UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

Form 10-Q



 

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

For the quarterly period ended March 31, 2015
or

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

Commission file number: 001-16179



 

EPL Oil & Gas, Inc.

(Exact name of registrant as specified in its charter)



 

 
Delaware   72-1409562
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 
1021 Main Street, Suite 2626, Houston, Texas   77002
(Address of principal executive offices)   (Zip Code)

(713) 351-3000

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 x (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 x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.Yes x No o

There is no market for the common stock of EPL Oil & Gas, Inc.

 

 


 
 

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TABLE OF CONTENTS

 
  Page
PART I — FINANCIAL INFORMATION
        

Item 1.

Financial Statements:

        
Condensed Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and June 30, 2014     1  
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended March 31, 2015 and 2014     2  
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended March 31, 2015     3  
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2015 and 2014     4  
Notes to Condensed Consolidated Financial Statements (Unaudited)     5  

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    29  

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

    39  

Item 4.

Controls and Procedures

    41  
PART II — OTHER INFORMATION
        

Item 1.

Legal Proceedings

    42  

Item 1A.

Risk Factors

    42  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    44  

Item 3.

Defaults Upon Senior Securities

    44  

Item 4.

Mine Safety Disclosures

    44  

Item 5.

Other Information

    44  

Item 6.

Exhibits

    44  

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this quarterly report on Form 10-Q (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to those summarized below:

our business strategy;
further or sustained declines in the prices we receive for our oil and gas production;
our future financial condition, results of operations, revenues, cash flows and expenses;
our future levels of indebtedness, liquidity, and compliance with debt covenants;
our inability to obtain additional financing necessary to fund our operations, capital expenditures, and to meet our other obligations;
economic slowdowns that can adversely affect consumption of oil and gas by businesses and consumers;
the need to take ceiling test impairments due to lower commodity prices;
hedging activities exposing us to pricing and counterparty risk;
uncertainties in estimating our oil and gas reserves;
replacing our oil and gas reserves;
uncertainties in exploring for and producing oil and gas;
our ability to establish production on our acreage prior to the expiration of related leaseholds;
availability of drilling and production equipment, field service providers and transportation;
disruption of operations and damages due to hurricanes or tropical storms;
availability, cost and adequacy of insurance coverage;
competition in the oil and gas industry;
our inability to retain and attract key personnel;
the effects of government regulation and permitting and other legal requirements;
costs associated with perfecting title for mineral rights in some of our properties; and
estimates of proved reserve quantities and net present values of those reserves.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part I, “Item 1A. Risk Factors” in our Transition Report on Form 10-K for the period ended June 30, 2014 (the “2014 Transition Report”) and Part II, “Item 1A. Risk Factors” in this Quarterly Report.

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Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

   
  March 31,
2015
  June 30,
2014
     (Unaudited)  
ASSETS
                 
Current assets:
                 
Cash and cash equivalents   $ 95     $ 5,601  
Trade accounts receivable – net     53,992       72,301  
Derivative financial instruments     2,906        
Deferred tax asset     16,760       24,587  
Prepaid expenses     6,135       26,521  
Total current assets     79,888       129,010  
Property and equipment, under the full cost method of accounting, including $679.1 million and $908.5 million of unevaluated properties not being amortized at March 31, 2015 and June 30, 2014,
respectively
    2,053,534       3,205,187  
Goodwill           329,293  
Restricted cash     6,024       6,023  
Other assets and debt issuance costs, net of accumulated amortization     1,068       317  
Total assets   $ 2,140,514     $ 3,669,830  
LIABILITIES AND STOCKHOLDER’S EQUITY
                 
Current liabilities:
                 
Accounts payable   $ 30,398     $ 92,981  
Due to EGC     182,792       4,960  
Accrued liabilities     72,397       161,518  
Asset retirement obligations     39,831       39,831  
Derivative financial instruments           26,440  
Current maturities of long-term debt     3,176        
Total current liabilities     328,594       325,730  
Long-term debt, less current maturities     692,855       1,025,566  
Intercompany promissory note     325,000        
Asset retirement obligations     214,355       232,864  
Deferred tax liabilities     49,308       483,798  
Derivative financial instruments           2,140  
Other           6  
Total liabilities     1,610,112       2,070,104  
Commitments and contingencies (Note 12)
                 
Stockholder’s equity:
                 
Preferred stock, par value $0.001 per share. Authorized 1,000,000 shares; no shares issued and outstanding at March 31, 2015 and
June 30, 2014
           
Common stock, par value $0.001 per share. Authorized 75,000,000 shares; 1,000 shares issued and outstanding at March 31, 2015 and
June 30, 2014
           
Additional paid-in capital     1,599,341       1,599,341  
Accumulated other comprehensive income (loss)     3,790       (6,252 ) 
Retained earnings (accumulated deficit)     (1,072,729 )      6,637  
Total stockholder’s equity     530,402       1,599,726  
Total liabilities and stockholder’s equity   $ 2,140,514     $ 3,669,830  

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)

       
  SUCCESSOR COMPANY   PREDECESSOR COMPANY
     Three Months
Ended
March 31,
2015
  Nine Months
Ended March 31,
2015
  Three Months
Ended
March 31,
2014
  Nine Months
Ended
March 31,
2014
Revenue:
                                   
Oil and natural gas   $ 87,253     $ 417,043     $ 158,470     $ 483,229  
Other           932       1,021       2,864  
Total revenue     87,253       417,975       159,491       486,093  
Costs and expenses:
                                   
Lease operating     49,571       161,175       41,734       123,203  
Transportation     543       2,317       900       3,125  
Exploration expenditures and dry hole costs                 4,941       23,033  
Impairment of oil and natural gas properties     430,859       1,113,727       61       827  
Goodwill impairment           329,293              
Depreciation, depletion and amortization     73,576       235,868       45,645       146,146  
Accretion of liability for asset retirement obligations     5,509       17,788       6,997       23,098  
General and administrative     11,998       26,850       10,287       23,923  
Taxes, other than on earnings     3,057       7,529       2,472       8,363  
Gain on sales of assets                       (1,825 ) 
Other     (3 )      18       (942 )      27,457  
Total costs and expenses     575,110       1,894,565       112,095       377,350  
Income (loss) from operations     (487,857 )      (1,476,590 )      47,396       108,743  
Other income (expense):
                                   
Interest income     6       10       10       82  
Interest expense     (12,558 )      (34,406 )      (13,304 )      (39,479 ) 
Loss on derivative instruments     (579 )      (635 )      (13,142 )      (68,482 ) 
Total other expense     (13,131 )      (35,031 )      (26,436 )      (107,879 ) 
Income (loss) before income taxes     (500,988 )      (1,511,621 )      20,960       864  
Income tax expense (benefit)     (190,471 )      (432,255 )      7,629       875  
Net income (loss)   $ (310,517 )    $ (1,079,366 )    $ 13,331     $ (11 ) 
Basic income (loss) per share                     $ 0.34     $  
Diluted income (loss) per share                     $ 0.34     $  
Weighted average common shares used in computing income (loss) per share:
                                   
Basic                       38,714       38,648  
Diluted                       39,233       38,648  

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands)

   
  Three Months
Ended
March 31,
2015
  Nine Months
Ended
March 31,
2015
Net loss   $ (310,517 )    $ (1,079,366 ) 
Other comprehensive income (loss)
                 
Crude oil and natural gas cash flow hedges
                 
Unrealized change in fair value net of ineffective portion     (954 )      43,220  
Effective portion reclassified to earnings during the period     (2,510 )      (27,586 ) 
Total other comprehensive income (loss)     (3,464 )      15,634  
Deferred income tax expense (benefit)     (1,282 )      5,592  
Net other comprehensive income (loss)     (2,182 )      10,042  
Comprehensive loss   $ (312,699 )    $ (1,069,324 ) 

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

   
  SUCCESSOR COMPANY   PREDECESSOR COMPANY
     Nine Months
Ended
March 31,
2015
  Nine Months
Ended
March 31,
2014
Cash flows from operating activities:
                 
Net loss   $ (1,079,366 )    $ (11 ) 
Adjustments to reconcile net loss to net cash provided by operating activities:
                 
Depreciation, depletion and amortization     235,868       146,146  
Accretion of liability for asset retirement obligations     17,788       23,098  
Change in derivative financial instruments
                 
Proceeds from sale of derivative financial instruments     4,559        
Unrealized (gain) loss on derivative financial instruments     (1,256 )      44,438  
Non-cash compensation           6,321  
Deferred income taxes     (432,255 )      1,025  
Exploration expenditures           1,876  
Impairment of oil and natural gas properties     1,113,727       827  
Goodwill impairment     329,293        
Amortization of premium, discount and deferred financing costs
on debt
    (7,688 )      4,149  
Gain on sales of assets           (1,825 ) 
Other           20,905  
Changes in operating assets and liabilities:
                 
Trade accounts receivable     19,267       (8,433 ) 
Prepaid expenses and other assets     20,702       11,057  
Accounts payable and accrued liabilities     (91,270 )      50,034  
Asset retirement obligation settlements     (39,025 )      (41,584 ) 
Net cash provided by operating activities     90,344       258,023  
Cash flows provided by (used in) investing activities:
                 
