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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 June 30, 2013

 

OR

 

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

 

For the transition period from                  to              

 

Commission File Number 333-183815

 

 

EP Energy LLC

(Exact Name of Registrant as Specified in Its Charter)

 

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Delaware		45-4871021
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
1001 Louisiana Street Houston, Texas		77002
(Address of Principal Executive Offices)		(Zip Code)

 

Telephone Number: (713) 997-1200

 

Internet Website: www.epenergy.com

 

 

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  o   No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  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		Smaller reporting company  o
(Do not check if a smaller reporting company)

 

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

 

 

Table of Contents

 

EP ENERGY LLC

TABLE OF CONTENTS

 

Caption			Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements		2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 4.	Controls and Procedures		46
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Mine Safety Disclosures		47
Item 5.	Other Information		47
Item 6.	Exhibits		47
Signatures			48

 

Below is a list of terms that are common to our industry and used throughout this document:

 

/d	=	per day
Bbl	=	Barrel
Boe	=	barrel of oil equivalent
CBM	=	Coal bed methane
Mboe	=	thousand barrels of oil equivalent
MBbls	=	thousand barrels
Mcf	=	thousand cubic feet
MMBtu	=	million British thermal units
MMcf	=	million cubic feet
NGL	=	natural gas liquids
TBtu	=	trillion British thermal units

 

When we refer to oil and natural gas in “equivalents,” we are doing so to compare quantities of oil with quantities of natural gas or to express these different commodities in a common unit. In calculating equivalents, we use a generally recognized standard in which one Bbl of oil is equal to six Mcf of natural gas. Also, when we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.

 

When we refer to “us”, “we”, “our”, “ours”, “the company” or “EP Energy”, we are describing EP Energy LLC and/or our subsidiaries.

 

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CAUTIONARY STATEMENTS FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

We have made statements in this document that constitute forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning possible or assumed future results of operations. The words “believe,” “expect,” “estimate,” “anticipate” and similar expressions will generally identify forward-looking statements. These statements may relate to information or assumptions about:

 

·                   capital and other expenditures;

 

·                   financing plans;

 

·                   capital structure;

 

·                   liquidity and cash flow;

 

·                   pending legal proceedings, claims and governmental proceedings, including environmental matters;

 

·                   future economic and operating performance;

 

·                   operating income;

 

·                   management’s plans; and

 

·                   goals and objectives for future operations.

 

Forward-looking statements are subject to risks and uncertainties. While we believe the assumptions or bases underlying the forward-looking statements are reasonable and are made in good faith, we caution that assumed facts or bases almost always vary from actual results, and these variances can be material, depending upon the circumstances. We cannot assure you that the statements of expectation or belief contained in our forward-looking statements will result or be achieved or accomplished. Important factors that could cause actual results to differ materially from estimates or projections contained in our forward-looking statements are described in our 2012 Annual Report on Form 10-K. There have been no material changes to the risk factors described in the Form 10-K.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

EP ENERGY LLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions)

(Unaudited)

 

		Quarterly Periods										Year-to-Date Periods
		Successor							Predecessor			Successor							Predecessor
		Quarter ended June 30, 2013			Quarter ended June 30, 2012				April 1 to May 24, 2012			Six months ended June 30, 2013			March 23 (inception) to June 30, 2012				January 1 to May 24, 2012
Operating revenues
Oil and condensate		$	293		$	74			$	113		$	568		$	74			$	322
Natural gas		115			46				80			215			46				262
NGL		17			4				12			32			4				29
Financial derivatives		166			57				289			35			57				365
Total operating revenues		591			181				494			850			181				978
Operating expenses
Natural gas purchases		8			4				—			10			4				—
Transportation costs		24			9				20			46			9				45
Lease operating expense		51			15				34			98			15				96
General and administrative		58			208				31			118			208				75
Depreciation, depletion and amortization		149			26				118			277			26				319
Ceiling test charges		—			—				—			—			—				62
Impairments		10			1				—			10			1				—
Exploration expense		13			6				—			27			6				—
Taxes, other than income taxes		17			10				17			43			10				45
Total operating expenses		330			279				220			629			279				642
Operating income (loss)		261			(98		)		274			221			(98		)		336
Earnings (loss) from unconsolidated affiliates		4			(1		)		(2		)	6			(1		)		(5		)
Other (expense) income		(2		)	1				(4		)	(1		)	1				(3		)
Loss on extinguishment of debt		(2		)	—				—			(3		)	—				—
Interest expense		(78		)	(53		)		(10		)	(162		)	(53		)		(14		)
Income (loss) from continuing operations before income taxes		183			(151		)		258			61			(151		)		314
Income tax expense		1			—				95			2			—				136
Income (loss) from continuing operations		182			(151		)		163			59			(151		)		178
Income from discontinued operations		27			1				—			44			1				—
Net income (loss)		$	209		$	(150	)		$	163		$	103		$	(150	)		$	178

