See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
Notes to Unaudited Condensed Consolidated
Financial Statements
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
Nature of Operations
EV
Energy Partners, L.P. together with its wholly owned subsidiaries (“we,” “our,” “us,” “EVEP”
or the “Partnership”) is a publicly held limited partnership. Our general partner is EV Energy GP, L.P. (“EV
Energy GP”), a Delaware limited partnership, and the general partner of our general partner is EV Management, LLC (“EV
Management”), a Delaware limited liability company. EV Management is a wholly owned subsidiary of EnerVest, Ltd. (“EnerVest”),
a Texas limited partnership. EnerVest and its affiliates also have a significant interest in us through their 71.25% ownership
of EV Energy GP which, in turn, owns a 2% general partner interest in us and all of our incentive distribution rights.
The Partnership operates
one reportable segment engaged in the acquisition, development and production of oil and natural gas properties and all of our
operations are located in the United States.
Basis of Presentation
Our unaudited condensed
consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed
or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited
condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for
a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with
our audited consolidated financial statements and the related notes included in our Annual Report on Form 10–K for the year
ended December 31, 2017.
All intercompany accounts
and transactions have been eliminated in consolidation. In the Notes to Unaudited Condensed Consolidated Financial Statements,
all dollar and unit amounts in tabulations are in thousands of dollars and units, respectively, unless otherwise indicated.
New Accounting Standards
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014–09,
Revenue
from Contracts with Customers
(“ASU 2014-09”)
.
This ASU, as amended, superseded virtually all of the revenue
recognition guidance in generally accepted accounting principles in the United States. The core principle of the five–step
model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects
the consideration to which it expects to be entitled in exchange for those goods or services. Entities can choose to apply the
standard using either the full retrospective approach or a modified retrospective approach. We implemented ASU 2014-09 as of January
1, 2018 using the modified retrospective method. The adoption of this ASU did not have a material impact on our unaudited condensed
consolidated financial statements. See Note 3 for additional details about the impact upon adoption and related disclosures.
In August 2016, the
FASB issued ASU No. 2016–15,
Statement of Cash Flows
. This ASU addresses certain cash flow issues with the objective
of reducing the existing diversity in practice in how the cash receipts and cash payments are presented and classified in the statement
of cash flows. We adopted ASU 2016–15 on January 1, 2018. The adoption of this ASU did not have a material impact on our
unaudited condensed consolidated financial statements
In November
2016, the FASB issued ASU No. 2016-18:
Statement of Cash Flows– Restricted Cash
. The main objective of ASU
2016-18 is to address the diversity that exists in the classification and presentation of changes in restricted cash on the
statement of cash flows. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash
equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of
cash flows. We adopted ASU 2016-18 on January 1, 2018. While there was no restricted cash as of March 31, 2018 or December
31, 2017, the adoption of this ASU resulted in a change to the condensed consolidated statement of cash flows for the three
months ended March 31, 2017. For the three months ended March 31, 2017, the $5.5 million cash and cash equivalents –
beginning of year was revised to $57.6 million cash, cash equivalents and restricted cash – beginning of year and the
net cash used in investing activities was increased from $7.3 million to $59.4 million.
In January 2017, the
FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”).
The main objective of ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments
of this ASU provide a screen to determine when a set is not a business. The screen requires that when substantially all of the
fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable
assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen
is not met, the amendments of this ASU (i) require that to be considered a business, a set must include, at a minimum, an input
and a substantive process that together significantly contribute to the ability to create output and (ii) remove the evaluation
of whether a market participant could replace missing elements. We adopted ASU 2017-01 on January 1, 2018, and will apply the ASU
prospectively to any acquisitions.
No other new accounting
pronouncements issued or effective during the three months ended March 31, 2018 have had or are expected to have a material impact
on our unaudited condensed consolidated financial statements other than those disclosed in our Annual Report on Form 10-K for the
year ended December 31, 2017.
Subsequent Events
We
evaluated subsequent events for appropriate accounting and disclosure through the date these unaudited condensed consolidated financial
statements were issued.
NOTE 2. CHAPTER 11 CASES, ABILITY TO
CONTINUE AS A GOING CONCERN AND COVENANT VIOLATIONS
Voluntary Reorganization under Chapter
11
On March 13, 2018,
EVEP, EV Energy GP, EV Management and certain of EVEP’s wholly owned subsidiaries (each a “Debtor” and, collectively,
the “Debtors”) entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with
(i) holders (collectively, the “Supporting Noteholders”) of approximately 70% of the 8.0% senior unsecured notes due
April 2019 (the “Senior Notes”) issued pursuant to that certain indenture, dated as of March 22, 2011 (as amended,
restated, supplemented or otherwise modified from time to time, the “Indenture”), among EVEP, EV Energy Finance Corp.,
each of the guarantors party thereto, and Delaware Trust Company, as indenture trustee (the “Notes Trustee”), that
are signatories to the Restructuring Support Agreement; (ii) lenders (collectively, the “Supporting Lenders” and, together
with the Supporting Noteholders, the “Supporting Parties”) under our reserve-based lending facility, by and among EVEP,
EV Properties, L.P., JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), BNP Paribas and
Wells Fargo, National Association, as co-syndication agents, the guarantors party thereto (the “credit facility”),
and the lenders signatory thereto, initially constituting approximately 94%, but subsequently increased to 100%, of the principal
amount outstanding thereunder; (iii) EnerVest; and (iv) EnerVest Operating, L.L.C. (“EnerVest Operating” and, together
with EnerVest, the “EnerVest Parties”). The Restructuring Support Agreement sets forth, subject to certain conditions,
the commitment of the Debtors and the Consenting Creditors to support a comprehensive restructuring of the Debtors’ long-term
debt (the “Restructuring”).