Decrease in restricted cash           51,757  
Property acquisitions     (350 )      (83,412 ) 
Deposit for Nexen Acquisition           (7,040 ) 
Capital expenditures     (271,496 )      (268,905 ) 
Other property and equipment additions     (58 )      (984 ) 
Proceeds from sale of assets           80  
Net cash used in investing activities     (271,904 )      (308,504 ) 
Cash flows provided by (used in) financing activities:
                 
Proceeds from (repayments of) indebtedness     (325,000 )      55,000  
Proceeds from intercompany promissory note     325,000        
Advances from EGC     177,832        
Deferred financing costs     (1,089 )      (206 ) 
Purchase of shares into treasury           (4,544 ) 
Exercise of stock options           794  
Other     (689 )       
Net cash provided by financing activities     176,054       51,044  
Net increase (decrease) in cash and cash equivalents     (5,506 )      563  
Cash and cash equivalents at beginning of period     5,601       3,885  
Cash and cash equivalents at end of period   $ 95     $ 4,448  

 
 
See accompanying notes to condensed consolidated financial statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) Organization and Basis of Presentation

Nature of Operations.  EPL Oil & Gas, Inc. was incorporated as a Delaware corporation on January 29, 1998 and is a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (“EGC”), a Delaware corporation, which is an indirect wholly-owned subsidiary of Energy XXI Ltd, an exempted company under the laws of Bermuda (“Energy XXI”). References in this Quarterly Report to “we,” “our,” “us,” “the Company” or “EPL”) are to EPL Oil & Gas, Inc. and its wholly-owned subsidiaries. We operate as an independent oil and natural gas exploration and production company with current operations concentrated in the U.S. Gulf of Mexico shelf (the “GoM shelf”) focusing on state and federal waters offshore Louisiana, which we consider our core area.

Principles of Consolidation and Reporting.  On June 3, 2014, Energy XXI, EGC, Clyde Merger Sub, Inc., a wholly-owned subsidiary of EGC (“Merger Sub”), and EPL, completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 12, 2014 (as amended, the “Merger Agreement”), by and among Energy XXI, EGC, Merger Sub, and EPL, pursuant to which Merger Sub was merged with and into EPL with EPL continuing as the surviving corporation (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, the issued and outstanding shares of EPL common stock, par value $0.001 per share, were converted, in the aggregate, into the right to receive merger consideration consisting of approximately 65% in cash and 35% in shares of common stock of Energy XXI, par value $0.005 per share.

The Merger resulted in EPL becoming an indirect, wholly-owned subsidiary of Energy XXI. Therefore, in the preparation of our financial statements, we have applied “pushdown” accounting, based on guidance from the Securities and Exchange Commission (“SEC”). Pushdown accounting refers to the use of the acquiring entity’s basis of accounting in the preparation of the acquired entity’s financial statements. As a result, our separate financial statements reflect the new basis of accounting recorded by Energy XXI upon the acquisition. As such, in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), due to our new basis of accounting, our financial statements include a black line denoting that our financial statements covering periods prior to the date of the Merger are not comparable to our financial statements as of and subsequent to the date of the Merger. References to the “Predecessor Company” refer to reporting dates of the Company through June 3, 2014, reflecting results of operations and cash flows of the Company prior to the Merger on our historical accounting basis; subsequent thereto, the Company is referred to as the “Successor Company,” reflecting the impact of pushdown accounting and the results of operations and cash flows of the Company subsequent to the Merger.

Energy XXI follows the “full cost” method of accounting for its oil and gas producing activities, while we had historically followed the “successful efforts” method of accounting. Subsequent to the Merger, we converted our accounting method from successful efforts to the full cost method of accounting to be consistent with Energy XXI’s method of accounting pursuant to SEC guidance, which requires a reporting entity that follows the full cost method to apply that method to all of its operations and to the operations of its subsidiaries. Under U.S. GAAP, a change in accounting method is required to be applied retroactively in order to provide comparable historical period information to users of financial statements. However, due to the new basis of accounting established as a result of the Merger transaction and pushdown accounting, our financial statements are no longer comparable to those of periods prior to the Merger and we have applied the full cost method of accounting on a prospective basis from the date of the Merger.

The accompanying consolidated financial statements include the accounts of EPL and its wholly-owned subsidiaries and have been prepared in accordance with U.S. GAAP. All significant intercompany accounts and transactions are eliminated in consolidation. Our interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated.

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

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) Organization and Basis of Presentation  – (continued)

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 our 2014 Transition 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. Other items subject to estimates and assumptions include fair value estimates used in pushdown accounting and accounting for acquisitions; carrying amounts of property, plant and equipment; goodwill; asset retirement obligations; deferred income taxes; and valuation of derivative financial instruments, among others. 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.

Recent Accounting Pronouncements.  In May 2014, the Financial Accounting Standards Board (“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. ASU No. 2014-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are evaluating the impact of the pending adoption of ASU No. 2014-09 on our financial position and results of operations and have not yet determined the method that will be adopted.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The standard is effective for annual periods ending after December 15, 2016, and interim periods within annual 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 statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The ASU is effective for public entities for annual periods beginning after December 15, 2015, and interim periods within those annual reporting periods. Early adoption is permitted for financial statements that have not been previously issued. The guidance will be applied on a retrospective basis. We are currently evaluating the provisions of ASU 2015-03 and assessing the impact it may have on our consolidated financial position, results of operations or cash flows.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Acquisitions

The South Pass 49 Transfer

On June 3, 2014, Energy XXI GOM, LLC, transferred an asset package to us consisting of certain shallow-water GoM shelf oil and natural gas interests in our South Pass 49 field (the “SP49 Interests”) for $230.0 million to reflect an economic effective date of June 1, 2014 (the “SP49 Transfer”). Prior to the SP49 Transfer, we owned a 43.5% working interest in certain of these assets, and Energy XXI owned a 56.5% working interest in certain of these assets as well as 100% interest in additional assets in the field. As a result of the SP49 Transfer, we have become the sole working interest owner of the South Pass 49 field. We financed the SP49 Transfer with borrowings of approximately $135 million under our prior credit facility and a $95 million capital contribution from EGC.

The following table summarizes the assets acquired and liabilities assumed in the transfer.

 
(In thousands)
Oil and natural gas properties   $ 231,271  
Asset retirement obligations     (1,086 ) 
Net assets acquired   $ 230,185  

The Nexen Acquisition

On January 15, 2014, we acquired from Nexen Petroleum Offshore U.S.A., Inc. (“Nexen”) a 100% working interest in certain shallow-water central GoM shelf oil and natural gas assets for $70.4 million, subject to customary adjustments to reflect the September 1, 2013, economic effective date (the “Nexen Acquisition”). The assets we acquired comprise five leases in the Eugene Island 258/259 field (the “EI Interests”). The Nexen Acquisition was financed with borrowings under our senior secured credit facility with BMO Capital Markets, as lead arranger, and Bank of Montreal, as administrative agent and a lender, and the other lender parties thereto (as amended and restated, the “Prior Senior Credit Facility”).

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects final adjustments to purchase price provided for by the purchase and sale agreement of approximately $5.7 million to reflect an economic effective date of September 1, 2013.

 
(In thousands)
Oil and natural gas properties   $ 82,897  
Asset retirement obligations     (18,165 ) 
Net assets acquired   $ 64,732  

The West Delta 29 Acquisition

On September 26, 2013, we acquired from W&T Offshore, Inc. (“W&T”) an asset package consisting of certain GoM shelf oil and natural gas interests in the West Delta 29 field (the “WD29 Interests”) for $21.8 million in cash, subject to customary adjustments to reflect an economic effective date of January 1, 2013 (the “WD29 Acquisition”). The WD29 Acquisition was funded with a portion of the proceeds from the sale of certain shallow water GoM shelf oil and natural gas interests located within the non-operated Bay Marchand field in a tax-deferred exchange of properties.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Acquisitions  – (continued)

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects final adjustments to purchase price provided for by the purchase and sale agreement of approximately $7.1 million to reflect an economic effective date of January 1, 2013.

 
(In thousands)
Oil and natural gas properties   $ 16,544  
Asset retirement obligations     (1,398 ) 
Net assets acquired   $ 15,146  

We have accounted for the Nexen Acquisition and WD29 Acquisition using the acquisition method of accounting for business combinations, and therefore we have estimated the fair value of the assets acquired and the liabilities assumed as of their respective acquisition dates. In the estimation of fair value, management uses various valuation methods including (i) comparable company analysis, which estimates the value of the acquired properties based on the implied valuations of other similar operations; (ii) comparable asset transaction analysis, which estimates the value of the acquired operations based upon publicly announced transactions of assets with similar characteristics; (iii) comparable merger transaction analysis, which, much like comparable asset transaction analysis, estimates the value of operations based upon publicly announced transactions with similar characteristics, except that merger analysis analyzes public to public merger transactions rather than solely asset transactions; and (iv) discounted cash flow analysis. The fair value is based on subjective estimates and assumptions, which are inherently subject to significant uncertainties which are beyond our control. These assumptions represent Level 3 inputs, as further discussed in Note 9, “Fair Value Measurements.”

