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

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2016

OR

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

For the transition period from            to           

Commission File Number: 001-33628

 

ENERGY XXI LTD

(Exact name of registrant as specified in its charter)

 

Bermuda		98-0499286
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Canon’s Court, 22 Victoria Street, PO Box HM 1179, Hamilton HM EX, Bermuda		N/A
(Address of principal executive offices)		(Zip Code)

(441) 295-2244

(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 þ 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. (Check one):

Large accelerated filer o		Accelerated filer þ
Non-accelerated filer o (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 þ

As of April 29, 2016, there were 97,507,056 shares outstanding of the registrant’s common stock, par value $0.005 per share.

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ENERGY XXI LTD
 
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		Page
GLOSSARY OF TERMS			1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			3
PART I — FINANCIAL INFORMATION
ITEM 1. Unaudited Consolidated Financial Statements			5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			55
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			78
ITEM 4. Controls and Procedures			80
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings			81
ITEM 1A. Risk Factors			81
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			86
ITEM 3. Defaults upon Senior Securities			86
ITEM 4. Mine Safety Disclosures			86
ITEM 5. Other Information			86
ITEM 6. Exhibits			86
SIGNATURES			87
EXHIBIT INDEX			88

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GLOSSARY OF TERMS

Below is a list of terms that are common to our industry and used throughout this Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (“Quarterly Report”):

Bbls		Standard barrel containing 42 U.S. gallons		MMBbls		One million Bbls
Mcf		One thousand cubic feet		MMcf		One million cubic feet
Btu		One British thermal unit		MMBtu		One million Btu
BOE		Barrel of oil equivalent. Natural gas is converted into one BOE based on six Mcf of gas to one barrel of oil		MBOE		One thousand BOEs
DD&A		Depreciation, Depletion and Amortization		MMBOE		One million BOEs
MBbls		One thousand Bbls

Call options are contracts giving the holder (purchaser) the right, but not the obligation, to buy (call) a specified item at a fixed price (exercise or strike price) during a specified period. The purchaser pays a nonrefundable fee (the premium) to the seller (writer).

Completion refers to the work performed and the installation of permanent equipment for the production of natural gas and/or crude oil from a recently drilled or recompleted well.

Development well is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry Well is an exploratory, development or extension well that proves to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Exploitation is drilling wells in areas proven to be productive.

Exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. Generally, an exploratory well is any well that is not a development well or a service well.

Field is an area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. For a complete definition of a field, refer to Rule 4-10(a) (8) of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).

Formation is a stratum of rock that is recognizable from adjacent strata consisting mainly of a certain type of rock or combination of rock types with thickness that may range from less than two feet to hundreds of feet.

Gathering and transportation is the cost of moving crude oil from several wells into a single tank battery or major pipeline.

Gross acres or gross wells are the total acres or wells in which a working interest is owned.

Horizon is a zone of a particular formation or that part of a formation of sufficient porosity and permeability to form a petroleum reservoir.

Independent oil and gas company is a company that is primarily engaged in the exploration and production sector of the oil and gas business.

Lease operating or well operating expenses are expenses incurred to operate the wells and equipment on a producing lease.

Net acreage and net oil and gas wells are obtained by multiplying gross acreage and gross oil and gas wells by the fractional working interest owned in the properties.

Oil includes crude oil, condensate and natural gas liquids.

Operating costs include direct and indirect expenses, including general and administrative expenses, incurred to manage, operate and maintain our wells and related equipment and facilities.

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Plugging and abandonment refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from a stratum will not escape into another or to the surface. Regulations of many states and the federal government require the plugging of abandoned wells.

Production costs are costs incurred to operate and maintain our wells and related equipment and facilities. For a complete definition of production costs, please refer to Rule 4-10(a) (20) of Regulation S-X as promulgated by the SEC.

Productive well is an exploratory, development or extension well that is not a dry well.

Proved area refers to the part of a property to which proved reserves have been specifically attributed.

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. For a complete definition of proved reserves, refer to Rule 4-10(a) (22) of Regulation S-X as promulgated by the SEC.

Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. For a complete definition of proved developed oil and gas reserves, refer to Rule 4-10(a)(3) of Regulation S-X as promulgated by the SEC.

Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. For a complete definition of proved undeveloped oil and gas reserves, refer to Rule 4-10(a) (4) of Regulation S-X as promulgated by the SEC.

Put options are contracts giving the holder (purchaser) the right, but not the obligation, to sell (put) a specified item at a fixed price (exercise or strike price) during a specified period. The purchaser pays a nonrefundable fee (the premium) to the seller (writer).

Reserve acquisition cost. The total consideration paid for an oil and natural gas property or set of properties, which includes the cash purchase price and any value ascribed to units issued to a seller adjusted for any post-closing items.

Reservoir refers to a porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Seismic is an exploration method of sending energy waves or sound waves into the earth and recording the wave reflections to indicate the type, size, shape and depth of subsurface rock formations. 2-D seismic provides two-dimensional information and 3-D seismic provides three-dimensional pictures.

Working interest is the operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover refers to operations on a producing well to restore or increase production and such costs are expensed. If the operations add new proved reserves, such costs are capitalized.

Zone is a stratigraphic interval containing one or more reservoirs.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this 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 certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors the Company believes are appropriate under the circumstances and their potential effect on us. While management believes that these forward-looking statements are reasonable, such statements are not guarantees of future performance and the actual results or developments anticipated may not be realized or, even if substantially realized, may not have the expected consequences to or effects on the Company’s business or results. 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:

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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 Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Annual Report”), Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2015 and Part II, “Item 1A. Risk Factors” in this Quarterly Report.

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

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PART I — FINANCIAL INFORMATION

ITEM 1. Unaudited Consolidated Financial Statements

ENERGY XXI LTD
 
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share information)

		March 31, 2016				June 30, 2015
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	183,447			$	756,848
Accounts receivable
Oil and natural gas sales			52,573				100,243
Joint interest billings			15,832				12,433
Other			21,658				43,513
Prepaid expenses and other current assets			33,845				24,298
Restricted cash			9,710				9,359
Derivative financial instruments			—				22,229
Total Current Assets			317,065				968,923
Property and Equipment
Oil and natural gas properties, net – full cost method of accounting, including $58.6 million and $436.4 million of unevaluated properties not being amortized at March 31, 2016 and June 30, 2015, respectively			797,036				3,570,759
Other property and equipment, net			18,481				21,820
Total Property and Equipment, net of accumulated depreciation, depletion, amortization and impairment			815,517				3,592,579
Other Assets
Derivative financial instruments			—				3,898
Equity investments			—				10,835
Restricted cash			55,559				32,667
Other assets and debt issuance costs, net of accumulated amortization			14,304				81,927
Total Other Assets			69,863				129,327
Total Assets		$	1,202,445			$	4,690,829
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable		$	74,921			$	156,339
Accrued liabilities			156,553				155,306
Asset retirement obligations			52,546				33,286
Derivative financial instruments			—				2,661
Current maturities of long-term debt			2,863,487				11,395
Total Current Liabilities			3,147,507				358,987
Long-term debt, less current maturities			—				4,597,037
Asset retirement obligations			496,192				453,799
Derivative financial instruments			—				1,358
Other liabilities			17,090				8,370
Total Liabilities			3,660,789				5,419,551

 
 
See accompanying Notes to Consolidated Financial Statements.

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ENERGY XXI LTD
 
CONSOLIDATED BALANCE SHEETS – (continued)
(In Thousands, except share information)

		March 31, 2016				June 30, 2015
		(Unaudited)
Commitments and Contingencies (Note 16)
Stockholders’ Deficit
Preferred stock, $0.001 par value, 7,500,000 shares authorized at March 31, 2016 and June 30, 2015
7.25% Convertible perpetual preferred stock, 3,000 shares issued and outstanding at March 31, 2016 and June 30, 2015			—				—
5.625% Convertible perpetual preferred stock, 692,450 and 812,759 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively			1				1
Common stock, $0.005 par value, 200,000,000 shares authorized and 97,504,961 and 94,643,498 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively			486				472
Additional paid-in capital			1,845,523				1,843,918
Accumulated deficit			(4,304,354	)			(2,573,113	)
Total Stockholders’ Deficit			(2,458,344	)			(728,722	)
Total Liabilities and Stockholders’ Deficit		$	1,202,445			$	4,690,829

 
 
See accompanying Notes to Consolidated Financial Statements.

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ENERGY XXI LTD
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share information)
(Unaudited)

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Revenues
Oil sales		$	95,081			$	177,605			$	413,687			$	827,468
Natural gas sales			14,430				27,012				54,530				93,374
Gain on derivative financial instruments			6,774				16,963				90,506				265,150
Total Revenues			116,285				221,580				558,723				1,185,992
Costs and Expenses
Lease operating			82,044				108,110				265,024				370,061
Production taxes			221				1,537				1,287				6,893
Gathering and transportation			14,155				3,726				45,911				17,685
Depreciation, depletion and amortization			53,847				187,947				299,438				522,242
Accretion of asset retirement obligations			15,057				12,106				45,785				37,723
Impairment of oil and natural gas properties			340,469				569,616				2,670,930				569,616
Goodwill impairment			—				—				—				329,293
General and administrative expense			28,358				37,121				79,562				91,290
Total Costs and Expenses			534,151				920,163				3,407,937				1,944,803
Operating Loss			(417,866	)			(698,583	)			(2,849,214	)			(758,811	)
Other Income (Expense)
Loss from equity method investees			—				(2,635	)			(10,746	)			(2,951	)
Other income, net			388				1,231				3,436				3,173
Gain on early extinguishment of debt			777,022				—				1,525,596				—
Interest expense			(198,768	)			(85,039	)			(392,220	)			(218,203	)
Total Other Income (Expense), net			578,642				(86,443	)			1,126,066				(217,981	)
Income (Loss) Before Income Taxes			160,776				(785,026	)			(1,723,148	)			(976,792	)
Income Tax Expense (Benefit)			—				(289,965	)			51				(232,958	)
Net Income (Loss)			160,776				(495,061	)			(1,723,199	)			(743,834	)
Preferred Stock Dividends			2,378				2,862				8,042				8,605
Net Income (Loss) Attributable to Common Stockholders		$	158,398			$	(497,923	)		$	(1,731,241	)		$	(752,439	)
Earnings (Loss) per Share
Basic		$	1.65			$	(5.27	)		$	(18.17	)		$	(8.00	)
Diluted		$	1.55			$	(5.27	)		$	(18.17	)		$	(8.00	)
Weighted Average Number of Common Shares Outstanding
Basic			95,916				94,408				95,254				94,076
Diluted			104,001				94,408				95,254				94,076

 
 
See accompanying Notes to Consolidated Financial Statements.

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ENERGY XXI LTD
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

		Nine Months Ended March 31,
		2016				2015
Cash Flows From Operating Activities
Net loss		$	(1,723,199	)		$	(743,834	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			299,438				522,242
Impairment of oil and natural gas properties			2,670,930				569,616
Goodwill impairment			—				329,293
Deferred income tax expense (benefit)			—				(233,798	)
Gain on early extinguishment of debt			(1,525,596	)			—
Change in fair value of derivative financial instruments			19,163				(85,086	)
Accretion of asset retirement obligations			45,785				37,723
Loss from equity method investees			10,746				2,951
Amortization and write off of debt issuance costs and other			137,592				17,942
Deferred rent			6,939				—
Stock-based compensation			1,173				3,271
Changes in operating assets and liabilities
Accounts receivable			33,597				62,163
Prepaid expenses and other assets			(12,919	)			32,938
Settlement of asset retirement obligations			(75,032	)			(77,235	)
Accounts payable and accrued liabilities			(87,519	)			(277,854	)
Net Cash Provided by (Used in) Operating Activities			(198,902	)			160,332
Cash Flows from Investing Activities
Acquisitions, net of cash			(2,797	)			(301	)
Capital expenditures			(93,831	)			(512,302	)
Insurance payments received			4,379				2,669
Change in equity method investments			—				12,642
Transfer from (to) restricted cash			(22,892	)			325
Proceeds from the sale of properties			4,623				7,093
Other			41				185
Net Cash Used in Investing Activities			(110,477	)			(489,689	)
Cash Flows from Financing Activities
Proceeds from the issuance of common and preferred stock, net of offering costs			334				2,187
Dividends to shareholders – common			—				(23,492	)
Dividends to shareholders – preferred			(5,673	)			(8,605	)
Proceeds from long-term debt			1,121				2,586,572
Payments on long-term debt			(227,884	)			(1,729,355	)
Payment of debt assumed in acquisition			(25,187	)			—
Fees related to debt extinguishment			(3,526	)			—
Debt issuance costs			(2,163	)			(41,732	)
Other			(1,044	)			—
Net Cash Provided by (Used in) Financing Activities			(264,022	)			785,575
Net Increase (Decrease) in Cash and Cash Equivalents			(573,401	)			456,218
Cash and Cash Equivalents, beginning of period			756,848				145,806
Cash and Cash Equivalents, end of period		$	183,447			$	602,024

 
 
See accompanying Notes to Consolidated Financial Statements.