 

See accompanying notes.

 

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EP ENERGY LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

		Quarterly Periods										Year-to-Date Periods
		Successor							Predecessor			Successor							Predecessor
		Quarter ended June 30, 2013			Quarter ended June 30, 2012				April 1 to May 24, 2012			Six months ended June 30, 2013			March 23 (inception) to June 30, 2012				January 1 to May 24, 2012
Net income (loss)		$	209		$	(150	)		$	163		$	103		$	(150	)		$	178
Cash flow hedging activities:
Reclassification adjustments (1)		—			—				1			—			—				3
Comprehensive income (loss)		$	209		$	(150	)		$	164		$	103		$	(150	)		$	181

 

(1)                          Reclassification adjustments are stated net of tax. Taxes recognized for the predecessor periods from April 1 to May 24, 2012 and January 1 to May 24, 2012 were less than $1 million and $2 million, respectively.

 

See accompanying notes.

 

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EP ENERGY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

		June 30, 2013			December 31, 2012
ASSETS
Current assets
Cash and cash equivalents		$	283		$	63
Accounts receivable
Customer, net of allowance of less than $1 for 2013 and 2012		196			185
Other, net of allowance of $1 for 2013 and 2012		21			15
Materials and supplies		20			16
Derivative instruments		77			108
Restricted cash		41			—
Assets of discontinued operations		964			994
Prepaid assets		33			18
Other		1			4
Total current assets		1,636			1,403
Property, plant and equipment, at cost
Oil and natural gas properties		7,506			6,605
Other property, plant and equipment		66			53
		7,572			6,658
Less accumulated depreciation, depletion and amortization		503			220
Property, plant and equipment, net		7,069			6,438
Other assets
Investment in unconsolidated affiliate		209			220
Derivative instruments		116			88
Deferred income taxes		6			6
Unamortized debt issue cost		125			134
Other		13			4
		469			452
Total assets		$	9,174		$	8,293

 

See accompanying notes.

 

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EP ENERGY LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

		June 30, 2013			December 31, 2012
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
Trade		$	128		$	98
Other		399			346
Derivative instruments		5			17
Accrued taxes other than income		31			21
Accrued interest		55			57
Accrued taxes		1			19
Asset retirement obligations		3			4
Liabilities of discontinued operations		171			156
Other accrued liabilities		60			45
Total current liabilities		853			763
Long-term debt		5,027			4,346
Other long-term liabilities
Derivative instruments		2			14
Asset retirement obligations		83			76
Other		9			9
Total non-current liabilities		5,121			4,445
Commitments and contingencies (Note 8)
Member’s equity		3,200			3,085
Total liabilities and equity		$	9,174		$	8,293

 

See accompanying notes.