Results of Operations and Pro Forma Information

Revenues and lease operating expenses attributable to acquired interests and properties were as follows:

       
  SUCCESSOR COMPANY   PREDECESSOR COMPANY
(In thousands)   Three Months
Ended
March 31,
2015
  Nine Months
Ended
March 31,
2015
  Three Months
Ended
March 31,
2014
  Nine Months
Ended
March 31,
2014
SP49 Interests:
                                   
Revenues   $ 8,311     $ 35,342     $     $  
Lease operating expenses   $ 837     $ 5,200     $     $  
EI Interests:
                                   
Revenues   $ 4,711     $ 24,703     $ 8,380     $ 8,380  
Lease operating expenses   $ 6,030     $ 16,026     $ 3,656     $ 3,656  
WD29 Interests:
                                   
Revenues   $ 1,683     $ 8,428     $ 3,232     $ 6,243  
Lease operating expenses   $ 238     $ 609     $ 59     $ 103  

We have determined that the presentation of net income attributable to the acquired interests and properties is impracticable due to the integration of the related operations upon acquisition.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2) Acquisitions  – (continued)

The following supplemental pro forma information presents consolidated results of operations as if the WD 29 Acquisition, the Nexen Acquisition and the SP49 Transfer had occurred on July 1, 2012. In addition, this information has been prepared to reflect the Merger and pushdown accounting as if it occurred on July 1, 2012. The supplemental unaudited pro forma information was derived from a) our historical condensed consolidated statements of operations and b) unaudited revenues and direct operating expenses of the SP49 Interests, WD29 Interests and the EI Interests as derived from the records of the applicable seller provided to us in connection with the acquisitions. This information does not purport to be indicative of results of operations that would have occurred had the transactions occurred on July 1, 2012, nor is such information indicative of any expected future results of operations. The most significant pro forma adjustments for the three and nine months ended March 31, 2014, were the following:

a. Exclude $5.0 million and $22.0 million, respectively, of exploration costs, impairment expense and gain on sales of assets accounted for under the successful efforts method of accounting to correspond with the full cost method of accounting.
b. Increase DD&A expense by $25.0 million and $82.6 million, respectively, to correspond with the full cost method of accounting.
c. Decrease interest expense $3.4 million and $10.0 million, respectively, to reflect non-cash premium amortization due to the adjustment to fair value associated with the $510 million face value of our 8.25% senior notes due February 2018 (the “8.25% Senior Notes”).

   
  PRO FORMA
(in thousands, except per share data)   Three Months
Ended
March 31,
2014
  Nine Months
Ended
March 31,
2014
Revenue   $ 176,833     $ 563,103  
Net income     11,434       2,289  
Basic income per share     0.29       0.06  
Diluted income per share     0.29       0.06  

(3) Pushdown Accounting and Goodwill

As described in Note 1, the Merger resulted in EPL becoming an indirect, wholly-owned subsidiary of Energy XXI. Therefore, we applied “pushdown” accounting, based on guidance from the SEC. In accordance with the acquisition method of accounting, the purchase price established in the Merger was 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; estimated 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 was recorded as goodwill. Goodwill recorded in connection with the Merger is not deductible for income tax purposes.

On April 2, 2013, we sold certain shallow water GoM shelf oil and natural gas interests located within the non-operated Bay Marchand 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 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 by Energy XXI in the Merger and a

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(3) Pushdown Accounting and Goodwill  – (continued)

corresponding increase in goodwill of approximately $2.1 million; accordingly the June 30, 2014 condensed consolidated balance sheet has been retrospectively adjusted to increase the value of goodwill.

ASC 350, Intangibles — Goodwill and Other (ASC 350), requires that intangible assets with indefinite lives, including goodwill, be evaluated for impairment on an annual basis or more frequently if events occur or circumstances change that could potentially result in impairment. Our annual goodwill impairment test is performed as of the last day of the fourth quarter each fiscal year.

Impairment testing for goodwill is performed at the reporting unit level. We have only one reporting unit, which includes all of our oil and natural gas properties. Accordingly, all of our goodwill, as well as all of our other assets and liabilities, are included in our single reporting unit.

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 necessary. In the first step of the goodwill impairment test, we determined that the fair value of our reporting unit was less than the carrying amount, including goodwill, primarily due to price deterioration in forward pricing curves for oil and natural gas and an increase in our weighted average cost of capital used to estimate fair value, both factors which adversely impacted the fair value of our estimated reserves. Therefore, we performed the second step of the goodwill impairment test, which led us to conclude that there was no remaining implied fair value attributable to goodwill. As a result, we recorded a goodwill impairment charge of $329.3 million to reduce the carrying value of goodwill to zero at September 30, 2014.

In estimating the fair value of our reporting unit and our estimated reserves, we used an income approach which estimated fair value primarily based on the anticipated cash flows associated with our estimated reserves, discounted using a weighted average cost of capital rate. The estimation of the fair value of our reporting unit includes the use of significant inputs not observable in the market, such as estimates of reserves quantities, the weighted average cost of capital (discount rate), future pricing beyond a certain period and estimated future capital and operating costs. The use of these unobservable inputs results in the fair value estimate being classified as a Level 3 measurement. Although we believe the assumptions and estimates used in the fair value calculation of our reporting unit are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions.

The final valuation of assets acquired and liabilities assumed is not complete and the net adjustments to those values may result in changes to carrying amounts initially assigned to the assets and liabilities based on the initial fair value analysis at the time of the Merger. 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.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(4) Earnings Per Share

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the indicated periods for the Predecessor Company.

   
  Three Months
Ended
March 31,
2014
  Nine Months
Ended
March 31,
2014
     (in thousands, except per share data)
Income (numerator):
                 
Net income (loss)   $ 13,331     $ (11 ) 
Net income attributable to participating securities     (166 )       
Net income (loss) attributable to common shares   $ 13,165     $ (11 ) 
Weighted average shares (denominator):
                 
Weighted average shares – basic     38,714       38,648  
Dilutive effect of stock options     519        
Weighted average shares – diluted     39,233       38,648  
Basic income (loss) per share   $ 0.34     $ (0.00 ) 
Diluted income (loss) per share   $ 0.34     $ (0.00 ) 

The following table indicates the number of shares underlying outstanding stock-based awards excluded from the computation of dilutive weighted average shares because their effect was antidilutive for the period indicated.

   
  Three Months
Ended
March 31,
2014
  Nine Months
Ended
March 31,
2014
     (in thousands)   (in thousands)
Weighted average shares     497       1,281  

(5) Property and Equipment

Under the full cost method of accounting at the end of each financial reporting period, we compare the present value of estimated future net cash flows from proved reserves (computed using the unweighted arithmetic average of the first-day-of-the-month historical price, net of applicable differentials, for each month within the previous 12-month period discounted at 10%, plus the lower of cost or fair market value of unproved properties and excluding cash flows related to estimated abandonment costs) to the net full cost pool of oil and natural gas properties, net of related deferred income taxes. We refer to this comparison as a “ceiling test.” If the net capitalized costs of these oil and natural gas properties exceed the estimated discounted future net cash flows, we are required to write-down the value of our oil and natural gas properties to the value of the discounted cash flows. For the three and nine months ended March 31, 2015, our ceiling test computations resulted in impairment of our oil and natural gas properties of $430.9 million and $1,113.7 million, respectively.

The ceiling test computation takes into account the impact of our cash flow hedges at the end of each financial reporting period. For the three and nine months ended March 31, 2015, our ceiling test computations would have resulted in impairment of our oil and natural gas properties of $415.7 million and $1,106.0 million, respectively, had the effects of the cash flow hedges not been considered in the computation.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(6) Asset Retirement Obligations

The following table reconciles the beginning and ending aggregate recorded amount of our asset retirement obligations.

 
  Nine Months
Ended
March 31,
2015
     (in thousands)
Beginning of period total   $ 272,695  
Accretion expense     17,788  
Liabilities incurred and true-up to liabilities settled     2,728  
Liabilities settled     (39,025 ) 
End of period total     254,186  
Less: Current portion     (39,831 ) 
End of period, noncurrent portion   $ 214,355  

(7) Indebtedness

The following table sets forth our indebtedness.