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Organization and Chapter 11 Proceedings

Nature of Operations

Energy XXI Ltd was incorporated in Bermuda on July 25, 2005. References in this report to “us,” “we,” “our,” “the Company,” or “Energy XXI” are to Energy XXI Ltd and its wholly-owned subsidiaries. With our principal operating subsidiary headquartered in Houston, Texas, we are engaged in the acquisition, exploration, development and operation of oil and natural gas properties onshore in Louisiana and Texas and in the Gulf of Mexico Shelf (“GoM Shelf”). We were listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “EXXI” prior to the suspension of our common stock at the opening of business on April 25, 2016, in connection with the commencement of the Chapter 11 proceedings described below. Our common stock resumed trading on the OTC Markets Group Inc.’s OTC Pink (the “OTC Pink”) under the symbol “EXXIQ” on April 25, 2016.

Bankruptcy Proceedings and Restructuring Support Agreement

On April 14, 2016, the Company, Energy XXI Gulf Coast, Inc., an indirect wholly-owned subsidiary of the Company (“EGC”), EPL Oil & Gas, Inc., an indirect wholly-owned subsidiary of the Company (“EPL”) and certain other subsidiaries of the Company (excluding Energy XXI GIGS Services, LLC, which leases a subsea pipeline gathering system located in the shallow Gulf of Mexico Shelf and storage an onshore processing facilities on Grand Isle, Louisiana) listed on Schedule 1 of the Restructuring Support Agreement (as defined below) (together with the Company, EGC and EPL, the “Debtors”) filed voluntary petitions for reorganization (the petitions collectively, the “Bankruptcy Petitions”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 (“Chapter 11”) of the United States Bankruptcy Code (the “Bankruptcy Code”). The Debtor’s Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being administered under the caption “In re: Energy XXI Ltd, et al., Case No. 16-31928.” The Debtors will continue to operate their businesses and manage their assets as debtors-in-possession under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Concurrently with the filing of the Bankruptcy Petitions, Energy XXI Ltd filed a winding-up petition commencing an official liquidation proceeding under the laws of Bermuda before the Supreme Court of Bermuda. On April 15, 2016, John C. McKenna was appointed as provisional liquidator by the Supreme Court of Bermuda.

Prior to filing the Bankruptcy Petitions, on April 11, 2016, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with certain holders (the “Second Lien Noteholders”) of EGC’s 11.0% Senior Secured Second Lien Notes due 2020 (the “Second Lien Notes”), providing that the Second Lien Noteholders party thereto will support a restructuring of the Debtors, subject to the terms and conditions of the Restructuring Support Agreement. The restructuring transactions contemplated by the Restructuring Support Agreement will be effectuated through a joint prearranged plan of reorganization (as may be amended, restated, supplemented, or otherwise modified from time to time, (the “Plan”)). The Plan will represent a settlement of various issues, controversies, and disputes.

The Restructuring Support Agreement provides, among other things, that:

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

Milestones

The Restructuring Support Agreement also contains the following proposed milestones (the “Milestones”) for progress in the Chapter 11 proceedings:

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

The Majority Restructuring Support Parties have the right, but not the obligation, to terminate their obligations under the Restructuring Support Agreement upon the failure of the Debtors to meet any of the Milestones unless (i) such failure is the direct result of any act, omission, or delay on the part of any Restructuring Support Parties in violation of its obligations under the Restructuring Support Agreement or (ii) such Milestone is extended with the express prior written consent of the Majority Restructuring Support Parties.

Reorganization Process

On the Petition Date, the Bankruptcy Court issued certain additional interim and final orders with respect to the Debtors’ first-day motions and other operating motions that allow the Debtors to operate their businesses in the ordinary course. The first-day motions provided for, among other things, the payment of certain pre-petition employee and retiree expenses and benefits, the use of the Debtors’ existing cash management system, the payment of certain pre-petition amounts to certain critical vendors, the ability to pay certain pre-petition taxes and regulatory fees, and the payment of certain pre-petition claims owed on account of insurance policies and programs. With respect to those first-day motions for which only interim approval has been granted, the Bankruptcy Court has scheduled final hearings on such motions for May 13, 2016.

Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors’ may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions, including approval of the majority of Majority Restructuring Support Parties in accordance with the Restructuring Support Agreement.

A Chapter 11 plan (including the Plan) determines the rights and satisfaction of claims and interests of various creditors and security holders and is subject to the ultimate outcome of negotiations and the Court’s decisions through the date on which a Chapter 11 plan (including the Plan) is confirmed. The Debtors currently expect that any proposed Chapter 11 plan (including the Plan), among other things, would provide mechanisms for settlement of the Debtors’ pre-petition obligations, changes to certain operational cost drivers, treatment of the Company’s existing equity holders, potential income tax liabilities and certain corporate governance and administrative matters pertaining to the reorganized New Entity. Any proposed Chapter 11 plan will (and the Plan may) be subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Debtors’ creditors, including the Lenders under the Revolving Credit Facility and holders of the EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, and EXXI Convertible Notes Claims, and other interested parties, and thereafter in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court. There can be no assurance that the Debtors will be able to secure approval for the Plan or any other Chapter 11 plan from the Bankruptcy Court or that any Chapter 11 plan will be accepted by the Debtors’ creditors.

Under the priority rankings established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a Chapter 11 plan (including the Plan). The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a Chapter 11 plan (including the Plan). No assurance can be given as to what values, if any, will be ascribed to each of

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

these constituencies or what types or amounts of distributions, if any, they would receive. A Chapter 11 plan (including the Plan) could result in holders of certain liabilities and/or securities, including common stock, receiving no distribution on account of their interests. Because of such possibilities, there is significant uncertainty regarding the value of our liabilities and securities, including our common stock. At this time, there is no assurance we will be able to restructure as a going concern or successfully propose or implement a Chapter 11 plan (including the Plan).

Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Principles of Consolidation and Reporting.  The accompanying consolidated financial statements include the accounts of Energy XXI and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“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. We use the equity method of accounting for investments in entities that we do not control, but over which we exert significant influence.

For the three and nine months ended March 31, 2016 and 2015, the consolidated financial statements have not been modified to reflect the bankruptcy filing. For periods subsequent to filing the Bankruptcy Petitions, the Company will apply the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 852, Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the Chapter 11 Cases will be recorded in a reorganization line item on the consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process will be classified on the balance sheet in liabilities subject to compromise. These liabilities will be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

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 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 the 2015 Annual Report.

Going Concern Matters.  The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, although the Bankruptcy Petitions noted above and sustained depressed commodity prices raise substantial doubt about our ability to continue as a going concern. Accordingly, the financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that would be required should we be unable to continue as a going concern.

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

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Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements  – (continued)

accounting for acquisitions and dispositions; 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 the 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 (“ASU”) 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. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09. With the one-year deferral, ASU 2014-09 is effective for annual periods beginning after December 15, 2017, 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 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 ASU 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. Our early adoption of ASU 2014-15 during the quarter ended December 31, 2015 impacted our disclosures but had no effect on our consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 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. In June 2015, the FASB issued ASU 2015-15 as an amendment to this guidance to address the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements. The SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

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. As a result of adopting ASU 2015-15, debt issuance costs will be presented in our consolidated balance sheets as a reduction in the carrying amount of the related debt liability, although we are continuing to evaluate the impact of ASU 2015-15 as it relates to debt issuance costs associated with line-of-credit arrangements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred taxes on the balance sheet by requiring classification of all deferred tax items as noncurrent including valuation allowances by jurisdiction. ASU 2015-17 is effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual reporting periods. Early adoption is permitted as of the beginning of any

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Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements  – (continued)

interim or annual reporting period. Our early adoption of ASU 2015-17 during the quarter ended December 31, 2015 had no effect on our consolidated financial position, results of operations or cash flows other than presentation.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification and creating Topic 842, Leases. The guidance in this ASU supersedes Topic 840, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the provisions of this new standard and assessing the impact it may have on our consolidated financial position, results of operations or cash flows.

Note 3 — Liquidity and Capital Resources

As of March 31, 2016, we had cash and cash equivalents of approximately $183 million and no available borrowing capacity under our Revolving Credit Facility. As of March 31, 2016, the total carrying value of our indebtedness was $2,863.5 million and was classified as current due to covenant violations that existed at March 31, 2016, that were not cured prior to the Bankruptcy Petitions filed by us on April 14, 2016. Our indebtedness was comprised of $99.4 million of secured indebtedness outstanding under our Revolving Credit Facility, $1.45 billion of Second Lien Notes, $4.8 million in other secured indebtedness and $1,309.3 million of unsecured notes.

Liquidity Before Filing Under Chapter 11 of the United States Bankruptcy Code

We have historically funded our operations primarily through cash flows from operating activities, borrowings under our Revolving Credit Facility, proceeds from the issuance of debt and equity securities and proceeds from asset sales. However, future cash flows are subject to a number of variables, and are highly dependent on the prices we receive for oil and natural gas. Oil and natural gas prices declined severely during fiscal year 2015 and have declined even further through fiscal 2016 to date. The price of WTI crude oil per barrel dropped below $27.00 per barrel in January 2016 for the first time in twelve years. Although oil prices have rebounded above $40.00 per barrel in April and May 2016, there is still significant volatility in commodity prices and these prices are still significantly lower than the industry has experienced in recent years. These lower commodity prices have negatively impacted revenues, earnings and cash flows, and sustained low oil and natural gas prices will have a material and adverse effect on our liquidity position.

As a result of the material adverse effect of commodity price declines on our liquidity position, uncertainty arose in the third quarter of fiscal 2016 as to whether we would be able to deliver the quarterly compliance certificate required under our Revolving Credit Facility, which among other things, requires that we make certain representations regarding our solvency and ongoing compliance with the financial ratios under our Revolving Credit Facility. In light of this uncertainty, on February 29, 2016, we entered into the Thirteenth Amendment and Waiver to our Revolving Credit Facility described below (the “Thirteenth Amendment”) which, among other things, waived our requirement to deliver a compliance certificate for the fiscal quarter ended December 31, 2015. On March 14, 2016, we entered into the Fourteenth Amendment and Waiver to the Revolving Credit Facility (the “Fourteenth Amendment”), which, among other things, extended the term of the waiver of the compliance certificate included in the Thirteenth Amendment until April 15, 2016.

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Note 3 — Liquidity and Capital Resources  – (continued)

In addition to providing that we were not required to deliver a compliance certificate for the fiscal quarter ended December 31, 2015 until its expiration date, the following additional changes to the First Lien Credit Agreement became effective upon the execution of the Thirteenth Amendment:

The Fourteenth Amendment further provided for the reduction of our borrowing base under the First Lien Credit Agreement. The borrowing base under the First Lien Credit Agreement as of the effectiveness of the Fourteenth Amendment was reduced from $500 million to $377.8 million, with such reduction effectively removing any further borrowing capacity under the First Lien Credit Agreement beyond an aggregate amount equal to the amount of outstanding letters of credit that have been issued thereunder plus the amount of outstanding loans to EPL thereunder. The Fourteenth Amendment further provided that we unwind certain hedging transactions and use the proceeds therefrom to repay amounts of outstanding loans to EPL under the First Lien Credit Agreement, and for such repayments to then result in an automatic and permanent reduction in our borrowing base. Accordingly, on March 15, 2016, we unwound and monetized all of our outstanding crude oil and natural gas contracts and received $50.6 million and paid this amount to reduce EPL’s borrowing base. As of March 31, 2016, our borrowing base was $327.2 million.