 

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EP ENERGY LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 

		Year-to-Date Periods
		Successor							Predecessor
		Six Months ended June 30, 2013			March 23 (Inception) to June 30, 2012				January 1 to May 24, 2012
Cash flows from operating activities
Net income (loss)		$	103		$	(150	)		$	178
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation, depletion and amortization		318			34				319
Deferred income tax expense		—			1				199
(Earnings) loss from unconsolidated affiliates, net of cash distributions		11			2				12
Ceiling test charges		—			—				62
Impairments		10			1				—
Loss on extinguishment of debt		3			—				—
Amortization of equity compensation expense		13			8				—
Non-cash portion of exploration expense		24			—				—
Amortization of debt issuance cost		11			3				7
Asset and liability changes
Accounts receivable		(23		)	(18		)		132
Accounts payable		61			(6		)		(56		)
Derivative instruments		(21		)	(15		)		(201		)
Accrued interest		(2		)	52				(1		)
Other asset changes		(15		)	(26		)		(3		)
Other liability changes		(43		)	22				(68		)
Net cash provided by (used in) operating activities		450			(92		)		580
Cash flows from investing activities
Capital expenditures		(914		)	(150		)		(636		)
Net proceeds from the sale of assets		10			22				9
Cash paid for acquisitions, net of cash acquired		(2		)	(7,126		)		(1		)
Net cash used in investing activities		(906		)	(7,254		)		(628		)
Cash flows from financing activities
Proceeds from long-term debt		985			4,323				215
Repayment of long-term debt		(305		)	(80		)		(1,065		)
Contributed member equity		—			3,300				—
Contribution from parent		—			—				960
Debt issuance costs		(4		)	(142		)		—
Net cash provided by financing activities		676			7,401				110
Change in cash and cash equivalents		220			55				62
Cash and cash equivalents
Beginning of period		63			—				25
End of period		$	283		$	55			$	87

 

See accompanying notes

 

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EP ENERGY LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In millions)

(Unaudited)

 

		Total Member’s Equity
Balance at December 31, 2012		$	3,085
Compensation expense		12
Net income		103
Balance at June 30, 2013		$	3,200

 

See accompanying notes.

 

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EP ENERGY LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

EP Energy LLC (the successor and formerly known as Everest Acquisition LLC) was formed as a Delaware limited liability company on March 23, 2012 by Apollo Global Management LLC (Apollo) and other private equity investors (collectively, the Sponsors). On April 24, 2012, we issued approximately $2.75 billion in private placement notes.  Proceeds from these notes, along with other sources, were used by the Sponsors to acquire EP Energy Global LLC (formerly known as EP Energy Corporation and EP Energy, L.L.C. after its conversion into a Delaware limited liability company) and subsidiaries for approximately $7.2 billion on May 24, 2012, from El Paso Corporation (El Paso) immediately prior to and in connection with its merger with Kinder Morgan, Inc. (KMI). We are engaged in the exploration for and the acquisition, development, and production of oil, natural gas and NGL primarily in the United States, with international activities in Brazil. EP Energy Global LLC constituted the oil and natural gas operations of El Paso prior to the Acquisition. Hereinafter, we refer to the May 24, 2012 transaction as the Acquisition and the acquired entities prior to the Acquisition are referred to as the predecessor for financial accounting and reporting purposes.

 

The condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles as it applies to interim condensed consolidated financial statements. Because this is an interim period report presented using a condensed format, it does not include all of the disclosures required by United States generally accepted accounting principles. You should read this quarterly report along with our 2012 Annual Report on Form 10-K, which contains a summary of significant accounting policies and other disclosures. The condensed consolidated financial statements as of June 30, 2013 and for each of the successor and predecessor periods presented are unaudited. The consolidated balance sheet as of December 31, 2012 has been derived from the audited consolidated balance sheet included in our 2012 Annual Report on Form 10-K.  In our opinion, all adjustments which are of a normal, recurring nature are reflected to fairly present these interim period results. The results for any interim period are not necessarily indicative of the expected results for the entire year. Our disclosures in this Form 10-Q are an update to those provided in our 2012 Annual Report on Form 10-K.

 

In June 2013, we entered into three separate agreements to sell our CBM properties located in the Raton, Black Warrior and Arkoma basins, our Arklatex conventional natural gas assets located in east Texas and north Louisiana and our legacy south Texas conventional natural gas assets as further described in Note 2.  We have classified the assets and liabilities associated with these assets as discontinued operations in our condensed consolidated balance sheets in all periods presented in this Form 10-Q.  We have classified the results of operations of the assets held for sale as income (loss) from discontinued operations in successor periods subsequent to the Acquisition (May 25, 2012).  For periods prior to the Acquisition, the predecessor applied the full cost method of accounting for oil and natural gas properties where capitalized costs were aggregated by country (e.g., U.S.); accordingly, the assets held for sale did not qualify for, and have not been reflected as discontinued operations in the predecessor financial statement periods.  Additionally, the predecessor periods also reflect reclassifications to conform to EP Energy LLC’s financial statement presentation.