   
  March 31,
2015
  June 30,
2014
     (In thousands)
8.25% Senior Notes due 2018   $ 542,855     $ 550,566  
Revolving Credit Sub-Facility     150,000       475,000  
Intercompany Promissory Note     325,000        
Derivative instruments premium financing     3,176        
Total debt     1,021,031       1,025,566  
Less: current maturities     (3,176 )       
Total indebtedness including intercompany promissory note   $ 1,017,855     $ 1,025,566  

Revolving Credit Sub-Facility

On March 3, 2015, EGC and EPL entered into the Tenth Amendment (the “Tenth Amendment”) to their second amended and restated first lien credit agreement (the “First Lien Credit Agreement” or “Revolving Credit Facility”) in connection with the issuance of $1.45 billion in aggregate principal amount of EGC’s 11.0% senior secured second lien notes due 2020 (the “11.0% Notes”). Pursuant to the terms of the Tenth Amendment, the lenders under the First Lien Credit Agreement reduced the borrowing base for EGC to $500.0 million, of which such amount $150.0 million is the borrowing base for EPL under the sub-facility established for EPL under the First Lien Credit Agreement (“Revolving Credit Sub-Facility”). The borrowing bases are to remain effective until the next redetermination thereof under the terms of the First Lien Credit Agreement. In addition to the reduction of the borrowing base, under the Tenth Amendment, the following changes, among others, to the First Lien Credit Agreement were effective:

addition of provisions to permit EGC to make a loan to us in the amount of $325 million using proceeds from the incurrence of additional permitted second lien or third lien indebtedness of EGC and for us to secure such loan by providing liens on substantially all of our assets that are second in priority to the liens of the lenders under the First Lien Credit Agreement pursuant to the terms of an intercreditor agreement and restricting the transfer of EGC’s rights in respect of such loan or making any prepayment or otherwise making modifications of the terms of such arrangements;

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(7) Indebtedness  – (continued)

change in the definition of the stated maturity date of the First Lien Credit Agreement so that it accelerates from April 9, 2018 (the scheduled date of maturity) to a date 210 days prior to the date of maturity of EGC’s outstanding 9.25% unsecured notes due December 2017 if such notes are not prepaid, redeemed or refinanced prior to such prior date, or to a date 210 days prior to the date of maturity of the 8.25% Senior Notes if such notes are not prepaid, redeemed or refinanced prior to such prior date, or otherwise to a date that is 180 days prior to the date of maturity of any other permitted second lien or permitted third lien indebtedness or certain permitted unsecured indebtedness or any refinancings of such indebtedness if such indebtedness would come due prior to April 9, 2018;
elimination, addition, or modification of certain financial covenants;
setting the applicable commitment fee under the First Lien Credit Agreement at 0.50% and providing that outstanding amounts drawn under the First Lien Credit Agreement bear interest at either the applicable London Interbank Offered Rate (“LIBOR”), plus applicable margins ranging from 2.75% to 3.75% or an alternate base rate based on the federal funds effective rate plus applicable margins ranging from 1.75% to 2.75%;
increase of the threshold requirement for oil and gas properties required to be secured by mortgages to 90% of the value of EGC and its subsidiaries’ (other than our properties until we become guarantors of the EGC indebtedness under the First Lien Credit Agreement) proved reserves and proved developed producing reserves, but allowing the threshold for our properties (until we become guarantors of the EGC indebtedness under the First Lien Credit Agreement) to remain at 85%;
addition of certain further restrictions on the prepayment and repayment of outstanding note indebtedness of EGC and its subsidiaries, including the prohibition on using proceeds from credit extensions under the First Lien Credit Agreement for any such prepayment or repayment and the requirement that EGC have net liquidity at the time thereof of at least $250 million;
modification to the restricted payment covenant to substantially limit the ability of EGC to make distributions and dividends to parent entities, provided that a distribution of the Grand Isle gathering system and related equipment and other assets is permitted;
qualification on the ability of EGC and its subsidiaries to refinance outstanding indebtedness by requiring that EGC have pro forma net liquidity of $250 million at the time of such refinancing; and
modification of the asset disposition covenant to require lender consent for any such disposition that would have the effect of reducing the borrowing base by more than $5 million in the aggregate; provided, however, that such provision is expressly deemed not to be applicable to certain sales relating to the Grand Isle gathering system that are the subject of current marketing efforts of EGC, as long as EGC and its subsidiaries meet certain obligations, such as, among others, maintaining the proceeds from such sales in accounts that are subject to the liens of the lenders.

The First Lien Credit Agreement, as amended, requires that EPL and EGC maintain certain financial covenants separately for so long as the 8.25% Senior Notes remain outstanding. We are currently subject to the following financial covenants: (a) a consolidated maximum first lien leverage ratio of 1.25 to 1.0 and (b) a consolidated maximum secured leverage ratio of no more than 3.75 to 1.0. If the 8.25% Senior Note are no longer outstanding and certain other conditions are met, EGC will be subject to the following financial covenants on a consolidated basis: (a) a consolidated maximum net first lien leverage ratio of 1.25 to 1.0, (b) a consolidated maximum net secured leverage ratio of no more than 3.75 to 1.0, provided that if the 8.25% Senior Notes are refinanced with new secured debt, the liens of which are junior in priority to the Revolving Credit Facility indebtedness, then the maximum ratio permitted would be 4.25 to 1.0, and (c) a minimum current ratio of no less than 1.0 to 1.0.

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TABLE OF CONTENTS

EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(7) Indebtedness  – (continued)

Our Revolving Credit Sub-Facility restricts our ability to obtain additional financing, make investments, lease equipment, sell assets and engage in business combinations. As of March 31, 2015, EPL and EGC were in compliance with all financial covenants under the First Lien Credit Agreement, and EPL had $150.0 million in borrowings under the Revolving Credit Sub-Facility. As of March 31, 2015, we have fully utilized amounts available under our Revolving Credit Sub-Facility.

For additional information regarding our Revolving Credit Sub-Facility, see Note 8, “Indebtedness,” of our 2014 Transition Report.

Promissory Note

On March 12, 2015, in connection with EGC’s issuance of the 11.0% Notes, we entered into a $325.0 million secured second lien promissory note between us, as the maker, and EGC, as the payee (the “Promissory Note”). Proceeds from the Promissory Note were used to repay a like amount of the outstanding borrowings under the Revolving Credit Sub-Facility. The Promissory Note bears interest at an annual rate of 10%, has a maturity date of October 9, 2018, and is secured by a second priority lien on certain of our assets that secure the obligations under the First Lien Credit Agreement. EGC may release the collateral securing the Promissory Note at any time. The note has not been, and will not be, registered under the Securities Act of 1933, as amended or the securities laws of any other jurisdiction. We have an option to prepay this note in whole or in part at any time, without penalty or premium. The note bears interest from the date of issuance with interest due quarterly, in arrears, on January 5th, April 5th, July 5th, and October 5th, beginning September 5, 2015.

8.25% Senior Notes

The 8.25% Senior Notes consist of $510.0 million in aggregate principal amount issued under an Indenture dated February 14, 2011 (as amended and supplemented, the “2011 Indenture”). The 8.25% Senior Notes bear interest from the date of their issuance at an annual rate of 8.25% with interest due semi-annually, in arrears, on February 15th and August 15th of each year. The 8.25% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis initially by each of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries). The 8.25% Senior Notes will mature on February 15, 2018. The effective interest rate on the 8.25% Senior Notes is approximately 5.8%, reflecting the fair value adjustment recorded in pushdown accounting. For additional information regarding the 8.25% Senior Notes, see Note 8, “Indebtedness,” of our 2014 Transition Report.

Derivative Instruments Premium Financing

We finance premiums on derivative instruments that we purchase with our hedge counterparties. Substantially all of our hedge transactions are with lenders under the Revolving Credit Sub-Facility. Derivative instruments premium financing is accounted for as debt and this indebtedness is pari passu with borrowings under the Revolving Credit Sub-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 March 31, 2015, our outstanding derivative instruments premium financing discounted at our approximate borrowing cost of 2.5% per annum totaled $3.2 million.

(8) Derivative Financial Instruments

We enter into derivative instruments to reduce exposure to fluctuations in the price of oil and natural gas for a portion of our production. Our fixed-price swaps fix the sales price for a limited amount of our production and, for the contracted volumes, eliminate our ability to benefit from increases in the sales price of the production. Derivative instruments are carried at their fair value on the consolidated balance sheets as Derivative financial instruments. Prior to the Merger, we did not designate derivative instruments as hedges, and all gains and losses due to changes in fair market value and contract settlements were recorded in Loss on derivative instruments in Other income (expense) in the condensed consolidated statements of operations.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(8) Derivative Financial Instruments  – (continued)

Subsequent to the Merger, we designate a majority of our 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. See Note 9, “Fair Value Measurements” for information regarding fair values of our derivative instruments.

In connection with the Merger, Energy XXI assumed our existing hedges with contract terms beginning in June 2014 through December 2015. Our oil contracts were primarily swaps and benchmarked to Argus-LLS and Brent. During the quarter ended December 31, 2014, we monetized all the calendar 2015 Brent swap contracts, keeping one natural gas contract intact, and received proceeds of $4.6 million. These monetized amounts received along with a $2.9 million positive change in fair value of the monetized contracts have been recorded in stockholders’ equity as part of accumulated other comprehensive income (“AOCI”) and will be recognized in income over the contract life of the underlying hedge contracts through December 31, 2015. During the three months ended March 31, 2015, we recognized approximately $1.9 million of monetized amounts into revenues. As of March 31, 2015, we had $5.7 million of monetized amounts remaining in AOCI of which approximately $1.9 million will be recognized in income during each of the quarters ending June 30, 2015, September 30, 2015, and December 31, 2015.