In response to commodity price declines, our fiscal year 2016 capital budget was reduced to a current planned amount in the range of $155 to $160 million, as compared to actual capital expenditures in fiscal year 2015 (excluding acquisition activity) of approximately $649 million, with a remaining budget of approximately $6 million to $11 million for the fourth quarter of fiscal 2016. Due to the depressed commodity prices and our lack of capital resources to develop our properties, the Company believed that all of its proved undeveloped oil and gas reserves no longer qualified as being proved as of the period ended December 31, 2015. As a result, we removed all of our proved undeveloped oil and gas reserves from the proved category as of December 31, 2015. Almost all of the proved undeveloped reserves that were removed from the proved category as of December 31, 2015 are still economic at current prices, but were reclassed to the probable category because they are no longer expected to be drilled within five years of initial booking due to current constraints on our ability to fund development drilling. In addition, as of December 31, 2015, we identified certain of our unevaluated properties totaling to $336.5 million as being uneconomical and transferred such amounts to the full cost pool, subject to amortization. The curtailment of the development of our properties will eventually lead to a decline in our production and reserves which would further reduce our liquidity and ability to satisfy our debt obligations by negatively impacting our cash flow from operating activities and the value of our assets.

Our liquidity may be further adversely affected if the BOEM requires us to provide additional bonding as a means to assure our decommissioning obligations, such as the plugging of wells, the removal of platforms and other offshore facilities, the abandonment of offshore pipelines and the clearing of the seafloor of obstructions, or if the surety companies providing such bonds on our behalf require us to provide additional cash collateral for such new or existing bonds. Any further expense in providing additional bonds or restrictions on our cash to collateralize existing bonds or new bonds would further reduce our liquidity.

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Note 3 — Liquidity and Capital Resources  – (continued)

As a result of continued decreases in commodity prices and our substantial debt burden, we continued throughout the third quarter of fiscal 2016 to work with our financial and legal advisors to analyze a variety of solutions to reduce our overall financial leverage, while maintaining primary focus on preserving liquidity. As part of this process, we engaged in discussions with certain of our debtholders and other stakeholders to develop and implement a comprehensive plan to restructure our balance sheet. As previously disclosed, as part of these ongoing discussions, on February 16, 2016, we had elected to enter into the 30-day grace period under the terms of the indenture governing EPL’s outstanding 8.25% Senior Notes due February 2018 (the “8.25% Senior Notes”) to extend the timeline for making the cash interest payment to March 17, 2016. In February 2016, we also repurchased $266.6 million of the 8.25% Senior Notes and $471.1 million of EGC’s 9.25% Senior Notes due 2017 in open market transactions at a total cost of approximately $2.8 million, plus accrued interest, eliminating the springing maturity in the Second Lien Notes described below in Note 7 — Long-Term Debt.

On March 15, 2016, as part of our ongoing discussions with certain of our debtholders, we elected to make the deferred interest payment on the 8.25% Senior Notes, while also electing not to make the interest payments due on the Second Lien Notes and on EGC’s 6.875% Senior Notes due 2024, commencing a new 30-day grace period. During the new 30-day grace period, we continued discussions with an ad hoc committee of Second Lien Noteholders and a steering committee of Lenders under our Revolving Credit Facility regarding a potential restructuring. On April 11, 2016, we entered into the Restructuring Support Agreement with certain of the Second Lien Noteholders. Pursuant to the Restructuring Support Agreement, we expect to eliminate more than $2.8 billion in debt from our balance sheet by eliminating substantially all of our prepetition indebtedness other than indebtedness under our Revolving Credit Facility, resulting in a significantly deleveraged capital structure. For more information regarding the Restructuring Support Agreement, see Note 1 — Organization and Chapter 11 Proceedings. On April 14, 2016, the Debtors filed Bankruptcy Petitions in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code.

Liquidity After Filing Under Chapter 11 of the United States Bankruptcy Code

As described in Note 1 — Organization and Chapter 11 Proceedings, the filing of the Bankruptcy Petitions constituted an event of default with respect to our existing debt obligations. However, subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

The Bankruptcy Court has approved payment of certain pre-petition obligations, including payments for employee wages, salaries and certain other benefits, customer programs, taxes, utilities, insurance, surety bond premiums as well as payments to critical vendors and possessory lien vendors. Despite the liquidity provided by our existing cash on hand, our ability to maintain normal credit terms with our suppliers may become impaired. We may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would further reduce our liquidity. If liquidity problems persist, our suppliers could refuse to provide key products and services in the future. In addition, due to the public perception of our financial condition and results of operations, in particular with regard to our potential failure to meet our debt obligations, some vendors could be reluctant to enter into long-term agreements with us.

Although we have lowered our capital budget and reduced the scale of our operations significantly, our business remains capital intensive. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with our Chapter 11 proceedings

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Note 3 — Liquidity and Capital Resources  – (continued)

(approximately $6.2 million, of which approximately $0.5 million was capitalized as debt issue costs, through March 31, 2016) and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 proceedings. The Company believes it has sufficient liquidity, including approximately $183 million of cash on hand as of March 31, 2016 and funds generated from ongoing operations, to fund anticipated cash requirements through the Chapter 11 proceedings for minimum operating and capital expenditures and for working capital purposes and excluding principal and interest payments on our outstanding debt. As such, the Company expects to pay vendor, royalty and surety obligations on a go-forward basis according to the terms of our current contracts and consistent with applicable court orders approving such payments. The Company does not intend to seek debtor-in-possession (“DIP”) financing at this time. However, given the current level of volatility in the market and the unpredictability of certain costs that could potentially arise in our operations, our liquidity needs could be significantly higher than we currently anticipate. There are no assurances that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases, allow us to proceed with the confirmation of a Chapter 11 plan of reorganization and allow us to emerge from bankruptcy. We can provide no assurance that we will be able to secure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms.

The Court has entered an Interim Cash Collateral Order authorizing the Debtors’ use of cash collateral in accordance with the terms of such order and the cash collateral budget described therein. The Bankruptcy Court has scheduled a final hearing on the Cash Collateral Motion for May 13, 2016. If the Bankruptcy Court enters a final order approving the Cash Collateral Motion, the Debtors will have the conditional authority, subject to the terms and conditions of the Bankruptcy Court’s orders, the Restructuring Support Agreement, and the cash collateral budget, to use cash collateral for a certain period from the Petition Date and the Debtors have agreed to pursue the confirmation and implementation of the Plan within that certain period. The Debtors’ use of cash collateral is critical to their ability to operate during the course of the Chapter 11 Cases, to remain current on their post-petition operating costs, to pursue a reorganization pursuant to the Plan and to emerge successfully as a going concern from the Chapter 11 proceedings.

Our ability to maintain adequate liquidity through the reorganization process and beyond depends on our ability to successfully implement the Plan (or another Chapter 11 plan), successful operation of our business, and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors. If we are unable to meet our liquidity needs, we may have to take other actions to seek additional financing to the extent available or we could be forced to consider other alternatives to maximize potential recovery for the creditors, including possible sale of the Company or certain material assets pursuant to Section 363 of the Bankruptcy Code, or a liquidation under Chapter 7 of the Bankruptcy Code.

Note 4 — Acquisitions

Acquisition of interest in M21K

On August 11, 2015, pursuant to a stock purchase agreement (the “M21K Purchase Agreement”) between Energy XXI M21K, LLC (“EXXI M21K”), in which we owned 20% interest, and Energy XXI GOM, LLC (“EXXI GOM”), an indirect wholly owned subsidiary of Energy XXI, we acquired all of the remaining equity interests of M21K, LLC (“M21K”) for consideration consisting of the assumption of all obligations and liabilities of M21K including approximately $25.2 million associated with M21K’s first lien credit facility, which was required to be paid at closing (the “M21K Acquisition”). The sellers retained certain overriding royalty interests applicable only to the extent that production proceeds during any calendar month average in excess of $65.00/Bbl WTI and $3.50/MMbtu Henry Hub and limited to a term of four years or an aggregate amount of $20 million, whichever occurs earlier. In addition, with respect to the Eugene Island 330 and South Marsh Island 128 fields, in the event we sell our interest in one or both of these fields, the

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Note 4 — Acquisitions  – (continued)

overriding royalty interests with respect to such sold field shall terminate; provided, however if such sale occurs within four years of the effective date of the M21K Purchase Agreement and the consideration received for such sale is greater than the allocated value for such field as specified in the M21K Purchase Agreement, then we are obligated to pay an amount equal to 20% of the portion of the consideration received in excess of the specified allocated value of such field. Prior to this transaction which was effective as of August 1, 2015, we had owned a 20% interest in M21K through our investment in EXXI M21K. See Note 6 — Equity Method Investments.

The following table presents the preliminary purchase price allocation to the assets acquired and liabilities assumed, based on their estimated fair values on August 11, 2015 (in thousands):

Oil and natural gas properties – evaluated		$	73,910
Oil and natural gas properties – unevaluated			39,278
Asset retirement obligations			(66,700	)
Net working capital*			(21,301	)
Fair value of debt assumed			(25,187	)
Cash paid		$	—

Note 5 — Property and Equipment

Property and equipment consists of the following (in thousands):

		March 31, 2016				June 30, 2015
Oil and natural gas properties
Proved properties		$	9,813,244			$	9,243,737
Less: accumulated depreciation, depletion, amortization and impairment			(9,074,800	)			(6,109,335	)
Proved properties, net			738,444				3,134,402
Unevaluated properties			58,592				436,357
Oil and natural gas properties, net			797,036				3,570,759
Other property and equipment			44,262				45,941
Less: accumulated depreciation			(25,781	)			(24,121	)
Other property and equipment, net			18,481				21,820
Total property and equipment, net of accumulated depreciation, depletion, amortization and impairment		$	815,517			$	3,592,579

At March 31, 2016, the Company’s investment in unevaluated properties primarily relates to the fair value of unproved oil and natural gas properties acquired in oil and natural gas property acquisitions (primarily the acquisition of EPL Oil & Gas, Inc. (“EPL”) on June 3, 2014 (the “EPL Acquisition”) and M21K, LLC on August 11, 2015). Costs associated with unevaluated properties are transferred to evaluated properties upon the earlier of (i) a determination as to whether there are any proved reserves related to the properties, or (ii) ratably over a period of time of not more than four years. As of December 31, 2015, we had identified certain of our unevaluated properties totaling to $336.5 million as being uneconomical and transferred such amounts to the full cost pool, subject to amortization.

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Note 5 — Property and Equipment  – (continued)

Due to the depressed commodity prices and our lack of capital resources to develop our properties, the Company believed that all of its proved undeveloped oil and gas reserves no longer qualified as being proved as of the period ended December 31, 2015. As a result, we removed all of our proved undeveloped oil and gas reserves from the proved category as of December 31, 2015. Almost all of the proved undeveloped reserves that were removed from the proved category as of December 31, 2015 are still economic at current prices, but were reclassed to the probable category because they were no longer expected to be drilled within five years of initial booking due to current constraints on ability to fund development drilling.

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 associated with developed properties) 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 amount of the discounted cash flows. For the three and nine months ended March 31, 2016, our ceiling test computation resulted in impairments of our oil and natural gas properties of $340.5 million and $2,670.9 million, respectively. If the current low commodity price environment or downward trend in oil and natural gas prices continues, we will incur further impairment to our full cost pool in fiscal 2016 based on the average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the previous 12-month period under the SEC pricing methodology.