 

 

Significant Accounting Policies

 

Natural Gas Purchases/Sales.   We purchase and sell natural gas on a monthly basis to manage our overall natural gas production and sales.  These transactions are undertaken to optimize prices we receive for our natural gas, to physically move gas to its intended sales point, or to manage firm transportation agreements. Revenue related to these transactions is recorded in natural gas sales in operating revenues and associated purchases reflected in natural gas purchases in operating expenses on our consolidated income statement.  All historical successor periods have been adjusted to reflect these purchases and sales transactions on a gross basis.

 

There were no changes in significant accounting policies as described in the 2012 Annual Report on Form 10-K and no material accounting pronouncements issued but not yet adopted as of June 30, 2013.

 

2. Acquisitions and Divestitures

 

Acquisitions. On May 24, 2012, the Sponsors acquired all of the equity of EP Energy Global LLC for approximately $7.2 billion. The Acquisition was funded with approximately $3.3 billion in equity contributions and the issuance of approximately $4.25 billion of debt. In conjunction with the Acquisition, a portion of the proceeds was used to repay approximately $960 million of debt outstanding under the predecessor’s revolving credit facility at that time. See Note 7 for an additional discussion of debt.

 

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The purchase transaction was accounted for under the acquisition method of accounting which requires, among other items, that assets and liabilities assumed be recognized on the balance sheet at their fair values as of the Acquisition date. Our consolidated balance sheet for all periods includes the following purchase price allocation based on available information to specific assets and liabilities assumed based on estimates of fair values and costs. There was no goodwill associated with the transaction.

 

Allocation of purchase price		May 24, 2012
		(In millions)
Current assets		$	587
Non-current assets		446
Property, plant and equipment		6,897
Current liabilities		(420		)
Non-current liabilities		(297		)
Total purchase price		$	7,213

 

The unaudited pro forma information below for the quarter and six months ended June 30, 2012 has been derived from the historical, consolidated financial statements and has been prepared as though the Acquisition occurred on January 1, 2012. The unaudited pro forma information does not purport to represent what our results of operations would have been if the Acquisition had occurred on such date.

 

		Quarter ended June 30,			Six months ended June 30,
		2012			2012
		(In millions)
Operating revenues		$	694		$	1,178
Net income		175			235

 

Discontinued Operations.   In June 2013, we entered into three separate agreements to sell our CBM properties located in the Raton, Black Warrior and Arkoma basins; our Arklatex conventional natural gas assets located in east Texas and north Louisiana and our legacy south Texas conventional natural gas assets.  In conjunction with signing these agreements in June, we received $41 million in deposits related to these sales, which is recorded as restricted cash and as other accrued liabilities in our balance sheet. In July and August 2013 we closed these sales for total consideration of approximately $1.3 billion. As a result of entry into these agreements, we presented the assets, liabilities and related income as discontinued operations in all successor periods as described in Note 1.

 

Summarized operating results and financial position data of our discontinued operations were as follows (in millions):

 

		Successor
		Quarterly Periods						Year-to-Date Periods
		Quarter ended June 30, 2013			Quarter ended June 30, 2012			Six months ended June 30, 2013			March 23 (inception) to June 30, 2012
Operating revenues		$	90		$	27		$	168		$	27
Operating expenses
Natural gas purchases		8			4			16			4
Transportation costs		8			5			15			5
Lease operating expense		17			6			34			6
Depreciation, depletion and amortization		20			8			41			8
Other expense		10			3			18			3
Total operating expenses		63			26			124			26
Income from discontinued operations		$	27		$	1		$	44		$	1

 