During January 2015, we entered into Argus-LLS three-way collars on 7,000 barrels of our estimated oil production per day from February through December 2015.

The following table sets forth our derivative instrument outstanding as of March 31, 2015.

Oil Contracts

           
  Type of Contract   Index   Volume (MMBtu)   Weighted Average Contract Price
Remaining Contract Term   Sub Floor   Floor   Ceiling
April 2015 – December 2015     Three-Way Collars        ARGUS-LLS       1,925     $ 32.86     $ 45.00     $ 75.71  

Gas Contracts

       
Remaining Contract Term   Type of Contract   Index   Volume
(MMBtu)
  Swap Fixed
Price
($/Mmbtu)
April 2015 – December 2015     Fixed Price Swaps       NYMEX-HH       1,183     $ 4.31  

For the three and nine months ended March 31, 2015, we reclassified from AOCI a gain of approximately $2.5 million and $27.6 million to oil and natural gas revenue, respectively. The amount expected to be reclassified from AOCI to income in the next 12 months is a gain of $6.0 million ($3.8 million net of tax) on our commodity hedges. The estimated and actual amounts are likely to vary significantly due to changes in market conditions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(8) Derivative Financial Instruments  – (continued)

The effect of derivative financial instruments on our condensed consolidated statements of operations was as follows:

       
  SUCCESSOR COMPANY   PREDECESSOR COMPANY
     Three Months
Ended
March 31,
2015
  Nine Months
Ended
March 31,
2015
  Three Months
Ended
March 31,
2014
  Nine Months
Ended
March 31,
2014
Location of (Gain) Loss in Statement of Operations
                                   
Cash Settlements
                                   
Oil sales   $ (1,170 )    $ (25,578 )    $     $  
Natural gas sales     (660 )      (1,328 )             
Total cash settlements     (1,830 )      (26,906 )             
Commodity Derivative Instruments designated as hedging instruments:
                                   
Loss on derivative financial instruments
                                   
Ineffective portion of commodity derivative instruments     579       579              
Commodity Derivative Instruments not designated as hedging instruments:
                                   
Loss on derivative financial instruments
                                   
Realized mark to market loss           55       (3,746 )      3,409  
Unrealized mark to market loss           1       16,888       65,073  
Total loss on derivative financial instruments     579       635       13,142       68,482  
Total (gain) loss   $ (1,251 )    $ (26,271 )    $ 13,142     $ 68,482  

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 March 31, 2015, we had no deposits for collateral with our counterparties.

(9) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy with three levels based on the reliability of the inputs used to determine fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets and liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2015 and June 30, 2014, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, primarily our derivative financial instruments. 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

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(9) Fair Value Measurements  – (continued)

based on published LIBOR rates. The fair values of derivative financial instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of derivative financial instruments in a liability position include a measure of our own nonperformance risk, each based on the current published issuer-weighted corporate default rates. These price inputs are quoted prices for assets and liabilities similar to those held by us and meet the definition of Level 2 inputs within the fair value hierarchy.

The following table sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis.

   
  March 31,
2015
  June 30,
2014
     (in thousands)
Assets
                 
Derivative financial instruments designated as hedging instruments
                 
Current   $ 5,981     $  
Noncurrent            
Total gross derivative financial instruments subject to enforceable netting agreement     5,981        
Gross amounts offset in balance sheet     (3,075 )       
Net amounts presented in balance sheet   $ 2,906     $  
Liabilities
                 
Derivative financial instruments designated as hedging instruments
                 
Current   $ 3,075     $ 26,440  
Noncurrent           2,140  
Total gross derivative financial instruments subject to enforceable netting agreement     3,075       28,580  
Gross amounts offset in balance sheet     (3,075 )       
Net amounts presented in balance sheet   $     $ 28,580  

The carrying values reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short term maturities of these instruments. The fair value for the 8.25% Senior Notes is estimated based on quoted prices in a market that is not an active market, which are Level 2 inputs within the fair value hierarchy. The carrying value of the Revolving Credit Sub-Facility approximates its fair value because the interest rate is variable and reflective of market rates, which are Level 2 inputs within the fair value hierarchy.

The following table sets forth the carrying values and estimated fair values of our long-term indebtedness.

       
  March 31,
2015
  June 30,
2014
     (In thousands)
     Carrying
Value
  Estimated Fair
Value
  Carrying
Value
  Estimated Fair
Value
8.25% Senior Notes   $ 542,855     $ 379,760     $ 550,566     $ 545,700  
Promissory Note     325,000       325,000              
Revolving Credit Sub-Facility     150,000       150,000       475,000       475,000  
Total   $ 1,017,855     $ 854,760     $ 1,025,566     $ 1,020,700  

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(9) Fair Value Measurements  – (continued)

The 8.25% Senior Notes contain an option to redeem up to 35% of the aggregate principal amount of the notes outstanding with the net cash proceeds of certain equity offerings. This option is considered an embedded derivative and is classified as a Level 3 financial instrument for which the estimated fair value at March 31, 2015 is not material.

As addressed in Note 2, “Acquisitions,” we apply fair value concepts in estimating and allocating the fair value of assets acquired and liabilities assumed in acquisitions in accordance with acquisition accounting for business combinations. The inputs to the estimated fair values of assets acquired and liabilities assumed are described in Note 2.

(10) Income Taxes

We are a (U.S.) Delaware company and, as a result of the Merger, a direct subsidiary of EGC. We are a member of a consolidated group of corporations for U.S. federal income tax purposes where Energy XXI, Inc., (the “U.S. Parent”) is the parent entity. Energy XXI indirectly owns 100% of U.S. Parent, but is not a member of the U.S. consolidated group. We operate through our various subsidiaries in the United States as they apply to our current ownership structure. ASC Topic 740 provides that the income tax amounts presented in the separate financial statements of a subsidiary entity that is a member of a consolidated group should be based upon a reasonable allocation of the income tax amounts of that group. We allocate income tax expense/benefit and deferred tax items between affiliates as if each affiliate prepared a separate U.S. income tax return for the reporting period. We have recorded no income tax-related intercompany balances with affiliates.

In each interim period, we estimate the annual effective tax rate we expect to be applicable for the current fiscal year and apply it to interim periods. However, during the first quarter of fiscal year 2015, we recorded a goodwill impairment charge of $329 million (see Note 3 — Pushdown Accounting and Goodwill). Currently, our estimated annual effective tax/(benefit) rate is approximately (36.2)% excluding the effect of the goodwill impairment charge. For purposes of computing our interim provision (benefit) for income taxes, the goodwill impairment charge was treated as a discrete item in the quarter in which it occurred. Our actual effective tax/(benefit) rates for the three and nine months ended March 31, 2015 were (38.0)% and (28.6)%, respectively. The variance from the U.S. statutory rate of 35% is primarily due to two elements: (i) the impairment of goodwill during the first quarter of fiscal year 2015 and (ii) an increase to the statutory rate due to the presence of common permanent difference items (such as non-deductible compensation, meals and entertainment expenses and state income taxes).

We have not recorded a valuation allowance against net deferred tax assets to date as we believe that, more-likely-than-not, at March 31, 2015, we will generate sufficient future taxable income from the reversal of existing temporary differences (primarily related to the excess of book carrying value of oil and natural gas properties) over their tax bases; however, with continued weakness in commodity pricing, this judgment could change as early as the fourth quarter of fiscal 2015.

(11) Related Party Transactions

On June 3, 2014, we entered an intercompany services and cost allocation agreement with Energy XXI Services, LLC (“Energy Services”), an affiliate of the Company. Services provided by Energy Services include management, legal, accounting, tax, corporate secretarial, human resources, employee benefit administration, office space and other furniture and equipment management, and other support services. Cost of these services for the three months ended March 31, 2015 was approximately $14.0 million, of which approximately $10.4 million is included in general and administrative expense. Cost of these services for the nine months ended March 31, 2015 was approximately $23.8 million, of which approximately $19.5 million is included in general and administrative expense.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(11) Related Party Transactions  – (continued)

On March 12, 2015, in connection with EGC’s issuance of the 11.0% Notes, we entered into the Promissory Note with a face value of $325 million. The Promissory Note bears interest at an annual rate of 10%, has a maturity date of October 9, 2018, and is secured by a second priority lien on certain of our assets that secure the obligations under the First Lien Credit Agreement. Interest expense on the Promissory Note amounted to approximately $1.6 million for the three months ended March 31, 2015. See Note 7, “Indebtedness” for more information regarding the Promissory Note.