Note 6 — Equity Method Investments

Prior to the M21K Acquisition on August 11, 2015 discussed previously in Note 4 — Acquisitions, we owned a 20% interest in EXXI M21K which was engaged in the acquisition, exploration, development and operation of oil and natural gas properties offshore in the Gulf of Mexico, through its wholly owned subsidiary, M21K. EGC received a management fee from M21K for providing administrative assistance in carrying out its operations. We also provided a guarantee related to the payment of asset retirement obligations and other liabilities of M21K. EXXI M21K was a guarantor of a $100 million first lien credit facility agreement entered into by M21K, which had a $40 million borrowing base and under which $28.0 million in loans and $1.2 million in letters of credit were outstanding as of June 30, 2015. At June 30, 2015, M21K was in default due to a breach of certain covenants under this agreement. On August 11, 2015, we acquired all of the equity interests of M21K and repaid the outstanding balance under the M21K credit facility. See Note 14 — Related Party Transactions.

We recorded an equity loss of $0 and $10.7 million for the three and nine months ended March 31, 2016, respectively. We recorded an equity loss of $2.6 million and $3.0 million for the three and nine months ended March 31, 2015, respectively.

Note 7 — Long-Term Debt

On April 14, 2016, the Debtors filed Bankruptcy Petitions in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code under the caption “In re: Energy XXI Ltd, et al., Case No. 16-31928.” The filing of the Bankruptcy Petitions constituted an event of default with respect to our existing debt obligations. As a result of the covenant violations that existed at March 31, 2016, that were not cured prior to the filing of the Bankruptcy Petitions, the Company’s pre-petition secured indebtedness under the Revolving Credit Facility, Second Lien Notes and EPL and EGC unsecured notes became immediately due and payable and any efforts to enforce such payment obligations are automatically stayed as a result of the Chapter 11

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Note 7 — Long-Term Debt  – (continued)

Cases. Accordingly, all of our outstanding indebtedness has been classified as current in the accompanying consolidated balance sheet at March 31, 2016, and we accelerated the amortization of the associated debt premium and original issue discount, fully amortizing those amounts as of March 31, 2016. In addition, except for amounts related to the Revolving Credit Facility, we accelerated the amortization of the remaining debt issuance costs related to our outstanding indebtedness, fully amortizing those costs as of March 31, 2016. We currently believe that it is probable that we may enter into a potential restructuring agreement with the lenders under our Revolving Credit Facility. Accordingly, we have not accelerated the amortization of remaining debt issue costs related to the Revolving Credit Facility. We continue to accrue interest on the Revolving Credit Facility subsequent to the Bankruptcy Petition date of April 14, 2016 since we anticipate that such interest will be allowed by the Bankruptcy Court to be paid to the Lenders. However, for all our other indebtedness, in accordance with accounting guidance in ASC 852, Reorganizations, we will accrue interest only up to the Bankruptcy Petition date of April 14, 2016. Additional information regarding the Chapter 11 proceedings is included in Note 1 — Organization and Chapter 11 Proceedings.

As of March 31, 2016 and June 30, 2015 our outstanding debt consisted of the following (in thousands):

		March 31, 2016				June 30, 2015
Revolving Credit Facility		$	99,412			$	150,000
11.0% Senior Secured Second Lien Notes due 2020			1,450,000				1,450,000
8.25% Senior Notes due 2018			213,677				510,000
6.875% Senior Notes due 2024			143,993				650,000
3.0% Senior Convertible Notes due 2018			363,018				400,000
7.5% Senior Notes due 2021			238,071				500,000
7.75% Senior Notes due 2019			101,077				250,000
9.25% Senior Notes due 2017			249,452				750,000
4.14% Promissory Note due 2017			4,006				4,343
Debt premium, 8.25% Senior Notes due 2018(1)			—				29,459
Original issue discount, 11.0% Notes due 2020			—				(51,104	)
Original issue discount, 3.0% Senior Convertible Notes due 2018			—				(45,782	)
Derivative instruments premium financing			—				10,647
Capital lease obligations			781				869
Total debt			2,863,487				4,608,432
Less current maturities			2,863,487				11,395
Total long-term debt		$	—			$	4,597,037

During the nine months ended March 31, 2016, we repurchased certain of our unsecured notes in aggregate principal amounts as follows: $506.0 million of 6.875% Senior Notes due 2024, $261.9 million of 7.5% Senior Notes due 2021, $148.9 million of 7.75% Senior Notes due 2019, $296.3 million of 8.25% Senior Notes due 2018 and $500.6 million of 9.25% Senior Notes due 2017. We repurchased these notes in open market transactions at a total cost of approximately $215.9 million, plus accrued interest, and we recorded a gain on the repurchases totalling approximately $1,492.4 million, net of associated debt issuance costs and certain other expenses. All of the repurchased notes, except for the 8.25% Senior Notes with face value of $266.6 million and 9.25% Senior Notes with face value of $471.1 million, repurchased in February 2016, were cancelled. In addition, in March 2016 certain bondholders holding $37 million in face

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Note 7 — Long-Term Debt  – (continued)

value of our 3.0% Senior Convertible Notes requested for conversion. Upon conversion, we recorded a gain of approximately $33.2 million after proportionate adjustment to the related debt issue costs, accrued interest and original debt issue discount.

Revolving Credit Facility

The Revolving Credit Facility was entered into by EGC in May 2011, but was most recently amended under the Fourteenth Amendment, the Thirteenth Amendment, the Twelfth Amendment to the First Lien Credit Agreement on November 30, 2015 (the “Twelfth Amendment”) and the Eleventh Amendment and Waiver to the First Lien Credit Agreement on July 31, 2015 (the “Eleventh Amendment”). The Revolving Credit Facility currently has a maximum facility amount and borrowing base of $327.2 million, of which such amount $99.4 million is the borrowing base under the sub-facility established for EPL. Borrowings under our First Lien Credit Agreement are limited to a borrowing base based on oil and natural gas reserve values, which are redetermined on a periodic basis. The scheduled date of maturity of the First Lien Credit Agreement is April 9, 2018.

The Revolving Credit Facility is secured by mortgages on at least 90% of the value of EGC and its subsidiaries’ (other than EPL and its subsidiaries until they shall have become guarantors of the EGC indebtedness under the First Lien Credit Agreement) proved reserves and proved developed producing reserves, but with the threshold for such properties of EPL and its subsidiaries (until they shall have become guarantors of the EGC indebtedness under the First Lien Credit Agreement) at 85%. Additionally, EPL is required to maintain $30 million of restricted cash in an account subject to a control agreement in favor of the administrative agent under the First Lien Credit Agreement.

The Company’s election to not make an interest payment on EPL’s 8.25% Senior Notes due on February 16, 2016 commenced a 30-day grace period, although such an election did not constitute an event of default under the indenture governing the 8.25% Senior Notes or any other debt instruments; however, under the Revolving Credit Facility agreement, the missed payment constituted a default under which no portion of the outstanding principal amount may be continued as a London Interbank Offered Rate (“LIBOR”), plus applicable margins ranging from 2.75% to 3.75% rate loan. Accordingly, on February 25, 2016, all the outstanding principal amounts was subjected to an alternate base rate based on the federal funds effective rate plus applicable margins ranging from 1.75% to 2.75%. The applicable commitment fee under the facility is 0.50%. As a result of the filing of the Bankruptcy Petitions described in Note 1 — Organization and Chapter 11 Proceedings, the highest of the margins currently applies and default interest is accruing under the facility.

Lender consent is required for any asset disposition that would have the effect of reducing the borrowing base by more than $5 million in the aggregate.

On February 29, 2016, the Thirteenth Amendment became effective and on March 14, 2016, the Fourteenth Amendment became effective, extending the term of the Thirteenth Amendment until April 15, 2016.

The Thirteenth and Fourteenth Amendments provided that the Company was not required to deliver a compliance certificate for the fiscal quarter ended December 31, 2015 until their respective expiration dates. The following additional changes to the First Lien Credit Agreement became effective upon the execution of the Thirteenth Amendment:

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Note 7 — Long-Term Debt  – (continued)

The Fourteenth Amendment provided for the reduction of our borrowing base under the First Lien Credit Agreement. The borrowing base under the First Lien Credit Agreement as of the effectiveness of the Fourteenth Amendment was reduced from $500 million to $377.8 million, with such reduction effectively removing any further borrowing capacity under the First Lien Credit Agreement beyond an aggregate amount equal to the amount of outstanding letters of credit that have been issued thereunder plus the amount of outstanding loans to EPL thereunder. In connection with such reduction, the Fourteenth Amendment provided that we unwind certain hedging transactions and use the proceeds therefrom to repay amounts of outstanding loans to EPL under the First Lien Credit Agreement, and for such repayments to then result in an automatic and permanent reduction in our borrowing base. This further reduction in borrowing base was for both the overall borrowing base under the First Lien Credit Agreement as well as the borrowing base specific to EPL, and in each case, the reduction is an amount equal to the full extent of the aggregate amount of repaid principal relating to such unwound hedging transactions.

The Fourteenth Amendment continued to allow us to get replacement letters of credit under the First Lien Credit Agreement without satisfying credit extension conditions so long as the replacement letter of credit did not have an aggregate face amount in excess of the available amount of the letter of credit being replaced and certain other conditions set forth in the Fourteenth Amendment were met.

As of March 31, 2016, we had $99.4 million in borrowings and $227.8 million in letters of credit issued under the First Lien Credit Agreement. On April 14, 2016, however, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the Revolving Credit Facility and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, the Debtors, on behalf of the holders of the First Lien Claims arising on account of the Revolving Credit Facility and subject to further negotiations with the Lenders, have agreed to use their best efforts to ensure that at emergence from the Chapter 11 proceedings, the amount drawn under the Revolving Credit Facility either (i) remains outstanding or (ii) is refinanced with a new facility with terms acceptable to the Majority Restructuring Support Parties; provided, however that (a) $228 million of letters of credit usage remains outstanding and (b) other terms, including a borrowing base redetermination holiday, are acceptable to the Debtors and the Majority Restructuring Support Parties. If the Debtors are unable to obtain the foregoing treatment of the First Lien Claims, then the Debtors will use their best efforts to obtain treatment acceptable to the Debtors and the Majority Restructuring Support Parties. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

11.0% Senior Secured Second Lien Notes Due 2020

On March 12, 2015, EGC issued $1.45 billion in aggregate principal amount of 11.0% senior secured second lien notes due March 15, 2020 (the “Second Lien Notes”) pursuant to the Purchase Agreement (the “Purchase Agreement”) by and among EGC, Energy XXI Ltd, our ultimate parent company (the “Parent”), Energy XXI USA, Inc. (“EXXI USA”) and certain of EGC’s wholly owned subsidiaries (together with the Parent and EXXI USA, the “Guarantors”), and Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Wells Fargo Securities, LLC and Imperial Capital, LLC, as representatives of the initial

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Note 7 — Long-Term Debt  – (continued)

purchasers named therein (the “Initial Purchasers”). EGC received net proceeds of approximately $1.35 billion in the offering after deducting the Initial Purchasers’ discount and direct offering costs. The Second Lien Notes were sold to investors at a discount of 96.313% of principal, for a yield to maturity at issuance of 12.0%. The Second Lien Notes were offered and sold in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) and were resold to qualified institutional buyers in reliance on Rule 144A of the Securities Act. The Second Lien Notes and the related guarantees have not been, and will not be, registered under the Securities Act or the securities laws of any other jurisdiction. The Second Lien Notes bear interest from the date of their issuance at an annual rate of Second Lien with interest due semi-annually, in arrears, on March 15^th and September 15^th, beginning September 15, 2015. EGC incurred underwriting and direct offering costs of $41.7 million which were recorded as debt issuance costs. The effective interest rate on the Second Lien Notes is approximately 12.8%, reflecting amortization of the Initial Purchasers’ discount of $53.5 million as well as the amortization of debt issuance costs.

The Second Lien Notes were issued pursuant to an indenture, dated March 12, 2015 (the “2015 Indenture”), among EGC, the Guarantors and U.S. Bank National Association, as trustee. The Second Lien Notes are secured by second-priority liens on substantially all of EGC and its subsidiary guarantors’ assets and all of EXXI USA’s equity interests in EGC, in each case to the extent such assets secure our Revolving Credit Facility. The liens securing the Second Lien Notes and the related guarantees are contractually subordinated to the liens on such assets securing our Revolving Credit Facility and any other priority lien debt, to the extent of the value of the collateral securing such obligations, pursuant to the terms of an intercreditor agreement, and to certain other secured indebtedness, to the extent of the value of the assets subject to the liens securing such indebtedness.