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		June 30, 2013			December 31, 2012
Assets of discontinued operations
Current assets		$	60		$	55
Property, plant and equipment, net		898			932
Other non-current assets		6			7
Total assets of discontinued operations		$	964		$	994
Liabilities of discontinued operations
Accounts payable		$	44		$	40
Other current liabilities		10			5
Asset retirement obligations		116			110
Other non-current liabilities		1			1
Total liabilities of discontinued operations		$	171		$	156

 

Other Divestitures. During the first quarter of 2013, we received approximately $10 million for the sale of domestic oil and natural gas properties.  No gain or loss was recorded on this sale. In June 2012, we sold our unevaluated property interests in Egypt for approximately $22 million and did not record a gain or loss on the sale. In addition, the predecessor received approximately $9 million for the sale of domestic oil and natural gas properties that closed in December 2011.

 

On July 16, 2013, we entered into a Quota Purchase Agreement to sell our Brazil operations which is expected to close by the end of the first quarter of 2014.  The sale is subject to Brazilian regulatory approval, as well as certain other customary closing conditions.  We recorded a $10 million impairment charge in the second quarter of 2013 based on comparing the fair market value of our Brazil operations to its underlying carrying value.  We estimated the fair value of our Brazil operations (representing a Level 3 fair value measurement) based primarily on sales proceeds expected to be received less estimates of retained liabilities. Our Brazil operations will be reflected as discontinued operations in all periods presented beginning with the third quarter of 2013.

 

3. Ceiling Test Charges

 

Prior to the Acquisition, the predecessor used the full cost method of accounting.  Under this method of accounting, the predecessor conducted quarterly ceiling tests of capitalized costs in each of its full cost pools. During the period from January 1, 2012 to May 24, 2012, the predecessor recorded a non-cash charge of approximately $62 million as a result of the decision to end exploration activities in Egypt. The charge related to unevaluated costs in that country and included approximately $2 million related to equipment.

 

4. Income Taxes

 

Effective Tax Rate. For the quarter and six months ended June 30, 2013, the effective tax rate applicable to continuing operations was less than one percent and three percent, respectively. These are significantly lower than the statutory rate primarily due to our being a limited liability company treated as a partnership for federal and state income tax purposes. We continue to be subject to foreign income taxes on our Brazil operations.

 

Prior to the Acquisition, the predecessor was party to a tax accrual policy with El Paso whereby El Paso filed U.S. and certain state returns on the predecessor’s behalf.  The effective tax rate for the predecessor period from January 1, 2012 to May 24, 2012, was 43 percent, significantly higher than the statutory rate primarily due to the impact of an Egyptian non-cash charge without a corresponding tax benefit.

 

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5. Financial Instruments

 

The following table presents the carrying value and fair value of our financial instruments:

 

		June 30, 2013						December 31, 2012
		Carrying Value			Fair Value			Carrying Value			Fair Value
		(In millions)
Long-term debt		$	5,027		$	5,356		$	4,346		$	4,690
Derivative instruments		$	186		$	186		$	165		$	165

 

As of June 30, 2013 and December 31, 2012, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable represent fair value because of the short-term nature of these instruments. We hold long-term debt obligations (see Note 7) with various terms. We estimated the fair value of debt (representing a Level 2 fair value measurement) primarily based on quoted market prices for the same or similar issuances, including consideration of our credit risk related to those instruments.

 

Oil and natural gas derivative instruments.  We attempt to mitigate a portion of our commodity price risk and stabilize cash flows associated with forecasted sales of oil and natural gas production through the use of oil and natural gas swaps, basis swaps and option contracts. In June and July of 2013, we entered into offsetting positions on natural gas derivatives of 35 TBtu on anticipated 2013 production and 42 TBtu on anticipated 2014 production due to an expected decline in natural gas volumes following the sale of natural gas assets as described in Note 2.  As of June 30, 2013 and December 31, 2012, we had total derivative contracts related to 33 MMBbl and 34 MMBbl of oil and 174 TBtu and 276 TBtu of natural gas, respectively. None of these contracts are designated as accounting hedges. Subsequent to June 30, 2013 through August 13, 2013, we added fixed price oil derivatives on 17 MMBbl.

