nearing the end of its productive life.  Accordingly, the Fund has fully impaired the net book value of the well as of September 30, 2015.


Results of Operations

The following table summarizes the Fund’s results of operations for the three and nine months ended September 30, 2015 and 2014, and should be read in conjunction with the Fund’s financial statements and notes thereto included within Item 1.  “Financial Statements” in Part I in this Quarterly Report.

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Revenue
                       
Oil and gas revenue
  $ 337     $ 2,494     $ 1,909     $ 8,663  
                                 
Expenses
                               
Depletion and amortization
    56       540       597       2,049  
Impairment of oil and gas properties
    1,210       -       1,210       -  
Management fees to affiliate
    438       438       1,314       1,313  
Operating expenses
    314       431       1,255       876  
General and administrative expenses
    42       37       112       108  
Total expenses
    2,060       1,446       4,488       4,346  
(Loss) income from operations
    (1,723 )     1,048       (2,579 )     4,317  
Interest income
    2       3       7       8  
Net (loss) income
  $ (1,721 )   $ 1,051     $ (2,572 )   $ 4,325  

Overview.  The following table provides information related to the Fund’s oil and gas production and oil and gas revenue during the three and nine months ended September 30, 2015 and 2014.  Natural gas liquid (“NGL”) sales are included within gas sales.
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Number of wells producing
    4       4       4       4  
Total number of production days
    256       328       936       956  
Oil sales (in thousands of barrels)
    1       5       5       19  
Average oil price per barrel
  $ 43     $ 94     $ 47     $ 98  
Gas sales (in thousands of mcfs)
    125       473       664       1,554  
Average gas price per mcf
  $ 2.33     $ 3.78     $ 2.41     $ 4.36  
 
The total number of production days was impacted by Main Pass 275, which was shut-in from June 2015 through August 2015 and by West Delta 68, which underwent a recompletion during first quarter 2014.  The decreases in sales volumes were primarily attributable to natural declines in production.  See additional discussion in “Business Update” section above.

Oil and Gas Revenue.  Oil and gas revenue for the three months ended September 30, 2015 was $0.3 million, a decrease of $2.2 million from the three months ended September 30, 2014.  The decrease was attributable to decreased sales volume totaling $1.8 million coupled with decreased oil and gas prices totaling $0.3 million.  Oil and gas revenue for the nine months ended September 30, 2015 was $1.9 million, a decrease of $6.8 million from the nine months ended September 30, 2014.  The decrease was attributable to decreased sales volume totaling $5.3 million coupled with decreased oil and gas prices totaling $1.5 million.  See “Overview” above for additional information.
 
Depletion and Amortization.  Depletion and amortization for the three months ended September 30, 2015 was $0.1 million, a decrease of $0.5 million from the three months ended September 30, 2014.  The decrease resulted from a decrease in production volumes totaling $0.4 million coupled with a decrease in average depletion rates totaling $0.1 million.  Depletion and amortization for the nine months ended September 30, 2015 was $0.6 million, a decrease of $1.5 million from the nine months ended September 30, 2014.  The decrease resulted from a decrease in production volumes totaling $1.2 million coupled with a decrease in average depletion rates totaling $0.3 million.  The decreases in average depletion rates were primarily attributable to decreased production for West Delta 68, which has higher cost reserves.  See “Overview” above for additional information.
 
 
Impairment of Oil and Gas Properties.  During third quarter 2015, South Marsh Island 111 and West Delta 68 produced at nominal rates and are nearing the end of their productive lives.  Accordingly, during the three and nine months ended September 30, 2015, the Fund recorded an impairment of oil and gas properties totaling $1.2 million, representing the remaining net book values of the wells at the date of impairment.  There were no impairments of oil and gas properties during the three and nine months ended September 30, 2014.
 
Management Fees to Affiliate.  Management fees for each of the three months ended September 30, 2015 and 2014 were $0.4 million.  Management fees for each of the nine months ended September 30, 2015 and 2014 were $1.3 million.  An annual management fee, totaling 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, is paid monthly to the Manager.
 
Operating Expenses.  Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells, as detailed in the following table.