The Second Lien Notes are fully and unconditionally guaranteed on a senior basis by the Guarantors and by certain of EGC’s future subsidiaries, except that a guarantor can be automatically released and relieved of its obligations under certain customary circumstances contained in the 2015 Indenture. Although the Second Lien Notes are guaranteed by the Parent and EXXI USA, the Parent and EXXI USA will not, subject to certain exceptions, be subject to the restrictive covenants in the 2015 Indenture.

As a result of our bond repurchases in February 2016, we have reduced the principal amount of the 8.25% Senior Notes and the 9.25% Senior Notes outstanding to $213.7 million and $249.5 million, respectively, eliminating this springing maturity in the Second Lien Notes.

The 2015 Indenture restricts EGC’s ability and the ability of its restricted subsidiaries to: (i) transfer or sell assets; (ii) make loans or investments; (iii) pay dividends, redeem subordinated indebtedness or make other restricted payments; (iv) incur or guarantee additional indebtedness or issue disqualified capital stock; (v) create or incur certain liens; (vi) incur dividend or other payment restrictions affecting certain subsidiaries; (vii) consummate a merger, consolidation or sale of all or substantially all of EGC’s assets; (viii) enter into transactions with affiliates; and (ix) engage in business other than the oil and gas business. These covenants are subject to a number of important exceptions and qualifications.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the Second Lien Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, holders of the Second Lien Notes Claims will receive their pro rata share of 100% of the New Equity in the reorganized company on account of such Second Lien Notes Claims, subject to dilution from the issuance of New Equity in connection with the Management Incentive Plan and the Warrant Package. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed

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Note 7 — Long-Term Debt  – (continued)

and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

8.25% Senior Notes Due 2018

On June 3, 2014, EGC assumed the 8.25% Senior Notes in the EPL Acquisition which consist of $510 million in aggregate principal amount issued under an indenture dated as of February 14, 2011 (the “2011 Indenture”). The 8.25% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis initially by each of EPL’s existing direct and indirect domestic subsidiaries. The 8.25% Senior Notes will mature on February 15, 2018. On April 18, 2014, EPL entered into a supplemental indenture (the “Supplemental Indenture”) to the 2011 Indenture, by and among EPL, the guarantors party thereto, and U.S. Bank National Association, as trustee, governing EPL’s 8.25% Senior Notes. The Supplemental Indenture amended the terms of the 2011 Indenture governing the 8.25% Senior Notes to waive EPL’s obligation to make and consummate an offer to repurchase the 8.25% Senior Notes at 101% of the principal amount thereof plus accrued and unpaid interest. EPL entered into the Supplemental Indenture after the receipt of the requisite consents from the holders of the 8.25% Senior Notes in accordance with the Supplemental Indenture. We paid an aggregate cash payment of $1.2 million (equal to $2.50 per $1,000 principal amount of 8.25% Senior Notes for which consents were validly delivered and unrevoked). The 8.25% Senior Notes are callable at 104.125% starting February 15, 2015 with such premium declining to zero by February 15, 2017.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 8.25% Senior Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EPL Unsecured Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

6.875% Senior Notes Due 2024

On May 27, 2014, EGC issued at par $650 million in aggregate principal amount of the 6.875% Senior Notes due March 15, 2024. On June 1, 2015, we completed a registered offer to exchange the 6.875% Senior Notes for a new series of freely tradable notes having substantially identical terms as the 6.875% Senior Notes. EGC incurred underwriting and direct offering costs of approximately $11 million which were recorded as debt issuance costs.

The indenture governing the 6.875% Senior Notes, among other things, limits EGC’s ability and the ability of our restricted subsidiaries to transfer or sell assets, make loans or investments, pay dividends, redeem subordinated indebtedness or make other restricted payments, incur or guarantee additional indebtedness or issue disqualified capital stock, create or incur certain liens, incur dividend or other payment restrictions affecting certain subsidiaries, consummate a merger, consolidation or sale of all or substantially all of our assets, enter into transactions with affiliates and engage in business other than the oil and natural gas business.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7 — Long-Term Debt  – (continued)

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 6.875% Senior Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EGC Unsecured Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

3.0% Senior Convertible Notes Due 2018

On November 18, 2013, the Parent sold $400 million face value of 3.0% Senior Convertible Notes due 2018 (the “3.0% Senior Convertible Notes”). We incurred underwriting and direct offering costs of $7.6 million which have been capitalized and are being amortized over the life of the 3.0% Senior Convertible Notes. The 3.0% Senior Convertible Notes are convertible into cash, shares of common stock or a combination of cash and shares of common stock, at the election of the Parent, based on an initial conversion rate of 24.7523 shares of common stock per $1,000 principal amount of the 3.0% Senior Convertible Notes (equivalent to an initial conversion price of approximately $40.40 per share of common stock). The conversion rate, and accordingly the conversion price, may be adjusted under certain circumstances as described in the indenture governing the 3.0% Senior Convertible Notes.

For accounting purposes, the $400 million aggregate principal amount of 3.0% Senior Convertible Notes for which we received cash was recorded at fair market value by applying the implied straight debt rate of 6.75% to allocate the proceeds between the debt component and the convertible equity component of the 3.0% Senior Convertible Notes, which has been reflected as additional paid-in-capital. Based on applying the implied straight debt rate, the $400 million aggregate principal amount of the 3.0% Senior Convertible Notes was recorded at $336.6 million and the original issue discount of $63.4 million is being amortized as an increase in interest expense over the life of the 3.0% Senior Convertible Notes.

As described in the indenture governing the 3.0% Senior Convertible Notes, the 3% Senior Convertible Notes can be converted in multiples of $1,000 principal amount, upon request by the bondholder, if prior to September 15, 2018, during the five consecutive business-day period following any ten consecutive trading-day period in which the trading price per $1,000 principal amount of 3% Senior Convertible Notes for each trading day during such ten trading-day period was less than 98% of the closing sale price of our common stock for each trading day during such ten trading-day period multiplied by the then current conversion rate. In March 2016, each $1,000 principal amount of 3% Senior Convertible Notes were trading substantially lower than 98% of the value of our common stock multiplied by the then current conversion rate. Accordingly, certain bondholders holding $37 million in face value of our 3.0% Senior Convertible Notes requested conversion into shares of our common stock. Upon conversion, we elected to issue shares of our common stock and delivered 915,385 shares of our common stock with fractional shares settled in cash. We followed the guidance in ASC 470-20, Debt with Conversion and Other Options, to record such conversion which allows for the allocation of fair value of the consideration transferred to the bondholder between the liability and equity components of the original instrument, recognition of gain or loss on debt extinguishment and allocation of remaining consideration transferred to reacquire the equity component. Accordingly, we recorded a debt extinguishment gain of approximately $33.2 million and proportionately adjusted the related debt issue costs, accrued interest and original debt issue discount.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7 — Long-Term Debt  – (continued)

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 3.0% Senior Convertible Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EXXI Convertible Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

7.5% Senior Notes Due 2021

On September 26, 2013, EGC issued at par $500 million aggregate principal amount of 7.5% unsecured senior notes due December 15, 2021 (the “7.5% Senior Notes”). In April 2014, we completed a registered offer to exchange the 7.5% Senior Notes with a new series of freely tradable notes having substantially identical terms as the 7.5% Senior Notes. EGC incurred underwriting and direct offering costs of $8.6 million which were recorded as debt issuance costs.

The indenture governing the 7.5% Senior Notes limits, among other things, EGC’s ability and the ability of our restricted subsidiaries to transfer or sell assets, make loans or investments, pay dividends, redeem subordinated indebtedness or make other restricted payments, incur or guarantee additional indebtedness or issue disqualified capital stock, create or incur certain liens, incur dividend or other payment restrictions affecting certain subsidiaries, consummate a merger, consolidate or sell all or substantially all of our assets, enter into transactions with affiliates and engage in business other than the oil and gas business.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 7.5% Senior Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EGC Unsecured Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

7.75% Senior Notes Due 2019

On February 25, 2011, EGC issued at par $250 million aggregate principal amount of 7.75% unsecured senior notes due June 15, 2019 (the “7.75% Old Senior Notes”). On July 7, 2011, EGC exchanged the 7.75% Old Senior Notes for newly issued notes registered under the Securities Act (the “7.75% Senior Notes”) with identical terms and conditions. EGC incurred underwriting and direct offering costs of $3.1 million which were recorded as debt issuance costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7 — Long-Term Debt  – (continued)

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 7.75% Senior Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EGC Unsecured Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

9.25% Senior Notes Due 2017

On December 17, 2010, EGC issued at par $750 million aggregate principal amount of 9.25% unsecured senior notes due December 15, 2017 (the “9.25% Old Senior Notes”). On July 8, 2011, EGC exchanged $749 million of the 9.25% Old Senior Notes for $749 million of newly issued notes (the “9.25% Senior Notes”) registered under the Securities Act with identical terms and conditions. The trading restrictions on the remaining $1 million face value of the 9.25% Old Senior Notes were lifted on December 17, 2011. EGC incurred underwriting and direct offering costs of $15.4 million which were recorded as debt issuance costs.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 9.25% Senior Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EGC Unsecured Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

4.14% Promissory Note

In September 2012, we entered into a promissory note of $5.5 million to acquire other property and equipment. Under this note, we are required to make a monthly payment of approximately $52,000 and one lump-sum payment of $3.3 million at maturity in October 2017. This note carries an interest rate of 4.14% per annum.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the promissory note and accelerated the indebtedness thereunder.

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 Facility. Derivative instruments premium financing is accounted for as debt and this indebtedness is pari passu with borrowings under the Revolving Credit Facility. The derivative instruments premium financing is structured to mature

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Note 7 — Long-Term Debt  – (continued)

when the derivative instrument settles so that we realize the value, net of derivative instrument premium financing. As of March 31, 2016 and June 30, 2015, our outstanding derivative instruments premium financing discounted at our approximate borrowing cost of 2.5% per annum totaled $0 and $10.6 million, respectively.

Interest Expense

Filing of the Bankruptcy Petitions on April 14, 2016 constituted an event of default with respect to our existing debt obligations, accordingly the Company’s pre-petition secured indebtedness under the Revolving Credit Facility, Second Lien Notes and EPL and EGC unsecured notes became immediately due and payable and any efforts to enforce such payment obligations are automatically stayed as a result of the Chapter 11 Cases. As a result of the covenant violations that existed at March 31, 2016, that were not cured prior to the filing of the Bankruptcy Petitions, all of our outstanding indebtedness has been classified as current in the accompanying consolidated balance sheet at March 31, 2016, and we accelerated the amortization of the associated debt premium and original issue discount, fully amortizing those amounts as of March 31, 2016. In addition, except for amounts related to the Revolving Credit Facility, we accelerated the amortization of the remaining debt issuance costs related to our outstanding indebtedness, fully amortizing those costs as of March 31, 2016. We currently believe that it is probable that we may enter into a potential restructuring agreement with the lenders under our Revolving Credit Facility. Accordingly, we have not accelerated the amortization of remaining debt issue costs related to the Revolving Credit Facility. We continue to accrue interest on the Revolving Credit Facility subsequent to the Bankruptcy Petition date of April 14, 2016 since we anticipate that such interest will be allowed by the Bankruptcy Court to be paid to the lenders. However, for all our other indebtedness, in accordance with accounting guidance in ASC 852, Reorganizations, we will accrue interest only up to the Bankruptcy Petition date of April 14, 2016. For the three and nine months ended March 31, 2016 and 2015, interest expense consisted of the following (in thousands):