(12) Commitments and Contingencies

Litigation.  We are a defendant in a number of lawsuits and are involved in governmental and regulatory proceedings, all of which arose in the ordinary course of business, including, but not limited to, personal injury claims, royalty claims, contract claims, and environmental claims, including claims involving assets owned by acquired companies. While the ultimate outcome and impact on us cannot be predicted with certainty, management believes that the resolution of pending proceedings will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

In March and April, 2014, three alleged stockholders (the “Plaintiffs”) filed three separate class action lawsuits in the Court of Chancery of the State of Delaware on behalf of our stockholders against our Company, our directors, Energy XXI, EGC, and Clyde Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of EGC (“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 alleged a variety of causes of action challenging the Agreement and Plan of Merger between Energy XXI, OpCo, Merger Sub, and EPL, which provided for the acquisition of EPL by Energy XXI. Plaintiffs alleged that (a) our directors allegedly breached fiduciary duties in connection with the Merger and (b) we along with Energy XXI, OpCo, and Merger Sub allegedly aided and abetted in these alleged breaches of fiduciary duties. Plaintiffs sought to have the Merger Agreement rescinded and also sought damages and attorneys’ fees.

On January 16, 2015, Plaintiffs filed a voluntary notice of dismissal. On January 20, 2015, the Court of Chancery of the State of Delaware entered an order dismissing the lawsuit in its entirety without prejudice.

Other.  We maintain restricted escrow funds in a trust for future abandonment costs at our East Bay property. The trust was originally funded with $15.0 million and, with accumulated interest, increased to $16.7 million at December 31, 2008. We may draw from the trust upon completion of qualifying abandonment activities at our East Bay field. At March 31, 2015, we had $6.0 million remaining in restricted escrow funds for decommissioning work in our East Bay field, which will remain restricted until substantially all required decommissioning in the East Bay field is complete. Amounts on deposit in the trust account are reflected in Restricted cash on our condensed consolidated balance sheets.

We record liabilities when we deliver production that is in excess of our interest in certain properties. In addition to these imbalances, we may, from time to time, be allocated cash sales proceeds in excess of amounts that we estimate are due to us for our interest in production. These allocations may be subject to further review, may require more information to resolve or may be in dispute.

We and our oil and gas joint interest owners are subject to periodic audits of the joint interest accounts for leases in which we participate and/or operate. As a result of these joint interest audits, amounts payable or receivable by us for costs incurred or revenue distributed by the operator or by us on a lease may be adjusted, resulting in adjustments, increases or decreases, to our net costs or revenues and the related cash flows. Such

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(12) Commitments and Contingencies  – (continued)

adjustments may be material. When they occur, these adjustments are recorded in the current period, which generally is one or more years after the related cost or revenue was incurred or recognized by the joint account.

Subsequent Event.  In April 2015, we received letters from the Bureau of Ocean Energy Management (the “BOEM”) stating that we no longer qualify for waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging and abandonment liabilities. The letters notified us that we must provide supplemental financial assurance and/or bonding for our offshore oil and gas leases, rights-of-way, and rights-of-use and easements that require supplemental bonding. The BOEM has indicated the amount of such required supplemental bonding totals approximately $566.5 million, which amount is currently being negotiated by us. We are currently evaluating the impact of these BOEM letters on our future consolidated financial position, results of operations and cash flow.

(13) Supplemental Condensed Consolidating Financial Information

In connection with issuing the 8.25% Senior Notes described in Note 7, “Indebtedness,” all of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries) each of which is 100% owned by EPL (the “Guarantor Subsidiaries”), jointly and severally guaranteed the payment obligations under our 8.25% Senior Notes. The guarantees are full and unconditional, as those terms are used in Rule 3-10 of Regulation S-X, except that a Guarantor Subsidiary can be automatically released and relieved of its obligations under certain customary circumstances contained in the 2011 Indenture. So long as other applicable provisions of the indenture are adhered to, these customary circumstances include: when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, when the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, or when the Guarantor Subsidiary is sold or sells all of its assets. The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and cash flow information for EPL (Parent Company Only) and for the Guarantor Subsidiaries. We have not presented separate financial statements and other disclosures concerning the Guarantor Subsidiaries, or for any individual Guarantor Subsidiary, because management has determined that such information is not material to investors.

The 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. The principal eliminating entries eliminate investments in subsidiaries and intercompany balances.

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Balance Sheet
As of March 31, 2015
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
ASSETS
                                   
Current assets:
                                   
Cash and cash equivalents   $ 95     $     $     $ 95  
Trade accounts receivable – net     54,029             (37 )      53,992  
Intercompany receivables           20,213       (20,213 )       
Derivative financial instruments     2,906                   2,906  
Deferred tax asset     16,760                   16,760  
Prepaid expenses     6,135                   6,135  
Total current assets     79,925       20,213       (20,250 )      79,888  
Net property and equipment     1,893,726       159,808             2,053,534  
Investment in affiliates     129,065             (129,065 )       
Restricted cash     6,024                   6,024  
Other assets     1,069       89       (90 )      1,068  
Total assets   $ 2,109,809     $ 180,110     $ (149,405 )    $ 2,140,514  
LIABILITIES AND STOCKHOLDER’S EQUITY
                                   
Current liabilities:
                                   
Accounts payable   $ 30,011     $ 424     $ (37 )    $ 30,398  
Due to EGC     182,792                   182,792  
Intercompany payables     20,213             (20,213 )       
Accrued liabilities     72,487             (90 )      72,397  
Asset retirement obligations     34,627       5,204             39,831  
Current maturities of long-term debt     3,176                   3,176  
Total current liabilities     343,306       5,628       (20,340 )      328,594  
Long-term debt     692,855                   692,855  
Intercompany promissory note     325,000                   325,000  
Asset retirement obligations     172,705       41,650             214,355  
Deferred tax liabilities     45,541       3,767             49,308  
Total liabilities     1,579,407       51,045       (20,340 )      1,610,112  
Stockholder’s equity:
                                   
Preferred stock                        
Common stock                        
Additional paid-in capital     1,599,341       85,479       (85,479 )      1,599,341  
Accumulated other comprehensive income     3,790                   3,790  
Retained earnings (accumulated deficit)     (1,072,729 )      43,586       (43,586 )      (1,072,729 ) 
Total stockholder’s equity     530,402       129,065       (129,065 )      530,402  
Total liabilities and stockholder’s equity   $ 2,109,809     $ 180,110     $ (149,405 )    $ 2,140,514  

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Balance Sheet
As of June 30, 2014
(AUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
ASSETS
                                   
Current assets:
                                   
Cash and cash equivalents   $ 5,601     $     $     $ 5,601  
Trade accounts receivable – net     72,156       145             72,301  
Intercompany receivables           26,311       (26,311 )       
Deferred tax asset     24,587                   24,587  
Prepaid expenses     26,521                   26,521  
Total current assets     128,865       26,456       (26,311 )      129,010  
Net property and equipment     3,034,805       170,382             3,205,187  
Investment in affiliates     126,638             (126,638 )       
Goodwill     329,293                   329,293  
Restricted cash     6,023                   6,023  
Other assets     226       91             317  
Total assets   $ 3,625,850     $ 196,929     $ (152,949 )    $ 3,669,830  
LIABILITIES AND STOCKHOLDER’S EQUITY
                                   
Current liabilities:
                                   
Accounts payable   $ 92,325     $ 656     $     $ 92,981  
Due to EGC     4,960                   4,960  
Intercompany payables     26,311             (26,311 )       
Accrued liabilities     161,503       15             161,518  
Asset retirement obligations     33,357       6,474             39,831  
Derivative financial instruments     26,440                   26,440  
Total current liabilities     344,896       7,145       (26,311 )      325,730  
Long-term debt     1,025,566                   1,025,566  
Asset retirement obligations     193,908       38,956             232,864  
Deferred tax liabilities     459,608       24,190             483,798  
Derivative financial instruments     2,140                   2,140  
Other     6                   6  
Total liabilities     2,026,124       70,291       (26,311 )      2,070,104  
Stockholder’s equity:
                                   
Preferred stock                        
Common stock                        
Additional paid-in capital     1,599,341       85,479       (85,479 )      1,599,341  
Accumulated other comprehensive loss     (6,252 )                  (6,252 ) 
Retained earnings     6,637       41,159       (41,159 )      6,637  
Total stockholder’s equity     1,599,726       126,638       (126,638 )      1,599,726  
Total liabilities and stockholder’s equity   $ 3,625,850     $ 196,929     $ (152,949 )    $ 3,669,830  

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 31, 2015
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
Revenue:
                                   
Oil and natural gas   $ 79,065     $ 8,188     $     $ 87,253  
Total revenue     79,065       8,188             87,253  
Costs and expenses:
                                   
Lease operating     49,552       19             49,571  
Transportation     544       (1 )            543  
Impairment of oil and natural gas properties     430,859                   430,859  
Depreciation, depletion and amortization     68,541       5,035             73,576  
Accretion of liability for asset retirement
obligations
    4,328       1,181             5,509  
General and administrative     11,998                   11,998  
Taxes, other than on earnings     2,193       864             3,057  
Other     (3 )                  (3 ) 
Total costs and expenses     568,012       7,098             575,110  
Income (loss) from operations     (488,947 )      1,090             (487,857 ) 
Other income (expense):
                                   