 

Interest Rate Derivative Instruments . During July 2012, we entered into interest rate swaps with a notional amount of $600 million that are intended to reduce variable interest rate risk related to our LIBOR based loans. These interest rate derivative instruments started in November 2012 and extend through April 2017. For the quarter and six months ended June 30, 2013, we recorded income of $8 million and $7 million, respectively, in interest expense related to the change in fair market value and cash settlements of our interest rate derivative instruments.

 

Fair Value Measurements.  We use various methods to determine the fair values of our financial instruments. The fair value of a financial instrument depends on a number of factors, including the availability of observable market data over the contractual term of the underlying instrument. We separate the fair values of our financial instruments into three levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value.  As of June 30, 2013 and December 31, 2012, all of our financial instruments were classified as Level 2. Our assessment of an instrument within a level can change over time based on the maturity or liquidity of the instrument, which could result in a change in the classification of our financial instruments between other levels.

 

Financial Statement Presentation.   The following table presents the fair value associated with derivative financial instruments as of June 30, 2013 and December 31, 2012. All of our derivative instruments are subject to master netting arrangements which provide for the unconditional right of offset for all derivative assets and liabilities with a given counterparty in the event of default. We present assets and liabilities related to these instruments in our balance sheets as either current or non-current assets or liabilities based on their anticipated settlement date, net of the impact of master netting agreements.  On certain derivative contracts recorded as assets in the table below we are exposed to the risk that our counterparties may not perform.

 

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		Level 2
		Derivative Assets												Derivative Liabilities
		Gross (1)						Balance Sheet Location						Gross (1)						Balance Sheet Location
		Fair value			Impact of Netting			Current			Non- current			Fair value			Impact of Netting			Current			Non- current
		(In millions)												(In millions)
June 30, 2013
Derivatives		$	254		$	(61	)	$	77		$	116		$	(68	)	$	61		$	(5	)	$	(2	)
December 31, 2012
Derivatives		$	235		$	(39	)	$	108		$	88		$	(70	)	$	39		$	(17	)	$	(14	)

(1)                          Gross derivative assets are comprised primarily of $245 million and $231 million of oil and natural gas derivatives and $9 million and $4 million of interest rate derivatives as of June 30, 2013 and December 31, 2012, respectively.  Gross derivative liabilities are comprised primarily of $66 million and $64 million of oil and natural gas derivatives and $2 million and $6 million of interest rate derivatives as of June 30, 2013 and December 31, 2012, respectively.

 

The following table presents realized and unrealized net gains and losses on financial oil and gas derivative instruments presented in operating revenues and dedesignated cash flow hedges of the predecessor included in accumulated other comprehensive income (in millions):

 

		Quarterly Periods										Year-to-Date Periods
		Successor							Predecessor			Successor							Predecessor
		Quarter ended June 30, 2013			April 1 to June 30, 2012				April 1 to  May 24, 2012			Six Months  ended  June 30,  2013			March 23 (inception)  to June 30, 2012				January 1 to May 24,  2012
Realized and unrealized gains		$	166		$	57			$	289		$	35		$	57			$	365
Accumulated other comprehensive income		—			—				1			—			—				5

 

6.  Property, Plant and Equipment

 

Unproved oil and natural gas properties .  As of June 30, 2013 and December 31, 2012, we had $1.8 billion and $2.3 billion of unproved oil and natural gas properties on our balance sheet. The reduction is largely attributable to transferring approximately $0.5 billion from unproved properties to proved properties.  For the quarter and six months ended June 30, 2013, we recorded $11 million and $23 million of amortization of unproved leasehold costs in exploration expense in our income statement.  Suspended well costs were not material as of June 30, 2013.

 

Impairments Assessment .  Subsequent to the Acquisition, we applied the successful efforts method of accounting and evaluate capitalized costs related to proved properties at least annually or upon a triggering event to determine if impairment of such properties is necessary.  During the second quarter of 2013, we recorded an impairment of approximately $10 million related to our Brazil operations as further described in Note 2.  Forward commodity prices can play a significant role in determining impairments. Due to the current forecast of future natural gas prices and considering the significant amount of fair value allocated to our oil and natural gas properties in conjunction with the Acquisition, sustained lower oil and natural gas prices from present levels could result in an impairment of the carrying value of our proved properties in the future.