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Revolving Credit Facility		$	3,919			$	7,526			$	11,480			$	21,901
11.0% Second Lien Notes due 2020			39,766				8,740				120,171				8,740
8.25% Senior Notes due 2018			6,613				10,518				27,262				31,556
6.875% Senior Notes due 2024			2,475				11,172				17,676				33,516
3.0% Senior Convertible Notes due 2018			2,903				2,959				8,952				9,008
7.50% Senior Notes due 2021			4,463				9,375				16,769				28,125
7.75% Senior Notes due 2019			1,959				4,843				7,917				14,531
9.25% Senior Notes due 2017			10,005				17,343				44,110				52,031
4.14% Promissory Note due 2017			41				47				130				146
Amortization of debt issue cost – Revolving Credit Facility			3,521				9,845				4,827				11,902
Accretion of original debt issue discount, 11.0% Second Lien Notes due 2020			2,135				418				6,249				418
Accretion of original debt issue discount, 11.0% Second Lien Notes due 2020 – accelerated			44,855				—				44,855				—
Amortization of debt issue cost – 11.0% Second Lien Notes due 2020			1,724				327				5,047				327
Amortization of debt issue cost – 11.0% Second Lien Notes due 2020 – accelerated			36,243				—				36,243				—
Amortization of fair value premium – 8.25% Senior Notes due 2018			(3,325	)			(2,608	)			(10,048	)			(7,712)

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(Unaudited)

Note 7 — Long-Term Debt  – (continued)

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Amortization of fair value premium – 8.25% Senior Notes due 2018 – accelerated			(6,730	)			—				(6,730	)			—
Amortization of debt issue cost – 6.875% Senior Notes due 2024			62				282				457				845
Amortization of debt issue cost – 6.875% Senior Notes due 2024 – accelerated			1,946				—				1,946				—
Accretion of original debt issue discount, 3.0% Senior Convertible Notes due 2018			2,941				2,794				8,917				8,355
Accretion of original debt issue discount, 3.0% Senior Convertible Notes due 2018 –  accelerated			33,370				—				33,370				—
Amortization of debt issue cost – 3.0% Senior Convertible Notes due 2018			377				358				1,142				1,070
Amortization of debt issue cost – 3.0% Senior Convertible Notes due 2018 – accelerated			4,271				—				4,271				—
Amortization of debt issue cost – 7.50% Senior Notes due 2021			123				263				478				788
Amortization of debt issue cost – 7.50% Senior Notes due 2021 – accelerated			2,822				—				2,822				—
Amortization of debt issue cost – 7.75% Senior Notes due 2019			38				97				168				291
Amortization of debt issue cost – 7.75% Senior Notes due 2019 – accelerated			491				—				491				—
Amortization of debt issue cost – 9.25% Senior Notes due 2017			517				552				1,902				1,655
Amortization of debt issue cost – 9.25% Senior Notes due 2017 – accelerated			913				—				913				—
Derivative instruments financing and other			330				188				433				710
		$	198,768			$	85,039			$	392,220			$	218,203

Note 8 — Asset Retirement Obligations

The following table describes the changes to our asset retirement obligations (in thousands):

Balance at June 30, 2015		$	487,085
Liabilities acquired			66,700
Liabilities incurred and true-up to liabilities settled			44,597
Liabilities settled			(75,032	)
Revisions*			(20,397	)
Accretion expense			45,785
Total balance at March 31, 2016			548,738
Less: current portion			52,546
Long-term balance at March 31, 2016		$	496,192

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9 — Derivative Financial Instruments

We enter into hedging transactions to reduce exposure to fluctuations in the price of crude oil and natural gas. We enter into hedging transactions with multiple investment-grade rated counterparties, primarily financial institutions, to reduce the concentration of exposure to any individual counterparty. We use various instruments including financially settled crude oil and natural gas puts, put spreads, swaps, zero-cost collars and three-way collars in our hedging portfolio. Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying consolidated balance sheets. Any gains or losses resulting from changes in fair value of our outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included in gain (loss) on derivative financial instruments as a component of revenues in the accompanying consolidated statements of operations.

With a zero-cost collar, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price of the collar, and we are required to make a payment to the counterparty if the settlement price for any settlement period is above the cap price for the collar. A three-way collar is a combination of options consisting of a sold call, a purchased put and a sold put. The sold call establishes a maximum price we will receive for the volumes under contract. The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be the reference price (i.e., NYMEX WTI, BRENT IPE and/or Argus-LLS) plus the difference between the purchased put and the sold put strike price.

Most of our crude oil production is Heavy Louisiana Sweet (“HLS”). We include contracts indexed to NYMEX WTI, ICE Brent futures and Argus-LLS futures in our hedging portfolio to closely align and manage our exposure to the associated price risk.

The energy markets have historically been very volatile, and there can be no assurances that crude oil and natural gas prices will not be subject to wide fluctuations in the future. While the use of hedging arrangements helps to limit the downside risk of adverse price movements, they may also limit future gains from favorable price movements.

On March 14, 2016, the Fourteenth Amendment to the First Lien Credit Agreement became effective and required us to unwind certain hedging transactions and use the proceeds therefrom to repay amounts of outstanding loans to EPL under the First Lien Credit Agreement, and for such repayments to then result in an automatic and permanent reduction in our borrowing base. Accordingly, on March 15, 2016, we unwound and monetized all of our outstanding crude oil and natural gas contracts and received $50.6 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9 — Derivative Financial Instruments  – (continued)

The fair values of derivative instruments in our consolidated balance sheets were as follows (in thousands):

		Asset Derivative Instruments																Liability Derivative Instruments
		March 31, 2016								June 30, 2015								March 31, 2016								June 30, 2015
		Balance Sheet Location				Fair Value				Balance Sheet Location				Fair Value				Balance Sheet Location				Fair Value				Balance Sheet Location				Fair Value
Derivative financial instruments			Current			$	—				Current			$	51,024				Current			$	—				Current			$	31,456
			Non-Current				—				Non-Current				11,980				Non-Current				—				Non-Current				9,440
Total gross derivative financial instruments subject to enforceable master netting agreement							—								63,004								—								40,896
Derivative financial instruments			Current				—				Current				(28,795	)			Current				—				Current				(28,795	)
			Non-Current				—				Non-Current				(8,082	)			Non-Current				—				Non-Current				(8,082	)
Gross amounts offset in Balance Sheets							—								(36,877	)							—								(36,877	)
Net amounts presented in Balance Sheets			Current				—				Current				22,229				Current				—				Current				2,661
			Non-Current				—				Non-Current				3,898				Non-Current				—				Non-Current				1,358
						$	—							$	26,127							$	—							$	4,019

The following table presents information about the components of the gain (loss) on derivative instruments (in thousands).

		Three Months Ended March 31,								Nine Months Ended December 31,
Gain (loss) on derivative financial instruments		2016				2015				2016				2015
Cash settlements, net of purchased put premium amortization		$	17,511			$	34,491			$	59,081			$	77,710
Proceeds from monetizations			50,588				73,117				50,588				102,354
Change in fair value			(61,325	)			(90,645	)			(19,163	)			85,086
Total gain on derivative financial instruments		$	6,774			$	16,963			$	90,506			$	265,150

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 our 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, 2016, we had no outstanding derivative contracts and, accordingly, no deposits for collateral with our counterparties.

Note 10 — Income Taxes

We are a Bermuda company and are generally not subject to income tax in Bermuda. We have historically operated through our various subsidiaries in the United States, and, accordingly, U.S income taxes have been provided based upon those U.S. operations and U.S withholding tax on interest owed to our Bermuda parent on intercompany indebtedness. Pursuant to the Restructuring Support Agreement discussed in Note 1 — Organization and Chapter 11 Proceedings, we filed bankruptcy and liquidation petitions in the United States and Bermuda, respectively, on April 14, 2016. These filings generally had no immediate effect on the Company’s income tax year or income tax reporting requirements, but will likely have future effects as discussed below.

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ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10 — Income Taxes  – (continued)

As required by ASC Topic 740-270, Income Taxes: Interim Reporting, we forecast our tax position for the year, and, in loss years, may not record an additional tax benefit in an interim period unless we believe that it would be appropriate under present literature to record a net deferred tax asset at the end of the year. At this time, we do not have such a belief (due to a preponderance of negative evidence as to future realizability) and accordingly reflect a current deferred tax benefit of zero. We continue to evaluate the need for the valuation allowance based on current and expected earnings and other factors, and adjust it accordingly.

Our Bermuda companies continue to record income tax expense reflecting 30% U.S. withholding tax on any interest (and interest equivalents) accrued on indebtedness of the U.S. companies held by them, and, consistent with this practice, we have accrued an additional withholding obligation of $7.8 million for the nine months ended March 31, 2016. This accrual policy changed effective with our bankruptcy filing on April 14, 2016, in light of the Restructuring Support Agreement. During the nine months ended March 31, 2016, we have not made any cash withholding tax payments on management fees paid to our Bermuda entities, nor do we expect any such payments in the foreseeable future. We record the 30% withholding tax as a separate line item which is offset by other U.S. federal deferred tax assets in the consolidated financial statements to arrive at the zero net deferred tax asset/liability amounts presented. This accrued income tax liability related to withholding on interest expense due to our Bermuda parent is not a current liability due nor was listed as a pre-petition tax liability in our bankruptcy petition filed April 14, 2016, as discussed in Note 1 — Organization and Chapter 11 Proceedings. Management is presently evaluating the potential treatment of this withholding tax accrual as a “Liability Subject to Compromise” for purposes of future presentation consistent with ASC Topic 852, as also discussed in Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements.

We have historically paid no significant U.S. cash income taxes (exclusive of withholding tax on Bermuda interest expense discussed above) due to the election to expense intangible drilling costs and the presence of our net operating loss carryforwards (“NOLs”). Section 61(a)(12) of the Internal Revenue Code of 1986, as amended (“IRC”) generally provides, in pertinent part, that income from the discharge of indebtedness (“CODI”) is treated as ordinary income subject to current taxation. The Company has completed several purchases of indebtedness in the past two quarters at less than the issued amount of the indebtedness, which constitutes CODI. The U.S. Alternative Minimum Tax (“AMT”) only allows offset of 90% of AMT income by NOL carryovers (with certain limited exceptions for 2009 and 2010 generated NOLs), with the balance of income being taxed at 20%. IRC section 108(a)(1) provides that CODI may be excluded from taxable income of a debtor if the discharge occurred: (i) while the debtor was subject to a Title 11 (or similar) proceeding (such as a Chapter 11 filing), or (ii) while insolvent. The significance of exclusion treatment is that an NOL carryforward is not required to shield excluded CODI. If NOLs were used to offset CODI (or other taxable income), the Company would be subject to a current cash AMT payment due to the 90% limitation in NOL usage against this tax. We believe, more likely than not, that prior to the bankruptcy filing, the Company was, for income tax purposes, insolvent as defined in IRC section 108(a)(1)(B) at the times of significant indebtedness repurchases and thus the exclusion applies to significant indebtedness repurchases that constitute CODI. As such, we presently do not expect to make any cash AMT payments during this fiscal year. If any such AMT payments were required, we believe that, under present circumstances, we would not be able to record a net deferred tax asset for these payments, even though they result in a Minimum Tax Credit usable against future regular income tax with no expiration period. Thus, we believe that any current-year cash AMT payments would have a negative impact on earnings. We revise our ongoing estimated AMT obligation each quarter during the year and revise our expected income tax rate and cash tax payment disclosure accordingly.

In accordance with IRC Section 382 certain transfers of our equity, or issuances of equity in connection with our restructuring, may impair our ability to utilize our U.S. federal income tax NOL carryforwards and the tax basis of property (“Tax Attributes”) to offset future taxable income. A corporation is generally

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Note 10 — Income Taxes  – (continued)

permitted to deduct from taxable income (or offset resulting income tax, in the case of credits) in any year NOLs carried forward from prior years as well as certain depletion, depreciation and amortization (“DD&A”) cost recovery deductions relating to the recovery of its tax basis in properties post-discharge.

As described in detail in Note 11 — Stockholders’ Equity — Notice Procedures and Transfer Restrictions, the Bankruptcy Court has entered an interim order that places certain limitations on trading in our equity during the pendency of the Chapter 11 cases. Additional limitations pursuant to IRC section 382 can apply based upon the enterprise value of the Company upon exit, and many of these factors are based upon market elements and the results of negotiations that are forthcoming and are beyond the control of the Company. Despite these precautions, we can provide no assurances that these tax law limitations, market factors, or results of negotiations will prevent an “ownership change” or otherwise inhibit our ability to utilize our NOLs or other Tax Attribute carryforwards as a result of our reorganization due to IRC section 382 ownership change limitations. Additionally, Tax Attribute reduction resulting from CODI exclusion is generally required irrespective of the application of IRC section 382 to changes in ownership of the Company. Accordingly, we expect that our Tax Attributes available for use after Company’s emergence from the Chapter 11 proceedings will be significantly limited.