On March 14, 2018,
the Partnership commenced the solicitation of votes from the holders of the Senior Notes to accept or reject the prepackaged plan
of reorganization (the “Plan”). If the Partnership effectuates the Restructuring pursuant to the Restructuring Support
Agreement and the Plan, and the Plan is approved by the Bankruptcy Court, then the claims of the lenders under the credit facility
and the holders of the Senior Notes will be cancelled.
On April 2, 2018, the
Debtors commenced the Chapter 11 Cases in the Bankruptcy Court. In connection with the Chapter 11 Cases, the Debtors filed motions
with the Bankruptcy Court seeking operational and procedural relief, including joint administration of their Chapter 11 Cases.
The Bankruptcy Court granted such motions at a “first day” hearing held on April 4, 2018, and on April 25, 2018, entered
into orders granting such motions on a final basis. The Bankruptcy Court scheduled a hearing to consider confirmation of the Plan
on May 15, 2018. If the Plan is confirmed by the Bankruptcy Court and becomes effective, then the claims of the lenders under the
credit facility and the holders of the Senior Notes will be discharged. There can be no assurance regarding the Partnership’s
ability to obtain confirmation of the Plan or approval of other relief in the Chapter 11 Cases, the Bankruptcy Court’s rulings
in the Chapter 11 Cases or the ultimate outcome of the Chapter 11 Cases in general.
For the duration of
the Restructuring and after the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject
to risks and uncertainties associated with the Restructuring and Chapter 11 Cases. As a result of these risks and uncertainties,
our assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases,
and the description of our operations, properties and capital plans included in these financial statements may not accurately reflect
our operations, properties and capital plans following the Chapter 11 Cases.
The Partnership expects
to continue its operations without interruption during the pendency of the Chapter 11 Cases.
The Restructuring Support
Agreement sets forth, subject to certain conditions, the commitment of the Debtors and the Consenting Creditors to support the
Restructuring. The Restructuring Support Agreement obligates the Debtors and the Consenting Creditors to, among other things, support
and not interfere with consummation of the Restructuring and, as to the Consenting Creditors, vote their claims in favor of the
Plan. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet
specified milestones relating to the filing, confirmation and consummation of the Plan, among other requirements, and in the event
of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to
termination if the effective date of the Plan has not occurred within 250 days of the bankruptcy filing. There can be no assurances
that the Restructuring will be consummated.
Under the terms of
the Restructuring Support Agreement, the financial restructuring would be effectuated through the Plan, which was filed contemporaneously
with the Debtors’ voluntary petitions. Pursuant to the terms of the Plan, if confirmed by the Bankruptcy Court, it is anticipated
that, among other things:
|
·
|
On or prior to the Effective Date of the Plan (the “Effective Date”), the Supporting
Holders that hold the Senior Notes will contribute their Senior Notes (the “Contributed Notes”) to a newly formed C-corporation
(“New EVEP Parent Inc.”) in exchange for pro rata share of 95% of the shares of common stock of New EVEP Parent Inc.
