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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		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:

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

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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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
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:

		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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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
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:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(7) Indebtedness  – (continued)

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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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 5^th, April 5^th, July 5^th, and October 5^th, 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 15^th and August 15^th 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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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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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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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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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

TABLE OF CONTENTS

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