Note 11 — Stockholders’ Equity

Common Stock

Our common stock traded on the NASDAQ under the symbol “EXXI” prior to the delisting of our common stock in connection with the commencement of the Chapter 11 proceedings. Our common stock resumed trading on the OTC Pink under the symbol “EXXIQ” on April 25, 2016. Our shareholders are entitled to one vote for each share of common stock held on all matters to be voted on by shareholders. We have 200,000,000 authorized common shares, par value of $0.005 per share.

Late in fiscal year 2015, our Board of Directors decided to suspend the declaration of quarterly dividends on our common stock for the foreseeable future.

On April 14, 2016, the Company received a letter from The NASDAQ Listing Qualifications Staff stating that the Staff has determined that the Company’s securities will be delisted from NASDAQ. The decision was reached by the Staff under NASDAQ Listing Rules 5101, 5110(b) and IM-5101-1 as a result of the Company’s announcement that the Company filed the Bankruptcy Petitions, the associated public interest concerns raised by the Bankruptcy Petitions, concerns regarding the residual equity interest of the existing listed securities holders and concerns about the Company’s ability to sustain compliance with all requirements for continued listing on NASDAQ. As previously disclosed, on February 24, 2016, the Company received a deficiency notice from NASDAQ stating that, based on the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer met the minimum $1.00 per share requirement under NASDAQ Listing Rule 5450(a)(1). The letter further indicates that, unless the Company requests an appeal, trading of the Company’s common stock was suspended at the opening of business on April 25, 2016, and a Form 25-NSE was filed with the SEC, which would remove the Company’s securities from listing and registration on NASDAQ. The Company currently does not intend to appeal NASDAQ’s determination.

The Company securities are eligible to be quoted on the OTC Markets Group Inc.’s OTC Pink. To be quoted on the OTC Pink, a market maker must have sponsored the security and comply with SEC Rule 15c2-11 before it can initiate a quote in a specific security. The OTC Pink is a significantly more limited market than NASDAQ, and the quotation of our common stock on the OTC Pink may result in a less liquid market available for existing and potential shareholders to trade shares of our common stock. This could further depress the trading price of our common stock and could also have a long-term adverse effect on our ability to raise capital. There can be no assurance that any public market for our common stock will exist in

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Note 11 — Stockholders’ Equity  – (continued)

the future or that we will be able to relist our common stock on a national securities exchange. In connection with the delisting of our common stock, there may also be other negative implications, including the potential loss of confidence in the Company by suppliers, customers and employees and the loss of institutional investor interest in our common stock.

As described in Note 1 — Organization and Chapter 11 Proceedings, pursuant to the Restructuring Support Agreement entered into on April 11, 2016, it is expected that an order of the Bermuda court will be sought to liquidate Energy XXI Ltd under the laws of Bermuda concurrently with the Company’s emergence from the Chapter 11 proceedings, and (assuming that there are no assets available for distribution to equity under the Bermuda laws governing the payment of stakeholders in a Bermuda liquidation), existing equity holders would not receive distribution from the liquidator in respect of their equity interests in that liquidation. Accordingly any trading in shares of our common stock during the pendency of the Chapter 11 proceedings is highly speculative. The Company intends to seek listing of the New Equity on the NASDAQ upon consummation of the Plan, but no assurance can be given that the Plan will be confirmed or consummated or that the Company will be successful with such listing.

Our Board adopted a Net Operating Loss (“NOL”) Shareholder Rights Agreement (the “Rights Plan”) designed to preserve substantial tax assets of our U.S. subsidiaries. The Rights Plan is intended to protect our tax benefits and to allow all of our existing shareholders to realize the long-term value of their investment in the Company. The Board adopted the Rights Plan after considering, among other matters, the estimated value of the tax benefits, the potential for diminution upon an ownership change, and the risk of an ownership change occurring. Our ability to use these tax benefits would be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code (“Section 382”). An ownership change would occur if shareholders that own (or are deemed to own) at least 5% or more of our outstanding common stock increased their cumulative ownership in the Company by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. The Rights Plan reduces the likelihood that changes in our investor base would limit the Company’s future use of its tax benefits, which would significantly impair the value of the benefits to all shareholders. To implement the Rights Plan, the Board declared a non-taxable dividend of one preferred share purchase right (“Rights”) for each outstanding common stock of Energy XXI. The rights will be exercisable if a person or group acquires 4.9% or more of our common stock. The rights will also be exercisable if a person or group that already owns 4.9% or more of our common stock acquires additional shares (other than as a result of a dividend or a stock split). Our existing shareholders that beneficially own in excess of 4.9% of the common stock were “grandfathered in” at their current ownership level. If the rights become exercisable, all holders of rights, other than the person or group triggering the rights, will be entitled to purchase our common stock at a 50% discount. Rights held by the person or group triggering the rights will become void and will not be exercisable.

The Rights will trade with shares of our common stock and will expire on February 15, 2017 unless our shareholders ratify the Rights Plan prior to such date, in which case the term of the Rights Plan is extended to three years. The Board may terminate the Rights Plan or redeem the rights prior to the time the rights are triggered.

Since the primary purpose of the Rights is to deter existing shareholders or new investors to acquire more than 4.9% of our outstanding common stock, we believe that it is unlikely that the Rights would get triggered or exercised. Accordingly, since the fair value of the Rights is mostly derived from the probability of the Rights being exercised, we determined the Rights fair value to be immaterial.

As of March 31, 2016, no ownership change as defined in Section 382 had occurred and no Rights had been exercised.

In March 2016, each $1,000 principal amount of 3% Senior Convertible Notes were trading substantially lower than 98% of the value of our common stock multiplied by the then current conversion rate.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 11 — Stockholders’ Equity  – (continued)

Accordingly, certain bondholders holding $37 million in face value of our 3.0% Senior Convertible Notes requested for conversion. Upon conversion, we elected to issue shares of our common stock and delivered 915,385 shares of our common stock with fractional shares settled in cash. For more information see Note 7 — Long-Term Debt, under the caption 3.0% Senior Convertible Notes Due 2018.

As of March 31, 2016, $83.2 million remains available for repurchases under the share repurchase program approved by our Board of Directors in May 2013. We have suspended the repurchase program indefinitely to reduce our capital needs.

Preferred Stock

Our bye-laws authorize the issuance of 7,500,000 shares of preferred stock. Our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. Shares of previously issued preferred stock that have been cancelled are available for future issuance.

Dividends on both the 5.625% Perpetual Convertible Preferred Stock (“5.625% Preferred Stock”) and the 7.25% Perpetual Convertible Preferred Stock (“7.25% Preferred Stock”) are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year.

Dividends on both the 5.625% Preferred Stock and the 7.25% Preferred Stock may be paid in cash, shares of our common stock, or a combination thereof. If we elect to make payment in shares of common stock, such shares shall be valued for such purposes at 95% of the market value of our common stock as determined on the second trading day immediately prior to the record date for such dividend. Energy XXI suspended the quarterly dividends on the 5.625% Preferred Stock and the 7.25% Preferred Stock for the quarter ended March 31, 2016, and, as a result, no dividends for the fiscal third quarter were paid to the holders of either series of preferred stock.

As described in Note 1 — Organization and Chapter 11 Proceedings, pursuant to the Restructuring Support Agreement entered into on April 11, 2016, it is expected that an order of the Bermuda court will be sought to liquidate Energy XXI Ltd under the laws of Bermuda concurrently with the Company’s emergence from the Chapter 11 proceedings, and assuming that there are no assets available for distribution to equity under the Bermuda laws governing the payment of stakeholders in a Bermuda liquidation, existing equity holders would not receive distribution from the liquidator in respect of their equity interests in that liquidation. Accordingly, as of April 14, 2016, we are no longer accruing dividends on preferred stock.

Conversions of Preferred Stock

During the nine months ended March 31, 2016, we canceled and converted 120,309 shares of our 5.625% Preferred Stock into a total of 1,260,429 shares of common stock using a conversion rate of 10.4765 common shares per preferred share.

During the nine months ended March 31, 2015, we canceled and converted a total of 5,000 shares of our 7.25% Preferred Stock into a total of 46,472 shares of common stock using a conversion rate of 9.2940 common shares per preferred share. During the nine months ended March 31, 2015, we also canceled and converted one share of our 5.625% Preferred Stock into 11 shares of common stock using a conversion rate of 10.2409 common shares per preferred share.

Notice Procedures and Transfer Restrictions

On April 14, 2016, the Debtors filed a motion (the “NOL Motion”) in the Bankruptcy Court for the entry of an order pursuant to Sections 105(a), 362 and 541 of the Bankruptcy Code to enable us to avoid limitations on the use of our tax net operating loss carryforwards and certain other tax attributes by imposing certain notice procedures and transfer restrictions on the acquisition (including by conversion) or disposition

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 11 — Stockholders’ Equity  – (continued)

of the Company’s equity securities, including common stock, 5.625% Preferred Stock or 7.25% Preferred Stock (the “Stock”). The Bankruptcy Court granted the requested interim order (the “Order”) on April 15, 2016 with a final hearing on the NOL Motion to be held on May 13, 2016. In general, the Order applies to any person or entity that, directly or indirectly, has (or would have, as a result of a proposed transaction) beneficial ownership of at least 4.9% of our outstanding Stock, as determined in accordance with applicable rules under Section 382 of the Internal Revenue Code of 1986, as amended (“Tax Ownership”).

Under the Order, any person or entity who has or acquires Tax Ownership of at least 4.9% of our common stock, 5.625% Preferred Stock or 7.25% Preferred Stock (each a “Substantial Equity Holder”) is required to file with the Bankruptcy Court, and serve on the Company, a notice containing certain Tax Ownership information set forth in the NOL Motion. Additionally, prior to any proposed acquisition of Stock that would result in an increase in the amount of our Stock beneficially owned by a Substantial Equity Holder, or that would result in a person or entity becoming a Substantial Equity Holder, such person, entity or Substantial Equity Holder is required to file with the Bankruptcy Court, and serve on the Company, a notice of such person, entity or Substantial Equity Holder’s intent to purchase, acquire or otherwise obtain Tax Ownership of Stock. Prior to effecting any sale, exchange, or other disposition of our Stock that would result in a decrease in the amount of our Stock beneficially owned by a Substantial Equity Holder, such Substantial Equity Holder is required to file with the Bankruptcy Court, and serve on the Company, a notice of such Substantial Equity Holder’s intent to sell, exchange or otherwise dispose of Tax Ownership of Stock.

If we file written approval of a proposed Stock transaction with the Court within fifteen calendar days of receipt of notice of such proposed transaction, then the proposed transaction may proceed. Otherwise, the transaction generally may not be consummated unless approved by a final and non-appealable order of the Court. The Order further provides that any transfer of Tax Ownership of Stock in violation of the procedures set forth in the NOL Motion, including but not limited to the notice requirements, shall be null and void ab initio, and the person or entity making such transfer or declaration shall be required to take such steps as the Court determines are necessary in order to be consistent with such transfer or declaration being null and void ab initio.

Note 12 — Supplemental Cash Flow Information

The following table presents our supplemental cash flow information (in thousands):

		Nine Months Ended March 31,
		2016				2015
Cash paid for interest		$	225,736			$	170,582
Cash paid for income taxes			150				840

The following table presents our non-cash investing and financing activities (in thousands):

		Nine Months Ended March 31,
		2016				2015
Financing of insurance premiums		$	—			$	2,148
Derivative instruments premium financing			—				7,305
Changes in capital expenditures and other accrued in accounts payable			(35,204	)			(4,346	)
Changes in asset retirement obligations			24,200				20,411
Proceeds from monetization of derivative instruments applied to Revolving Credit Facility			50,588				—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 13 — Employee Benefit Plans

The Energy XXI Services, LLC 2006 Long-Term Incentive Plan (“Incentive Plan”).  We maintain an incentive and retention program for our employees. Participation shares (or “Restricted Stock Units”) are issued from time to time at a value equal to our common share price at the time of issue. The Restricted Stock Units generally vest equally over a three-year period. When vesting occurs, we pay the employee an amount equal to the then current common share price times the number of Restricted Stock Units. We have also awarded time-based performance units (“Time-Based Performance Units”) and Total Shareholder Return Performance-Based Units (“TSR Performance-Based Units”). Both the Time-Based Performance Units and TSR Performance-Based Units vest equally over a three-year period.