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Lease operating expense
  $ 247     $ 250     $ 890     $ 681  
Workover expense
    (11 )     131       164       120  
Insurance expense
    74       43       161       56  
Accretion expense
    -       -       35       -  
Other
    4       7       5       19  
    $ 314     $ 431     $ 1,255     $ 876  

Lease operating expense relates to the Fund’s producing properties during each period as outlined above in “Overview”.  The average production cost was $12.22 per barrel of oil equivalent (“BOE”) and $8.39 per BOE during the three and nine months ended September 30, 2015, respectively, compared to $2.98 per BOE and $2.45 BOE during the three and nine months ended September 30, 2014, respectively.  Workover expense represents costs to restore or stimulate production of existing reserves.  Insurance expense represents premiums related to producing well and control of well insurance, which varies depending upon the number of wells producing or drilling.  Insurance expense related to operating wells has been reclassified from “General and administrative expense” in prior year to “Operating expense” to correct prior period presentation.  Accretion expense related to the asset retirement obligations established for the Fund’s proved properties.

General and Administrative Expenses.  General and administrative expenses represent costs specifically identifiable or allocable to the Fund, such as accounting and professional fees and insurance expenses.

Interest Income.  Interest income is comprised of interest earned on cash and cash equivalents and salvage fund.

Capital Resources and Liquidity

Operating Cash Flows
Cash flows provided by operating activities for the nine months ended September 30, 2015 were $0.1 million, related to revenue received of $2.4 million, partially offset by management fees of $1.3 million and operating expenses paid of $1.0 million.

Cash flows provided by operating activities for the nine months ended September 30, 2014 were $6.3 million, related to revenue received of $8.9 million, partially offset by management fees of $1.3 million, operating expenses paid of $1.0 million and general and administrative expenses paid of $0.3 million.
 

Investing Cash Flows
Cash flows used in investing activities for the nine months ended September 30, 2015 were $2.5 million, related to capital expenditures for oil and gas properties.

Cash flows used in investing activities for the nine months ended September 30, 2014 were $4.3 million, related to capital expenditures for oil and gas properties of $4.0 million and investments in salvage fund of $0.3 million.

Financing Cash Flows
Cash flows provided by financing activities for the nine months ended September 30, 2015 were $0.7 million, related to proceeds from long-term borrowings of $1.4 million, partially offset by manager and shareholder distributions totaling $0.7 million.

Cash flows used in financing activities for the nine months ended September 30, 2014 were $1.4 million, related to manager and shareholder distributions totaling $4.4 million, partially offset by proceeds from long-term borrowings of $3.0 million.

Estimated Capital Expenditures

The Fund has entered into multiple agreements for the acquisition, drilling and development of its oil and gas properties. The estimated capital expenditures associated with these agreements vary depending on the stage of development on a property-by-property basis. As of September 30, 2015, the Fund had one non-producing property, the Beta Project, for which additional development costs must be incurred in order to commence production. The Fund currently expects to spend an additional $9.5 million related to the development of this project, which the Fund anticipates will include a four-well development with related platform and pipeline infrastructure.  See “Liquidity Needs” below for additional information.

Capital expenditures for oil and gas properties have been funded with the capital raised by the Fund in its private placement offering, and in certain circumstances, through debt financing. The number of projects in which the Fund could invest was limited, and each unsuccessful project the Fund experienced exhausted its capital and reduced its ability to generate revenue.

Liquidity Needs

The Fund’s primary short-term liquidity needs are to fund its operations and capital expenditures for its oil and gas properties. Such needs are funded utilizing operating income, existing cash on-hand and borrowings.

As of September 30, 2015, the Fund’s estimated capital commitments related to its oil and gas properties were $10.9 million (which include asset retirement obligations for the Fund’s projects of $2.4 million and projected interest costs of $0.6 million for the Beta Project), of which $5.3 million is expected to be spent during the next twelve months. These expected capital commitments exceed available working capital and salvage fund by $4.3 million at September 30, 2015. The Fund has entered into a credit agreement to provide capital for the Beta Project.  See “Credit Agreement” below for additional information.

Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations and borrowings to be sufficient to cover its commitments, as well as ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision.