(the “New Equity Interests”);
|
|
·
|
On the Effective Date, New EVEP Parent Inc. would contribute to a newly formed subsidiary (“Acquisition
Inc.”) (i) the Contributed Notes, (ii) a number of shares of New Equity Interests sufficient to satisfy (a) the claims of
the holders of the Senior Notes (the “Notes Claims”) other than the Notes Claims in respect of the Contributed Notes
and (b) shares of New Equity Interests to be distributed to the holders of existing equity interests in the Partnership (the “Existing
Unitholders”) and (iii) 5-year warrants for 8% of the New Equity Interests (subject to dilution by the shares (the “MIP
Shares”) reserved to participants in the new management incentive plan (the “MIP”)), with a strike price set
at an equity value at which the Supporting Holders would receive a recovery equal to par plus accrued and unpaid interest as of
the petition date of the Chapter 11 Cases in respect of the Senior Notes (after taking into account value dilution on account of
the initial distribution of participants in the MIP) (the “New Warrants”); and in return, New EVEP Parent Inc. will
receive all of the equity interests of Acquisition Inc.;
|
|
·
|
On the Effective Date, Acquisition Inc. will acquire all of the assets of the Partnership and certain
liabilities not discharged, satisfied or as otherwise provided for under the Plan in exchange for (i) the Contributed Notes and
(ii) the New Equity Interests it received from New EVEP Parent Inc.;
|
|
·
|
New EVEP Parent Inc. will distribute the New Equity Shares it received from Acquisition Inc. to
the (i) holders of the Senior Notes that did not contribute Contributed Notes and (ii) Existing Unitholders;
|
|
·
|
At the conclusion of these steps, the Supporting Holders will directly own 95% of the New Equity
Interests and 5% will be owned by the Existing Unitholders, subject in each case to the dilution by the MIP Shares and New Equity
Interest issued in respect of the New Warrants;
|
|
·
|
The Senior Notes will be cancelled and discharged and the holders of those Notes will receive (directly
or indirectly) New Equity Interests representing, in the aggregate, 95% of the New Equity Interests issued on the Effective Date
(subject to dilution by the MIP Shares and the New Equity Interests issuable upon exercise of the New Warrants);
|
|
·
|
Lenders under the credit facility will receive (a) pro rata loans under an amendment to the credit
facility (the “Exit Credit Facility”, (b) cash in amount equal to the accrued but unpaid interest payable to such lenders
under the credit facility as of the Effective Date, and (c) unfunded commitments and letter of credit participation under the Exit
Credit Facility equal to the unfunded commitments and letter of credit participation of such lender as of the Effective Date;
|
|
·
|
Each Existing Unitholder will receive its pro rata share of (i) New Equity Interests representing,
in the aggregate, 5% of the New Equity Interests issued on the Effective Date and (ii) the New Warrants (in each case, subject
to dilution by the MIP Shares and, in the case of the New Equity Interests, subject to dilution by the New Warrants);
|
|
·
|
General unsecured claims will receive, (i) if such claim is due and payable on or before the Effective
Date, payment in full, in cash, or the unpaid portion of its allowed general unsecured claim, (ii) if such claim is not due and
payable before the Effective Date, payment in the ordinary course, and (iii) other treatment, as may be agreed upon by the Debtors,
the Supporting Noteholders and the holder of such general unsecured claim; and
|
|
·
|
New EVEP Parent Inc. will enter into the Exit Credit Facility.
|
The Partnership expects
to emerge from the Chapter 11 Cases as a corporation, including for US federal income tax purposes.
Subject to certain
exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of
most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect
or secure a claim arising prior to the date of the Chapter 11 Cases. Accordingly, although the filing of the Chapter 11 Cases triggered
defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of
such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court,
substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
Subject to certain
exceptions, under the Bankruptcy Code, the Debtors may assume, assign or reject certain executory contracts and unexpired leases
subject to the approval of the Court and certain other conditions. Generally, the rejection of an executory contract or unexpired
lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves
the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty
or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts
or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for such damages. Generally,
the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory
contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory
contract or unexpired lease with the Debtor in these financial statements, including where applicable a quantification of the Partnership’s
obligations under any such executory contract or unexpired lease with the Debtor is qualified by any overriding rejection rights
the Partnership has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim
amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve
all of their rights with respect thereto.
A summary of certain
of the material expected terms and conditions of the Exit Credit Facility is set forth below:
|
·
|
a senior secured revolving credit facility with maximum aggregate commitments of $1 billion, subject
to a borrowing base;
|
|
·
|
an expected initial borrowing base of approximately $325 million based on a second quarter 2018
emergence date to be effective upon consummation of the Restructuring, subject to certain automatic deductions between redeterminations;
|
|
·
|
the first scheduled borrowing base redetermination will occur no later than April 1, 2019
;
|
|
·
|
a maturity date of February 26, 2021; and
|
|
·
|
proceeds of the amended and restated credit facility will be used to finance the emergence from
the Chapter 11 Cases and for general corporate purposes (including financing working capital needs).
|
Ability to Continue as a Going Concern
As of April 2, 2018,
the Partnership was in default under certain of its debt instruments. The Partnership’s filing of the Chapter 11 Cases described
above constitutes an event of default that accelerated the Partnership’s obligations under its credit facility and the Indenture
governing the Senior Notes. Additionally, other events of default, including cross-defaults, are present, including a total debt
to EBITDAX ratio higher than the level prescribed in the most recent tenth amendment of our credit agreement, and the receipt of
a going concern explanatory paragraph from the Partnership’s independent registered public accounting firm on the Partnership’s
consolidated financial statements for the year ended December 31, 2017, subject to a 30 day grace period. Under the Bankruptcy
Code, the creditors under these debt agreements are stayed from taking any action against the Partnership as a result of an event
of default.
Throughout 2017, management,
along with its legal and financial advisors, explored strategic alternatives to maintain sufficient liquidity and to address the
credit agreement covenant compliance issue. The Partnership specifically evaluated options with the lenders under the credit facility
and holders of the Senior Notes under the Indenture that would improve liquidity and deleverage the Partnership. The Partnership’s
ability to access the capital markets has been extremely limited. In addition, the Partnership’s credit facility is subject
to scheduled redeterminations of its borrowing base, semi-annually as of April 1 and October 1. The Partnership’s filing
of the Chapter 11 Cases described above accelerated the Partnership’s obligations under its credit facility and under the
Indenture governing the Senior Notes, and the Partnership does not have sufficient liquidity to repay amounts due under the credit
facility and the Senior Notes.