Interest income     6                   6  
Interest expense     (12,558 )                  (12,558 ) 
Loss on derivative instruments     (579 )                  (579 ) 
Income from equity investments     716             (716 )       
Total other expense     (12,415 )            (716 )      (13,131 ) 
Income (loss before provision for income taxes)     (501,362 )      1,090       (716 )      (500,988 ) 
Income tax expense (benefit)     (190,845 )      374             (190,471 ) 
Net income (loss)   $ (310,517 )    $ 716     $ (716 )    $ (310,517 ) 
Comprehensive income (loss)
                                   
Net income (loss)     (310,517 )      716       (716 )      (310,517 ) 
Other comprehensive loss     (2,182 )                  (2,182 ) 
Comprehensive income (loss)   $ (312,699 )    $ 716     $ (716 )    $ (312,699 ) 

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 31, 2015
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
Revenue:
                                   
Oil and natural gas   $ 379,502     $ 37,541     $     $ 417,043  
Other     778       154             932  
Total revenue     380,280       37,695             417,975  
Costs and expenses:
                                   
Lease operating     152,170       9,005             161,175  
Transportation     2,316       1             2,317  
Impairment of oil and natural gas properties     1,113,727                   1,113,727  
Goodwill impairment     329,293                   329,293  
Depreciation, depletion and amortization     218,928       16,940             235,868  
Accretion of liability for asset retirement
obligations
    14,580       3,208             17,788  
General and administrative     26,850                   26,850  
Taxes, other than on earnings     2,792       4,737             7,529  
Other     18                   18  
Total costs and expenses     1,860,674       33,891             1,894,565  
Income (loss) from operations     (1,480,394 )      3,804             (1,476,590 ) 
Other income (expense):
                                   
Interest income     10                   10  
Interest expense     (34,406 )                  (34,406 ) 
Loss on derivative instruments     (635 )                  (635 ) 
Income from equity investments     2,427             (2,427 )       
Total other expense     (32,604 )            (2,427 )      (35,031 ) 
Income (loss) before provision for income taxes     (1,512,998 )      3,804       (2,427 )      (1,511,621 ) 
Income tax expense (benefit)     (433,632 )      1,377             (432,255 ) 
Net income (loss)   $ (1,079,366 )    $ 2,427     $ (2,427 )    $ (1,079,366 ) 
Comprehensive income (loss)
                                   
Net income (loss)     (1,079,366 )      2,427       (2,427 )      (1,079,366 ) 
Other comprehensive income     10,042                   10,042  
Comprehensive income (loss)   $ (1,069,324 )    $ 2,427     $ (2,427 )    $ (1,069,324 ) 

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PREDECESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 31, 2014
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
Revenue:
                                   
Oil and natural gas   $ 141,812     $ 16,658     $     $ 158,470  
Other     264       757             1,021  
Total revenue     142,076       17,415             159,491  
Costs and expenses:
                                   
Lease operating     35,736       5,998             41,734  
Transportation     899       1             900  
Exploration expenditures and dry hole costs     4,941                   4,941  
Impairment of oil and natural gas properties     61                   61  
Depreciation, depletion and amortization     40,696       4,949             45,645  
Accretion of liability for asset retirement
obligations
    5,788       1,209             6,997  
General and administrative     10,287                   10,287  
Taxes, other than on earnings     177       2,295             2,472  
Other     (942 )                  (942 ) 
Total costs and expenses     97,643       14,452             112,095  
Income from operations     44,433       2,963             47,396  
Other income (expense):
                                   
Interest income     10                   10  
Interest expense     (13,304 )                  (13,304 ) 
Loss on derivative instruments     (13,142 )                  (13,142 ) 
Income from equity investments     1,884             (1,884 )       
Total other expense     (24,552 )            (1,884 )      (26,436 ) 
Income before provision for income taxes     19,881       2,963       (1,884 )      20,960  
Income tax expense     6,550       1,079             7,629  
Net income   $ 13,331     $ 1,884     $ (1,884 )    $ 13,331  

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PREDECESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 31, 2014
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
Revenue:
                                   
Oil and natural gas   $ 424,970     $ 58,259     $     $ 483,229  
Other     543       2,321             2,864  
Total revenue     425,513       60,580             486,093  
Costs and expenses:
                                   
Lease operating     105,136       18,067             123,203  
Transportation     3,123       2             3,125  
Exploration expenditures and dry hole costs     22,415       618             23,033  
Impairment of oil and natural gas properties     827                   827  
Depreciation, depletion and amortization     129,764       16,382             146,146  
Accretion of liability for asset retirement
obligations
    19,033       4,065             23,098  
General and administrative     23,923                   23,923  
Taxes, other than on earnings     638       7,725             8,363  
Gain on sale of assets     (1,825 )                  (1,825 ) 
Other     27,330       127             27,457  
Total costs and expenses     330,364       46,986             377,350  
Income from operations     95,149       13,594             108,743  
Other income (expense):
                                   
Interest income     82                   82  
Interest expense     (39,479 )                  (39,479 ) 
Loss on derivative instruments     (68,482 )                  (68,482 ) 
Income from equity investments     8,633             (8,633 )       
Total other expense     (99,246 )            (8,633 )      (107,879 ) 
Income (loss) before provision for income taxes     (4,097 )      13,594       (8,633 )      864  
Income tax expense (benefit)     (4,086 )      4,961             875  
Net income (loss)   $ (11 )    $ 8,633     $ (8,633 )    $ (11 ) 

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SUCCESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 31, 2015
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
Net cash provided by operating activities   $ 83,979     $ 6,365     $     $ 90,344  
Cash flows used in investing activities:
                                   
Property acquisitions     (350 )                  (350 ) 
Capital expenditures     (265,131 )      (6,365 )            (271,496 ) 
Other property and equipment additions     (58 )                  (58 ) 
Net cash used in investing activities     (265,539 )      (6,365 )            (271,904 ) 
Cash flows provided by financing activities:
                                   
Repayments of indebtedness     (325,000 )                  (325,000 ) 
Proceeds from intercompany promissory note     325,000                         325,000  
Advances from EGC     177,832                   177,832  
Deferred financing costs     (1,089 )                  (1,089 ) 
Other     (689 )                  (689 ) 
Net cash provided by financing activities     176,054                   176,054  
Net decrease in cash and cash equivalents     (5,506 )                  (5,506 ) 
Cash and cash equivalents at beginning of period     5,601                   5,601  
Cash and cash equivalents at end of period   $ 95     $     $     $ 95  

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PREDECESSOR COMPANY
 
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 31, 2014
(UNAUDITED)

       
  Parent
Company Only
  Guarantor
Subsidiaries
  Reclassifications
& Eliminations
  Consolidated
     (In thousands)
Net cash provided by operating activities   $ 235,046     $ 22,977     $     $ 258,023  
Cash flows provided by (used in) investing activities:
                                   
Decrease in restricted cash     51,757                   51,757  
Property acquisitions     (83,412 )                  (83,412 ) 
Deposit for Nexen Acquisition     (7,040 )                  (7,040 ) 
Capital expenditures     (245,928 )      (22,977 )            (268,905 ) 
Other property and equipment additions     (984 )                  (984 ) 
Proceeds from sale of assets     80                   80  
Net cash used in investing activities     (285,527 )      (22,977 )            (308,504 ) 
Cash flows provided by (used in) financing activities:
                                   
Repayments of indebtedness     55,000                   55,000  
Deferred financing costs     (206 )                  (206 ) 
Purchase of shares into treasury     (4,544 )                  (4,544 ) 
Exercise of stock options     794                   794  
Net cash provided by financing activities     51,044                   51,044  
Net increase in cash and cash equivalents     563                   563  
Cash and cash equivalents at beginning of period     3,885                   3,885  
Cash and cash equivalents at end of period   $ 4,448     $     $     $ 4,448  

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Statements we make in this quarterly report on Form 10-Q (the “Quarterly Report”) which express a belief, expectation or intention, as well as those that are not historical fact, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Items 1 and 1A of Part I of our 2014 Transition Report and under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report.

OVERVIEW

EPL Oil & Gas, Inc. (“we,” “our,” “us,” “the Company” or “EPL”) was incorporated as a Delaware corporation in January 1998 and is a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (“EGC”), a Delaware corporation and indirect wholly-owned subsidiary of Energy XXI Ltd, an exempted company under the laws of Bermuda (“Energy XXI”). We operate as an independent oil and natural gas exploration and production company with current operations concentrated in the U.S. Gulf of Mexico shelf (“GoM shelf”) focusing on state and federal waters offshore Louisiana, which we consider our core area.

On June 3, 2014, Energy XXI, EGC, Clyde Merger Sub, Inc., a wholly-owned subsidiary of EGC (“Merger Sub”), and EPL, completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 12, 2014 (as amended, the “Merger Agreement”), by and among Energy XXI, EGC, Merger Sub, and EPL, pursuant to which Merger Sub was merged with and into EPL with EPL continuing as the surviving corporation (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, the issued and outstanding shares of EPL common stock, par value $0.001 per share, were converted, in the aggregate, into the right to receive merger consideration consisting of approximately 65% in cash and 35% in shares of common stock of Energy XXI, par value $0.005 per share.