The Manager is entitled to receive an annual management fee from the Fund regardless of the Fund’s profitability in that year.

Distributions, if any, are funded from available cash from operations, as defined in the LLC Agreement, and the frequency and amount are within the Manager’s discretion. Due to the significant capital required to develop the Beta Project, distributions have been impacted, and will be impacted in the future, by amounts reserved to provide for its ongoing development costs, debt service costs, and funding its estimated asset retirement obligations.
 
 
Credit Agreement
The Fund has entered into a credit agreement (the “Credit Agreement”) with Rahr Energy Investments LLC, as administrative agent and lender (and any other banks or financial institutions that may in the future become a party thereto) that provides for an aggregate loan commitment to the Fund of approximately $12.8 million to provide capital toward the funding of the Fund’s share of development costs on the Beta Project. As of September 30, 2015 and December 31, 2014, the Fund had borrowed $5.7 million and $4.3 million, respectively, under the Credit Agreement.  Principal and interest amounts are contracted to be repaid upon the onset of production of the Beta Project, which is expected in 2016, over a period not to extend beyond December 31, 2020.  See Note 3 of “Notes to Unaudited Condensed Financial Statements” – “Credit Agreement – Beta Project Financing” in Part I of this Quarterly Report for more information regarding the Credit Agreement.
 
Off-Balance Sheet Arrangements

The Fund had no off-balance sheet arrangements at September 30, 2015 and December 31, 2014 and does not anticipate the use of such arrangements in the future.

Contractual Obligations

The Fund enters into participation and joint operating agreements with operators. On behalf of the Fund, an operator enters into various contractual commitments pertaining to exploration, development and production activities. The Fund does not negotiate such contracts. No contractual obligations exist at September 30, 2015 and December 31, 2014, other than those discussed in “Estimated Capital Expenditures” and “Liquidity Needs” – Credit Agreement above.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to the presentation of debt issuance costs in the balance sheet as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts, rather than as an asset.  Amortization of debt issuance costs will continue to be reported as interest expense.  Debt issuance costs related to revolving credit arrangements, however, will continue to be presented as an asset and amortized ratably over the term of the arrangement.  In August 2015, the FASB issued accounting guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements which clarifies that companies may continue to present unamortized debt issuance costs associated with line of credit arrangements as an asset.  These pronouncements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.  The Fund will not early adopt this new guidance and it will not have a significant impact on the Fund’s financial statements.
 

Not required.


In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Fund’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Fund’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective as of September 30, 2015.

There has been no change in the Fund’s internal control over financial reporting that occurred during the three months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
 

PART II – OTHER INFORMATION


None.


Not required.


None.


None.


None.


None.
 

EXHIBIT
NUMBER
TITLE OF EXHIBIT
METHOD OF FILING
     
31.1
Certification of Robert E. Swanson, Chief Executive Officer of
the Fund, pursuant to Exchange Act Rule 13a-14(a)
Filed herewith
     
31.2
Certification of Kathleen P. McSherry, Executive Vice President
and Chief Financial Officer of the Fund, pursuant to Exchange
Act Rule 13a-14(a)
Filed herewith
     
32
Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Robert E. Swanson, Chief Executive Officer of the
Fund and Kathleen P. McSherry, Executive Vice President and
Chief Financial Officer of the Fund
Filed herewith
     
101.INS
XBRL Instance Document
Filed herewith
     
101.SCH
XBRL Taxonomy Extension Schema
Filed herewith
     
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Filed herewith
     
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
     
101.LAB
XBRL Taxonomy Extension Label Linkbase
Filed herewith
     
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Filed herewith

 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
         
RIDGEWOOD ENERGY S FUND, LLC
 
Dated:
November 3, 2015
By:
/s/
 
ROBERT E. SWANSON
     
Name:
 
Robert E. Swanson
     
Title:
 
Chief Executive Officer
         
(Principal Executive Officer)
           
           
Dated:
November 3, 2015
By:
/s/
 
KATHLEEN P. MCSHERRY
     
Name:
 
Kathleen P. McSherry
     
Title:
 
Executive Vice President and Chief Financial Officer
         
(Principal Financial and Accounting Officer)
 
 
18