The significant risks
and uncertainties related to the Partnership’s liquidity and Chapter 11 Cases described above raise substantial doubt about
the Partnership’s ability to continue as a going concern. The unaudited condensed consolidated financial statements have
been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction
of liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements do not
include any adjustments that might result from the outcome of the going concern uncertainty. If the Partnership cannot continue
as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts
of income and expenses could be required and could be material.
In order to decrease
the Partnership’s level of indebtedness and maintain the Partnership’s liquidity at levels sufficient to meet its commitments,
the Partnership has undertaken a number of actions, including minimizing capital expenditures and further reducing its recurring
operating expenses. The Partnership believes that even after taking these actions, it would not have had sufficient liquidity to
satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors
filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.
NOTE 3. REVENUE
On January 1, 2018,
we adopted ASU No. 2014–09,
Revenue from Contracts with Customers
(“Topic 606”), using the modified retrospective
method applied to contracts that were not completed as of January 1, 2018. Accordingly, the comparative information for the three
months ended March 31, 2017, has not been adjusted and continues to be reported under the previous revenue standard. The adoption
of this ASU did not have a material impact on our unaudited condensed consolidated financial statements, and the primary impacts
of this change in accounting policy for revenue recognition effective January 1, 2018, are detailed below.
There were no significant
changes to the timing of revenue recognized for sales of production. However, as a result of management’s evaluation under
new considerations within Topic 606, the adoption did result in certain contracts being recorded on a net basis instead of a gross
basis, as well as some contracts being recorded on a gross basis instead of a net basis, as a result of the determined delivery
point. These presentation changes did not have an impact on loss from operations, earnings per unit or cash flows, but did increase
oil, natural gas and natural gas liquids revenues and lease operating expenses in the unaudited condensed consolidated financial
statements by approximately $1.4 million for the three months ended March 31, 2018 as compared to what would have been recognized
using the revenue recognition guidance that was in affect before the adoption of Topic 606.
The following table
summarizes the impact of adopting Topic 606 on our unaudited condensed consolidated financial statements for the three months ended
March 31, 2018:
|
|
Without
|
|
|
Impact of
|
|
|
|
|
|
|
Adoption of
|
|
|
Change in
|
|
|
|
|
|
|
Topic 606
|
|
|
Accounting Policy
|
|
|
As Reported
|
|
Oil, natural gas and natural gas liquids revenues
|
|
$
|
66,190
|
|
|
$
|
1,368
|
|
|
$
|
67,558
|
|
Lease operating expenses
|
|
$
|
26,176
|
|
|
$
|
1,368
|
|
|
$
|
27,544
|
|
Revenue from contracts
with customers includes the sale of our oil, natural gas and natural gas liquids production (recorded in “Oil, natural gas
and natural gas liquids revenues” in the unaudited condensed consolidated statements of operations) and gathering and transportation
revenues (recorded in “Transportation and marketing-related revenues” in the unaudited condensed consolidated statements
of operations).
Oil, Natural Gas and Natural Gas Liquids
Revenues
Oil, natural gas and
natural gas liquids revenues are recognized upon the transfer of control of the products to a purchaser. Transfer of control typically
occurs when the products are delivered to the purchaser, title has transferred and collectability of the revenue is reasonably
assured. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration we expect to
receive in exchange for those products.
The Partnership’s
oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile
Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, the Partnership generally
records sales based on the net amount received.
The Partnership’s
natural gas production is primarily sold under market-sensitive contracts that are typically priced at a differential to the published
natural gas index price for the producing area due to the natural gas quality and the proximity to major consuming markets. For
natural gas contracts, the Partnership generally records wet gas sales at the wellhead or inlet of the plant as revenues net of
transportation, gathering and processing expenses if the processor is the customer and there is no redelivery of commodities to
the Partnership at the tailgate of the plant. Conversely, the Partnership generally records residual natural gas and NGL sales
at the tailgate of the plant on a gross basis along with the associated transportation, gathering and processing expenses if the
processor is a service provider and there is redelivery of commodities to the Partnership at the tailgate of the plant. All facts
and circumstances of an arrangement are considered and judgment is often required in making this determination.
In addition, the Partnership
recognizes processing expenses for commodities paid as noncash consideration in exchange for processing services and recognizes
the associated revenues for those same commodities. This recognition results in an increase to revenues and expenses with no impact
on net income.
We follow the sales
method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold,
which may differ from the volume to which we are entitled based on our working interest. An imbalance is recognized as a liability
only when the estimated remaining reserves will not be sufficient to enable the under–produced owner(s) to recoup its entitled
share through future production. Under the sales method, no receivables are recorded where we have taken less than our share of
production.
Transportation and Marketing-Related
Revenues
We own and operate
a network of natural gas gathering systems in the Appalachian Basin and the Monroe field in Northern Louisiana which gather and
transport owned natural gas and a small amount of third party natural gas to intrastate, interstate and local distribution pipelines.