 

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Table of Contents

 

Asset Retirement Obligations.  We have legal asset retirement obligations associated with the retirement, replacement, or removal of our oil and natural gas wells and related infrastructure. We incur these obligations when production on those wells is exhausted, when we no longer plan to use them or when we abandon them. We accrue these obligations when we can estimate the timing and amount of their settlement. In estimating our liability, we utilize several assumptions, including a credit-adjusted risk-free rate of 7 percent and a projected inflation rate of 2.5 percent. The net asset retirement liability is reported on our balance sheet in other current and non-current liabilities.  Changes in the net liability from January 1 through June 30, 2013 related to our continuing operations were as follows:

 

(1)       Includes approximately $37 million related to our Brazil operations which we entered into a Quota Purchase Agreement to sell (see Note 2).

 

Capitalized Interest.   Interest expense is reflected in our financial statements net of capitalized interest. Capitalized interest for the quarter and six months ended June 30, 2013 was $3 million and $8 million, respectively. Capitalized interest for the quarter ended June 30, 2012 and from March 23 (inception) to June 30, 2012 was $3 million and $2 million, respectively. Capitalized interest for the predecessor periods from April 1 to May 24, 2012 and from January 1 to May 24, 2012 was $1 million and $4 million, respectively.

 

7. Long-Term Debt

 

Listed below are our debt obligations:

 

		Interest Rate		June 30, 2013
				(In millions)
$2.5 billion RBL credit facility - due May 24, 2017		Variable		$	785
$750 million term loan - due May 24, 2018 (1) (3)		Variable		743
$400 million senior secured term loan - due April 30, 2019 (2) (3)		Variable		399
$750 million senior secured notes - due May 1, 2019 (3)		6.875%		750
$2.0 billion senior unsecured notes - due May 1, 2020		9.375%		2,000
$350 million senior unsecured notes - due September 1, 2022		7.75%		350
Total				$	5,027

(1)	The term loan was issued at 99 percent of par. In May 2013, we repriced our term loan which reduced the specified margin over LIBOR from 4.00% to 2.75%, and reduced the minimum LIBOR floor from 1.00% to 0.75%. As of June 30, 2013, the effective interest rate of the term loan was 3.50%.
(2)	The term loan carries a specified margin over the LIBOR of 3.50%, with a minimum LIBOR floor of 1.00%.
(3)	The term loans and secured notes are secured by a second priority lien on all of the collateral securing the RBL credit facility, and effectively rank junior to any existing and future first lien secured indebtedness of the Company.

 

During the quarter and six months ended June 30, 2013, we amortized $5 million and $10 million of deferred financing costs, respectively.  During the quarter ended June 30, 2012, and for the period from March 23 (inception) to June 30, 2012, we amortized $3 million of deferred financing costs for each period. During the predecessor periods from April 1 to May 24, 2012 and from January 1 to May 24, 2012, we amortized $7 million of deferred financing costs for each period. These costs are included in interest expense.  As of June 30, 2013, we had $125 million remaining of unamortized debt issuance costs.  During the six months ended June 30, 2013, we recorded a $3 million loss on extinguishment of debt in our income statement for the portion of deferred financing costs written off in conjuction with our $750 million term loan repricing in May 2013 and the first semi-annual redetermination of our RBL in March 2013.

 

$2.5 Billion Reserve-based Loan (RBL). In March 2013, we completed our first semi-annual redetermination increasing the borrowing base of our RBL Facility from $1.8 billion to $2.5 billion.  Under this facility, we can borrow funds or issue letters of credit (LCs). During the six months ended June 30, 2013, we borrowed $680 million. As of June 30, 2013, we had $785 million of outstanding borrowings and approximately $9 million of letters of credit issued, leaving $1.71 billion of remaining capacity available under the facility. As of August 13, 2013, we had no outstanding borrowings under the facility.

 

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