The Merger resulted in EPL becoming an indirect, wholly-owned subsidiary of Energy XXI. Therefore, in the preparation of our financial statements, we have applied “pushdown” accounting, based on guidance from the Securities and Exchange Commission (“SEC”). Pushdown accounting refers to the use of the acquiring entity’s basis of accounting in the preparation of the acquired entity’s financial statements. As a result, our separate financial statements reflect the new basis of accounting recorded by Energy XXI upon acquisition. As such, in accordance with U.S. GAAP, due to our new basis of accounting, our financial statements include a black line denoting that our financial statements covering periods prior to the date of the Merger are not comparable to our financial statements as of and subsequent to the date of the Merger. References to the “Predecessor Company” refer to reporting dates of the Company through June 3, 2014, reflecting results of operations and cash flows of the Company prior to the Merger on our historical accounting basis; subsequent thereto, the Company is referred to as the “Successor Company,” reflecting the impact of pushdown accounting and the results of operations and cash flows of the Company subsequent to the Merger.

Energy XXI follows the “full cost” method of accounting for its oil and gas producing activities, while we had historically followed the “successful efforts” method of accounting. Subsequent to the Merger, we converted our accounting method from successful efforts to the full cost method of accounting to be consistent with Energy XXI’s method of accounting pursuant to SEC guidance, which requires a reporting entity that follows the full cost method to apply that method to all of its operations and to the operations of its subsidiaries. Under U.S. GAAP, a change in accounting method is generally required to be applied retroactively in order to provide comparable historical period information to users of financial statements. However, due to the new basis of accounting established as a result of the Merger transaction and pushdown accounting, our financial statements are no longer comparable to those of prior periods and we have applied the full cost method of accounting on a prospective basis from the date of the Merger.

Under the full cost method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other

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disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.

Under the full cost method, oil and natural gas properties include costs that are excluded from costs being depleted or amortized. Costs excluded from depletion or amortization represent investments in unevaluated properties and include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. We exclude these costs until the property has been evaluated. We also allocate a portion of our acquisition costs to unevaluated properties based on fair value. Costs are transferred to the full cost pool as the properties are evaluated or over the life of the reservoir.

As noted above, prior to the Merger, we used the successful efforts method of accounting for oil and natural gas producing activities. Costs to acquire mineral interests in oil and natural gas properties, to drill and complete exploratory wells with found proved reserves, and to drill and complete development wells were capitalized. Exploratory drilling costs were initially capitalized, but charged to expense if and when a well was determined not to have reserves in commercial quantities. Geological and geophysical costs were charged to expense as incurred. Leasehold acquisition costs were capitalized as unproved properties. If proved reserves were discovered on undeveloped leases, the related leasehold costs were transferred to proved properties and amortized using the units of production method. For individual unevaluated properties with capitalized costs below a threshold amount, we allocated capitalized costs to earnings generally over the primary lease terms. Properties that were subject to amortization and those with capitalized costs greater than the threshold amount were assessed for impairment periodically. Capitalized costs of producing oil and natural gas properties were depreciated and depleted by the units-of-production method.

We produce both oil and natural gas. Throughout this Quarterly Report, when we refer to “total production,” “total reserves,” “percentage of production,” “percentage of reserves,” or any similar term, we have converted our natural gas reserves or production into barrel of oil equivalents. For this purpose, six thousand cubic feet of natural gas is equal to one barrel of oil, which is based on the relative energy content of natural gas and oil. Natural gas liquids are aggregated with oil in this Quarterly Report.

Overview and Outlook

As a result of pushdown accounting in connection with the Merger, the Predecessor Company’s operations are deemed to have ceased on June 3, 2014 and the Successor Company began operations as of that date. In the following discussion, the consolidated financial information for the three and nine months ending March 31, 2015 (reflecting operations of the Successor Company) is not comparable to that for the three and nine months ending March 31, 2014 (reflecting operations of the Predecessor Company). However, the comparability of certain components of our operating results and key operating performance measures was not significantly impacted by the Merger, specifically those related to production, average oil and natural gas selling prices, revenues and lease operating expenses. Therefore, we believe that comparing the Successor Company’s results of operations and cash flows with those of the Predecessor Company is useful when analyzing certain measures of our performance.

As a result of the Merger, the future strategy of EPL is determined by Energy XXI’s Board of Directors. Our fiscal year 2015 capital budget is approximately $250 million, excluding potential capitalized general and administrative expenses. For the nine months ended March 31, 2015, our capital expenditures totaled approximately $228 million, of which approximately $157 million was spent on development of core properties, $30 million on exploration of core properties and $41 million on other assets. The budgeted capital is allocated to development activities, which are geared toward the improvement of existing production, the continued development of core fields, and the performance of necessary plugging, abandonment and other decommissioning activities.

Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as oil and natural gas prices, tropical weather, economic, political and regulatory developments and availability of other sources of energy. Prices for oil and natural gas historically have been extremely volatile and are expected to continue to be volatile. Oil prices declined severely during the second quarter of our 2015 fiscal year, with continued lower prices in the third fiscal quarter of 2015. The posted price per barrel for West Texas intermediate light sweet crude oil, or WTI, for the period from January 1, 2014 to March 31, 2015 ranged from a high of $107.95 to a low of $43.39, a decrease of 59.8%, and the NYMEX natural gas price

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per MMBtu for the period January 1, 2014 to March 31, 2015 ranged from a high of $6.15 to a low of $2.50, a decrease of 59.3%. As of April 30, 2015, the spot market price for WTI was $59.63. During January 2015, we entered into Argus-LLS three-way collars on 7,000 barrels of our estimated oil production per day from February through December 2015.

The recent declines in oil prices have adversely affected our financial position and results of operations and the quantities of oil and natural gas reserves that we can economically produce. During the three and nine months ended March 31, 2015, we recognized ceiling test write-downs of our oil and natural gas properties of $430.9 million and $1.1 billion, respectively. These write-downs did not impact our cash flows from operating activities but did increase our net loss and reduce stockholder’s equity. If the current low commodity price environment or downward trend in oil prices continues, there is a reasonable likelihood that we could incur further impairment to our full cost pool in fiscal 2015 and 2016 based on the average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the previous 12-month period under SEC pricing methodology. Additionally, if the current low commodity price environment or downward trend in oil prices continues, there is also a possibility that our estimated proved oil and natural gas reserves will be reduced from such estimated reserves as of June 30, 2014.

In addition, in April 2015, we received letters from the Bureau of Ocean Energy Management (the “BOEM”) stating that we no longer qualify for waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging and abandonment liabilities. The letters notified us that we must provide supplemental financial assurance and/or bonding for our offshore oil and gas leases, rights-of-way, and rights-of-use and easements that require supplemental bonding. The BOEM has indicated the amount of such required supplemental bonding totals approximately $566.5 million, which amount is currently being negotiated by us. We are currently evaluating the impact of the BOEM letters on our future consolidated financial position, results of operations and cash flow. We intend to continue to work with the BOEM staff to resolve this matter, and we have already undertaken a number of initiatives to mitigate our potential liability resulting from the waiver disqualification and to limit the amount of required supplemental bonding by ensuring we have received credit for all of the plugging and abandonment work completed to date as well as counting our existing bonds with third parties and certain letters of credit against the BOEM bonding request. If we are unable to obtain the additional required bonds or assurances requested, the BOEM may require any of our operations on federal leases to be suspended or terminated, which would materially and adversely affect our financial condition, cash flows and results of operations.

If we experience sustained periods of low prices for oil and natural gas, it will likely have a further material adverse effect on our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.

We intend to continue to focus on integrating operations to realize consolidation benefits and maximize returns on existing assets by deploying capital resources on lower risk development drilling in the fields where we have previously enjoyed success, and reducing capital commitments on exploration and other activities that do not provide incremental production, while we seek to improve cash flow and pay down debt. We have also seen a significant and continuing reduction in rig rates and drilling costs, which should allow us to spend less capital drilling our development wells than in prior periods. Jack-up rig rates, for example, have fallen by 35 – 50% in recent months and other service providers are similarly cutting their rates.

Known Trends and Uncertainties

Ceiling Test Write-down.  During the three and nine months ended March 31, 2015, we recognized write-downs of our oil and natural gas properties. If the current low commodity price environment or downward trend in oil prices continues, there is a reasonable likelihood that we could incur further impairment to our full cost pool in fiscal 2015 and 2016.

Oil Spill Response Plan.  Energy XXI maintains a Regional Oil Spill Response Plan (the “Plan”) that defines response requirements, procedures and remediation plans in the event we have an oil spill. Oil Spill Response Plans are generally approved by the Bureau of Safety and Environmental Enforcement (“BSEE”) bi-annually, except when changes are required, in which case revised plans are required to be submitted for

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approval at the time changes are made. We believe the Plan specifications are consistent with the requirements set forth by the BSEE. Additionally, these plans are tested and drills are conducted periodically at all levels of the Company.

Hurricanes.  Since the majority of our production originates in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. Significant hurricane impacts co