Natural gas gathering and transportation revenue is recognized when the natural gas has been delivered to a custody transfer point.
The following table
disaggregates revenue by significant product and service type:
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
Oil
|
|
$
|
24,905
|
|
Natural gas
(1)
|
|
|
26,389
|
|
Natural gas liquids
(1)
|
|
|
16,264
|
|
Oil, natural gas and natural gas liquids revenues
|
|
|
67,558
|
|
Transportation and marketing–related revenues
|
|
|
384
|
|
Total revenues
|
|
$
|
67,942
|
|
|
(1)
|
We recognize wet gas revenues, which are recorded net of transportation, gathering and processing expenses, partially as natural
gas revenues and partially as natural gas liquids revenues based on the end products after processing occurs. For the three months
ended March 31, 2018, wet gas revenues was $5.1 million which was recognized as $1.9 million of natural gas revenues and $3.2 million
of natural gas liquids revenues.
|
Contract Balances
Customers are invoiced
once the Partnership’s performance obligations have been satisfied. Payment terms and conditions vary by contract type, although
terms generally include a requirement of payment within 30 days. There are no significant judgments that significantly affect the
amount or timing of revenue from contracts with customers. Accordingly, the Partnership’s product sales contacts do not give
rise to material contract assets or contract liabilities.
Our accounts receivables
are primarily from purchasers of oil, natural gas and natural gas liquids and from exploration and production companies that own
interests in properties we operate. This industry concentration could affect our overall exposure to credit risk, either positively
or negatively, because our purchasers and joint working interest owners may be similarly affected by changes in economic, industry
or other conditions. We routinely assess the financial strength of our customers and bad debts are recorded based on an account-by-account
review specifically identifying receivables that we believe may be uncollectible after all means of collection have been exhausted,
and the potential recovery is considered remote. As of March 31, 2018 and December 31, 2017, we did not have any reserves
for doubtful accounts.
Performance Obligations
We apply the optional
exemptions in Topic 606 and do not disclose consideration for remaining performance obligations with an original expected duration
of one year or less or for variable consideration related to unsatisfied performance obligations.
NOTE 4. EQUITY–BASED COMPENSATION
We may grant various
forms of equity–based awards to employees, consultants and directors of EV Management and its affiliates who perform services
for us. These equity–based awards currently consist of phantom units.
We estimated the fair
value of the phantom units using the Black–Scholes option pricing model. These phantom units are subject to graded vesting
over a four year period. Compensation cost has been recognized for these phantom units on a straight–line basis over the
service period, and we account for forfeitures as they occur.
We recognized compensation
cost related to these phantom units of $0.6 million and $1.2 million in the three months ended March 31, 2018 and 2017, respectively.
These costs are included in “General and administrative expenses” in our unaudited condensed consolidated statements
of operations.
As of March 31, 2018,
there was $3.2 million of total unrecognized compensation cost related to unvested phantom units which is expected to be recognized
over a weighted average period of 1.7 years.
NOTE 5. RISK MANAGEMENT
Our business activities
expose us to risks associated with changes in the market price of oil, natural gas and natural gas liquids. In addition, our floating
rate credit facility exposes us to risks associated with changes in interest rates. As such, future earnings are subject to fluctuation
due to changes in the market prices of oil, natural gas and natural gas liquids and interest rates. We use derivatives to reduce
our risk of volatility in the prices of oil, natural gas and natural gas liquids and interest rates. Our policies do not permit
the use of derivatives for speculative purposes. As substantial doubt exists that we will be able to continue as a going concern,
finding counterparties for commodity hedges has proven difficult.
We have elected not
to designate any of our derivatives as hedging instruments
.
Accordingly, changes in the fair value of our derivatives are
recorded immediately to operations as “Gain on derivatives, net” in our unaudited condensed consolidated statements
of operations.
As of March 31, 2018,
we did not have any outstanding commodity derivative contracts.
As of March 31, 2018,
we had entered into interest rate swaps with the following terms:
Period Covered
|
|
Notional Amount
|
|
|
Floating Rate
|
|
Fixed Rate
|
|
April 2018 – September 2020
|
|
$
|
100,000
|
|
|
1 Month LIBOR
|
|
|
1.795
|
%
|
The following table
sets forth the fair values and classification of our outstanding derivatives:
|
|
|
|
|
|
|
|
Net Amounts
|
|
|
|
|
|
|
Gross Amounts
|
|
|
of Assets
|
|
|
|
|
|
|
Offset in the
|
|
|
Presented in the
|
|
|
|
Gross
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
Amounts of
|
|
|
Condensed
|
|
|
Condensed
|
|
|
|
Recognized
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Assets
|
|
|
Balance Sheet
|
|
|
Balance Sheet
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative asset
|
|
$
|
1,544
|
|
|
$
|
-
|
|
|
$
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative asset
|
|
$
|
3,402
|
|
|
$
|
(350
|
)
|
|
$
|
3,052
|
|
|
|
|
|
|
|
|
|
Net Amounts
|
|
|
|
|
|
|
Gross Amounts
|
|
|
of Liabilities
|
|
|
|
|
|
|
Offset in the
|
|
|
Presented in the
|
|
|
|
Gross
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
Amounts of
|
|
|
Condensed
|
|
|
Condensed
|
|
|
|
Recognized
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
Liabilities
|
|
|
Balance Sheet
|
|
|
Balance Sheet
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
746
|
|
|
$
|
(350
|
)
|
|
$
|
396
|
|
We have entered into
master netting arrangements with our counterparties. The amounts above are presented on a net basis in our unaudited condensed
consolidated balance sheets when such amounts are with the same counterparty. In addition, we have recorded accounts payable and
receivable balances related to our settled derivatives that are subject to our master netting agreements. These amounts are not
included in the above table; however, under our master netting agreements, we have the right to offset these positions against
our forward exposure related to outstanding derivatives.
In April 2018, in conjunction
with our Chapter 11 filing, we terminated our interest rate swaps for the period of April 2018 to September 2020, which resulted
in a cash settlement received in April 2018 of $1.6 million.
NOTE 6. FAIR VALUE MEASUREMENTS
The fair value hierarchy
has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined
based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values determined based
on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability,
either directly or indirectly through market corroboration. Level 3 refers to fair values determined based on our own assumptions
used to measure assets and liabilities at fair value.
Recurring Basis
The following table
presents the fair value hierarchy for our assets and liabilities that are required to be measured at fair value on a recurring
basis:
|
|
|
|
|
Fair Value Measurements
at the End of the Reporting Period
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
As of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,544
|
|
|
$
|
-
|
|
|
$
|
1,544
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids derivatives
|
|
$
|
2,696
|
|
|
$
|
-
|
|
|
$
|
2,696
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
706
|
|
|
|
-
|
|
|
|
706
|
|
|
|
-
|
|
|
|
$
|
3,402
|
|
|
$
|
-
|
|
|
$
|
3,402
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids derivatives
|
|
$
|
721
|
|
|
$
|
-
|
|
|
$
|
721
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
$
|
746
|
|
|
$
|
-
|
|
|
$
|
746
|
|
|
$
|
-
|
|
Our derivatives consist
of over–the–counter contracts which are not traded on a public exchange. As the fair value of these derivatives
is based on inputs using market prices obtained from independent brokers or determined using quantitative models that use as their
basis readily observable market parameters that are actively quoted and can be validated through external sources, including third
party pricing services, brokers and market transactions, we have categorized these derivatives as Level 2. We value these derivatives
using the income approach with inputs such as the forward curve for commodity prices based on quoted market prices and prospective
volatility factors related to changes in the forward curves and yield curves based on money market rates and interest rate swap
data, such as forward LIBOR curves. Our estimates of fair value have been determined at discrete points in time based on relevant
market data. Furthermore, fair values are adjusted to reflect the credit risk inherent in the transaction, which may include amounts
to reflect counterparty credit quality and/or the effect of our own creditworthiness. These assumed credit risk adjustments are
based on published credit ratings, public bond yield spreads and credit default swap spreads. There were no changes in valuation
techniques or related inputs in the three months ended March 31, 2018.
Nonrecurring Basis
During
the three months ended March 31, 2018, we did not recognize any impairment expense related to proved oil and natural gas properties.
During the three months ended March 31, 2017, we recognized $49.5 million of impairment expense related to proved oil and natural
gas properties located in the Mid-Continent area and the Permian Basin.
The
fair values were determined using the income approach and were based on the expected present value of the future net cash flows
from reserves. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the impairment
analysis included estimates of future prices, production costs, development expenditures, anticipated production of our estimated
reserves, appropriate risk–adjusted discount rates and other relevant data.
Financial Instruments
The
estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information.
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities,
derivatives and long–term debt. The carrying amounts of our financial instruments other than long–term debt approximate
fair value because of the short–term nature of the items. Derivatives are recorded at fair value (see above).
The carrying value
of debt outstanding under our credit facility approximates fair value because the credit facility’s variable interest rate
resets frequently and approximates current market rates available to us. The estimated fair value of our Senior Notes was $166.5
million and $176.8 million at March 31, 2018 and December 31, 2017, respectively, which differs from the carrying value of $342.7
million and $342.5 million at March 31, 2018 and December 31, 2017, respectively. The fair value of the Senior Notes was determined
using Level 2 inputs
.
NOTE 7. ASSET RETIREMENT OBLIGATIONS
We record an asset
retirement obligation (“ARO”) and capitalize the asset retirement cost in oil and natural gas properties in the period
in which the retirement obligation is incurred based upon the fair value of an obligation to perform site reclamation, dismantle
facilities or plug and abandon wells. After recording these amounts, the ARO is accreted to its future estimated value using an
assumed cost of funds and the additional capitalized costs are depreciated on a unit–of–production basis. The changes
in the aggregate ARO are as follows:
|
|
2018
|
|
|
2017
|
|
Balance as of January 1
|
|
$
|
161,963
|
|
|
$
|
183,476
|
|
Liabilities incurred
|
|
|
44
|
|
|
|
118
|
|
Accretion expense
|
|
|
1,897
|
|
|
|
1,999
|
|
Settlements and divestitures
|
|
|
(75
|
)
|
|
|
(1,639
|
)
|
Liabilities held for sale
|
|
|
-
|
|
|
|
(23,835
|
)
|
Balance as of March 31
|
|
$
|
163,829
|
|
|
$
|
160,119
|
|
As of both March 31,
2018 and December 31, 2017, $3.2 million of our ARO is classified as current and is included in “Accounts payable and accrued
liabilities” in our unaudited condensed consolidated balance sheets, respectively.
NOTE 8. LONG–TERM DEBT
The Partnership’s
long–term debt was classified as current at both March 31, 2018 and December 31, 2017 due to an event of default. If the
Partnership effectuates the Restructuring pursuant to the Restructuring Support Agreement and the Plan, and the Plan is approved
by the Bankruptcy Court, then the claims of the lenders under the credit facility and the holders of the Senior Notes will be cancelled.
See Note 2 for additional information.
The current portion
of long-term debt, net consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Credit facility
|
|
$
|
297,000
|
|
|
$
|
263,000
|
|
8.0% senior notes due April 2019:
|
|
|
|
|
|
|
|
|
Principal outstanding
|
|
|
343,348
|
|
|
|
343,348
|
|
Unamortized discount and debt issuance costs
(1)
|
|
|
(1,382
|
)
|
|
|
(1,701
|
)
|
Unaccreted premium
(2)
|
|
|
734
|
|
|
|
902
|
|
|
|
|
342,700
|
|
|
|
342,549
|
|
Total
|
|
$
|
639,700
|
|
|
$
|
605,549
|
|
|
(1)
|
Imputed interest rate of 8.62% and 8.49% for March 31,
2018 and December 31, 2017, respectively.
|
|
(2)
|
Imputed interest rate of 7.51% and 7.43% for March 31,
2018 and December 31, 2017, respectively.
|
Credit Facility
As of March 31, 2018,
the credit facility had a capitalization of $1.0 billion and will expire in February 2020. Borrowings under the credit facility
are secured by a first priority lien on substantially all of our oil and natural gas properties. We may use borrowings under the
credit facility for acquiring and developing oil and natural gas properties, for working capital purposes, for general corporate
purposes and for funding distributions to partners. We also may use up to $100.0 million of available borrowing capacity for letters
of credit. As of March 31, 2018, we had a $0.2 million letter of credit outstanding.
The terms of the credit
facility did not require any repayments of amounts outstanding until it expires in February 2020. Borrowings under the credit facility
bear interest at a floating rate based on, at our election, a base rate or the London Inter–Bank Offered Rate plus applicable
premiums based on the percent of the borrowing base that we have outstanding (weighted average effective interest rate of 5.56%
and 4.82% at March 31, 2018 and December 31, 2017, respectively).
Borrowings under the
credit facility may not exceed a “borrowing base” determined by the lenders under the credit facility based on our
oil and natural gas reserves. As of March 31, 2018, the borrowing base under the credit facility was $325.0 million. The borrowing
base is subject to scheduled redeterminations as of April 1 and October 1 of each year with an additional redetermination once
per calendar year at our request or at the request of the lenders and with one calculation that may be made at our request during
each calendar year in connection with material acquisitions or divestitures of properties.
The credit facility
requires the maintenance of the following (as defined in the facility):
|
·
|
the total funded debt to EBITDAX ratio covenant to be no greater than (a) for the fiscal quarter
ending March 31, 2018, 5.50 to 1.0, (b) for the fiscal quarters ending June 30, 2018 and September 30, 2018, 5.25 to 1.0 and (c)
for the fiscal quarter ending December 31, 2018 and thereafter, 4.25 to 1.0;
|
|
·
|
the EBITDAX to cash interest expense ratio covenant to be no less than 1.5 to 1.0; and
|
|
·
|
limits cash held by us to the greater of 5% of the current borrowing base or $30.0 million.
|
As of March 31, 2018,
we were not in compliance with all of these financial covenants. Furthermore, as of April 2, 2018, the Partnership’s filing
of the Chapter 11 Cases described in Note 2 accelerated the Partnership’s obligations under its credit facility and the Senior
Notes. Additionally, events of default, including cross-defaults, are present, including a total debt to EBITDAX ratio higher than
the level prescribed in the most recent tenth amendment of our credit agreement, and the receipt of a going concern explanatory
paragraph from the Partnership’s independent registered public accounting firm on the Partnership’s consolidated financial
statements for the year ended December 31, 2017, subject to a 30 day grace period. Under the Bankruptcy Code, the creditors under
these debt agreements are stayed from taking any action against the Partnership as a result of an event of default. See also Note
2.
During the existence
of an event of default and the Chapter 11 Cases, we have no borrowing capacity under our credit facility. If the Plan is approved
by the Bankruptcy Court, we expect to enter into the Exit Credit Facility.
8.0% Senior Notes due April 2019
Our Senior Notes were
issued under the Indenture, mature April 15, 2019 and bear interest at 8.0%. The Senior Notes are fully and unconditionally guaranteed,
jointly and severally, on a senior unsecured basis, by all of our existing wholly owned subsidiaries other than EV Energy Finance
Corp. (“Finance”), which is a co–issuer of the Notes. Neither EV Energy Partners, L.P. nor Finance have independent
assets or operations apart from the assets and operations of our subsidiaries.
The filing of the Chapter
11 Cases constitutes an event of default that accelerated the Partnership’s obligations under the Indenture governing the
Senior Notes. However, under the Bankruptcy Code, holders of the Senior Notes are stayed from taking any action against the Partnership
as a result of the default. See also Note 2.
NOTE 9. COMMITMENTS AND CONTINGENCIES
We are involved in
disputes or legal actions arising in the ordinary course of business. We do not believe the outcome of such disputes or legal actions
will have a material effect on our unaudited condensed consolidated financial statements. As of March 31, 2018, we have accrued
$0.1 million related to pending litigation and no amounts were accrued at December 31, 2017.
NOTE 10. OWNERS’ EQUITY
Units Outstanding
At March 31, 2018,
owners’ equity consists of 49,368,869 common units, representing a 98% limited partnership interest in us, and a 2% general
partnership interest.
Issuance
of Units
In the three months
ended March 31, 2018, we did not issue any common units related to the vesting of equity–based awards.
Cash Distributions
During 2017, the board
of directors of EV Management announced that it had elected to suspend distributions to unitholders for all four quarters of 2017.
The board of directors also elected to suspend distributions for the first quarter of 2018.
NOTE 11. EARNINGS PER LIMITED PARTNER
UNIT
The following sets
forth the calculation of earnings per limited partner unit:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(15,449
|
)
|
|
$
|
(50,831
|
)
|
General partner’s 2% interest in net loss
|
|
|
309
|
|
|
|
1,017
|
|
Earnings attributable to unvested phantom units
|
|
|
-
|
|
|
|
-
|
|
Limited partners’ interest in net loss
|
|
$
|
(15,140
|
)
|
|
$
|
(49,814
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per limited partner unit (basic and diluted)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average limited partner units outstanding (basic and diluted)
|
|
|
49,369
|
|
|
|
49,320
|
|
NOTE 12. RELATED PARTY TRANSACTIONS
Pursuant
to an omnibus agreement, we paid EnerVest $4.3 million and $3.5 million in the three months ended March 31, 2018 and 2017, respectively,
in administrative fees for providing us general and administrative services. These fees are based on an allocation of charges between
EnerVest and us based on the estimated use of such services by each party, and we believe that the allocation method employed by
EnerVest is reasonable and reflective of the estimated level of costs we would have incurred on a standalone basis. These fees
are included in general and administrative expenses in our unaudited condensed consolidated statements of operations.
We
have entered into operating agreements whereby a wholly owned subsidiary of EnerVest and its affiliates act as contract operator
of the oil and natural gas wells and related gathering systems and production facilities in which we own an interest. We reimbursed
EnerVest approximately $5.1 million and $4.6 million in the three months ended March 31, 2018 and 2017, respectively, for direct
expenses incurred in the operation of our wells and related gathering systems and production facilities and for the allocable share
of the costs of EnerVest employees who performed services on our properties. As the vast majority of such expenses are charged
to us on an actual basis (i.e., no mark–up or subsidy is charged or received by EnerVest), we believe that the aforementioned
services were provided to us at fair and reasonable rates relative to the prevailing market and are representative of the costs
that would have been incurred on a standalone basis. These costs are included in lease operating expenses in our unaudited condensed
consolidated statements of operations. Additionally, in its role as contract operator, this EnerVest subsidiary also collects proceeds
from oil and natural gas sales and distributes them to us and other working interest owners.
As
of March 31, 2018 and December 31, 2017, we owed EnerVest Operating $1.4 million, and $4.2 million, respectively.
NOTE 13. OTHER SUPPLEMENTAL INFORMATION
Supplemental cash flows
and noncash transactions were as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Supplemental cash flows information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,220
|
|
|
$
|
2,603
|
|
|
|
As of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Costs for additions to oil and natural gas properties in accounts payable and
accrued liabilities
|
|
$
|
8,800
|
|
|
$
|
3,172
|
|
Accounts payable and accrued liabilities
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Interest
|
|
$
|
12,727
|
|
|
$
|
5,820
|
|
Lease operating expenses
|
|
|
10,262
|
|
|
|
11,411
|
|
Costs for additions to oil and natural gas properties
|
|
|
8,800
|
|
|
|
12,748
|
|
Production and ad valorem taxes
|
|
|
4,748
|
|
|
|
6,351
|
|
Current portion of ARO
|
|
|
3,170
|
|
|
|
3,170
|
|
General and administrative expenses
|
|
|
1,801
|
|
|
|
3,331
|
|
Derivative settlements
|
|
|
216
|
|
|
|
573
|
|
Other
|
|
|
530
|
|
|
|
413
|
|
Total
|
|
$
|
42,254
|
|
|
$
|
43,817
|
|