At our discretion, at the time the Restricted Stock Units and Performance Units vest, the amount due to employees will be settled in either common shares or cash. Historically, we have settled all vesting Restricted Stock Units awards in cash and accordingly they are accounted for under the liability method. The July 2015 vesting of the July 2014, 2013, and 2012 Performance Unit awards were also settled in cash. Subsequent to the Bankruptcy Petition date of April 14, 2016, any vesting of Restricted Stock Units or the Performance Units is accrued but not payable. Upon a change in control of the Company, as defined in the Incentive Plan, all outstanding Restricted Stock Units and Performance Units become immediately vested and payable.

Changes for Fiscal 2016 Performance Unit Grants.  For the performance unit awards granted in fiscal 2016, the Total Shareholder Return (“TSR Modifier”) is linked to the performance of the Company’s common stock, and the price of the Company’s common stock is calculated using the simple average of the closing prices of the Company’s stock for the period of twenty business days ending on the last business day of June 2018 (“TSR Stock Price”). The number of units that cliff vest on June 30, 2018 will be the number of performance unit awards granted multiplied by TSR modifier which ranges from 0% to 300% for the TSR Stock Price range of less than $3 to $12. Prior to vesting, the holder of the granted units is not entitled to any rights as a holder of the common stock of the Company and is prohibited from selling, transferring or alienating or hypothecating the granted units. Within 30 days of vesting, the Company will issue stock or at the Company’s discretion the holder may be paid cash for the vested units.

We recognized compensation expense (benefit) related to our outstanding Restricted Stock Units and Performance Units as follows (in thousands):

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Restricted Stock Units		$	(2,270	)		$	6,124			$	(6,149	)		$	10,102
Performance Units			(509	)			838				1,786				(4,770	)
Total compensation expense recognized		$	(2,779	)		$	6,962			$	(4,363	)		$	5,332

As of March 31, 2016, we had 6,200,958 unvested Restricted Stock Units and 331,146 Time-Based Performance Units and 2,151,546 TSR Performance Based Units.

As described in Note 1 — Organization and Chapter 11 Proceedings, pursuant to the Restructuring Support Agreement entered into on April 11, 2016, it is expected that the liquidation of Energy XXI Ltd will be completed under the laws of Bermuda, and, given that it is unlikely to have assets available for distribution, existing equity holders would receive no distributions in respect of that equity in that liquidation. As described in the Restructuring Support Agreement, it is expected that the Plan will include a new long-term management incentive plan (the “Management Incentive Plan”) for the Company upon emergence from the Chapter 11 proceedings. Such Management Incentive Plan will reserve up to 8% of the total New Equity on a fully diluted basis and will be a comprehensive equity based award plan with equity based awards (including stock option and restricted stock units) to be issued on terms and conditions determined by the board of directors of the New Entity.

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(Unaudited)

Note 14 — Related Party Transactions

Prior to the M21K Acquisition on August 11, 2015, we had a 20% interest in EXXI M21K and accounted for this investment using the equity method. We had provided a guarantee related to the payment of asset retirement obligations and other liabilities by M21K for the EP Energy property acquisition estimated at $65 million and $1.8 million, respectively. For the LLOG Exploration acquisition, we had guaranteed payment of asset retirement obligations by M21K estimated at $36.7 million. For the Eugene Island 330 and South Marsh Island 128 properties purchase, we had guaranteed payment of asset retirement obligation by M21K estimated at $18.6 million. For these guarantees, M21K agreed to pay us $6.3 million, $3.3 million and $1.7 million, respectively, over a period of three years from the respective acquisition dates. For the month ended July 31, 2015, we received $0.3 million related to such guarantees. For the three and nine months ended March 31, 2015, we received $0.9 million and $2.8 million, respectively, related to such guarantees. Prior to the M21K Acquisition, we also received a management fee of $0.98 per BOE produced for providing administrative assistance in carrying out M21K operations. For the month ended July 31, 2015, we received management fees of $0.2 million. For the three and nine months ended March 31, 2015, we received management fees of $0.7 million and $2.1 million, respectively. See Note 4 — Acquisitions.

Effective January 15, 2015, our Board of Directors appointed one of its members, James LaChance, to serve as our interim Chief Strategic Officer. In that position, Mr. LaChance pursued discussions with our lenders and noteholders to improve our available capital, leverage ratios and average debt maturity, as directed by our Chief Executive Officer, in consultation with the Board. Mr. LaChance’s duties as interim Chief Strategic Officer were separate from, and in addition to, his responsibilities as a member of the Board of Directors. In light of the significant increase in the amount of time Mr. LaChance was required to spend performing in this new role, we and Mr. LaChance entered into an interim Chief Strategic Officer consulting agreement (the “Consulting Agreement”), with an effective date of January 15, 2015. Under the Consulting Agreement, Mr. LaChance was paid $200,000 per month for his services as interim Chief Strategic Officer. The Consulting Agreement expired on July 15, 2015. During the nine months ended March 31, 2016, Mr. LaChance earned and was paid consulting fees of $0.1 million under the Consulting Agreement.

In accordance with the Consulting Agreement, Mr. LaChance was also entitled to a success fee if he continuously provided consulting services through the closing of one or a series of transactions to provide us and our affiliates with additional capital of more than $1 billion. The amount of this success fee was capped at $6 million, with up to $5 million payable upon achievement of objective criteria set forth in the Consulting Agreement and up to an additional $1 million payable in the Board of Directors’ discretion, based on qualitative factors. The success fee was earned and Mr. LaChance received, on March 12, 2015, 1,644,737 RSUs based on a price of $3.04 per share (the value weighted average price of our common stock for the period from December 1, 2014 through January 31, 2015), representing the full $5 million portion of the success fee.

With respect to the discretionary portion of the success fee, the Board of Directors awarded Mr. LaChance the full $1 million amount on October 15, 2015. Fifty percent of this amount was paid in cash in October 2015 and the other fifty percent was paid in the form of 231,482 RSUs, based on a price of $2.16 per share, which was the closing price of our common stock on October 15, 2015. All of the outstanding 1,876,219 RSUs were settled in cash for $1,182,018 on March 12, 2016 based on a price of $0.63 per share.

On October 9, 2015, the Board determined that the positions of Chief Executive Officer and Chairman of the Board should be held by two different individuals. As a result of that determination, the Board elected Mr. LaChance to serve as Chairman of the Board, effective as of October 15, 2015, to serve in such capacity until the earlier of his resignation or removal. Mr. LaChance will not receive any compensation for serving as Chairman of the Board, other than pursuant to director compensation programs that are applicable to other non-employee directors. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, the board of directors of the reorganized Debtors upon emergence from the Chapter 11 proceedings shall consist

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Note 14 — Related Party Transactions  – (continued)

of seven persons to be designated by the Majority Restructuring Support Parties, which will include John D. Schiller, Jr., the Company’s current President and Chief Executive Officer.

Note 15 — Earnings (Loss) per Share

Basic earnings (loss) per share of common stock is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Except when the effect would be anti-dilutive, the diluted earnings per share include the impact of convertible preferred stock, restricted stock and other common stock equivalents. The following table sets forth the calculation of basic and diluted earnings (loss) per share (“EPS”) (in thousands, except per share data):

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Net income (loss)		$	160,776			$	(495,061	)		$	(1,723,199	)		$	(743,834	)
Preferred stock dividends			2,378				2,862				8,042				8,605
Net income (loss) attributable to common stockholders		$	158,398			$	(497,923	)		$	(1,731,241	)		$	(752,439	)
Weighted average shares outstanding for basic EPS			95,916				94,408				95,254				94,076
Add dilutive securities			8,085				—				—				—
Weighted average shares outstanding for diluted EPS			104,001				94,408				95,254				94,076
Earnings (loss) per share
Basic		$	1.65			$	(5.27	)		$	(18.17	)		$	(8.00	)
Diluted		$	1.55			$	(5.27	)		$	(18.17	)		$	(8.00	)

For the three and nine months ended March 31, 2016, 1,549,380 and 9,094,703 common stock equivalents, respectively, were excluded from the diluted average shares due to an anti-dilutive effect. For the three and nine months ended March 31, 2015, 8,777,374 and 8,582,708 common stock equivalents, respectively, were excluded from the diluted average shares due to an anti-dilutive effect.

Note 16 — Commitments and Contingencies

Litigation.  We are involved in various legal proceedings and claims, which arise in the ordinary course of our business. As described below, most of our pending legal proceedings have been stayed by virtue of filing the Bankruptcy Petitions on April 14, 2016. We do not believe the ultimate resolution of any such actions will have a material effect on our consolidated financial position, results of operations or cash flows. For more information regarding the Chapter 11 proceedings, see Note 1 — Organization and Chapter 11 Proceedings.

Letters of Credit and Performance Bonds.  As of March 31, 2016, we had $225 million in letters of credit to third parties relating to assets in the Gulf of Mexico and $388.0 million of performance bonds outstanding. On April 26, 2016, pursuant to the redetermination of our plugging and abandonment liabilities with third parties, it was agreed that subsequent to the Company’s emergence from the Chapter 11 proceedings, the letters of credit issued in favor of third parties would be reduced to $200 million from the existing amount of $225 million.

As a lessee and operator of oil and natural gas leases on the federal Outer Continental Shelf (“OCS”), approximately $226.6 million of our performance bonds are lease and/or area bonds issued to the BOEM (including $65.4 million associated with our August 2015 acquisition of the remaining equity interests in M21K) that the BOEM has access to and assure our commitment to comply with the terms and conditions of those leases. We also maintain approximately $161.4 million in performance bonds issued not to the BOEM

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Note 16 — Commitments and Contingencies  – (continued)

but rather to predecessor third party assignors including certain state regulatory bodies of certain of the wells and facilities on these leases pursuant to a contractual commitment made by us to those third parties at the time of assignment with respect to the eventual decommissioning of those wells and facilities. In April 2015, we received letters from the BOEM stating that certain of our subsidiaries no longer qualify for waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging and abandonment liabilities. The letters notified us that certain of our subsidiaries must provide approximately $1.0 billion in supplemental financial assurance and/or bonding for our offshore oil and gas leases, rights-of-way, and rights-of-use and easements. In June 2015 and December 2015, following discussions with BOEM, we provided $150 million and $21.1 million, respectively, of supplemental bonds issued to the BOEM (which is reflected in the $226.6 million in lease and/or area bonds discussed above). On June 30, 2015, we sold the East Bay field, and as a result, the $1.0 billion of supplemental financial assurance and/or bonding required by the BOEM in April 2015 was reduced by approximately $178 million.

In October 2015, we received information from the BOEM indicating that we could receive additional demands of supplemental financial assurance for amounts in addition to the $1.0 billion initially sought by the BOEM in April 2015, primarily relating to certain properties that were no longer exempt from supplemental bonding as a result of co-lessees losing their exemptions. However, we believe that a substantial portion of the additional supplemental financial assurance and/or bonding that could be sought by the BOEM may relate to circumstances that could eventually be removed from our responsibility (in terms of providing added assurance or bonding), including, for example, lease interests of co-lessees, leases that have since been divested by us, and leases where we are not the permitted operator and no drilling of wells has occurred. We would expect that most, if not all, of our co-lessees with the remaining working interest in such lease interests will provide their share of the bonding.

Since we received the additional information from the BOEM in October 2015, we have had a series of discussions and exchanges of information with the BOEM on long-term financial assurance planning, culminating in the BOEM’s agreement to, and execution of, our long-term plan approved and executed by the BOEM on February 25, 2016 (the “Long-Term Plan”). As required by our Long-Term Plan, we must perform, among other things, the following activities: (1) use our best commercial efforts to have the BOEM included as an additional obligee under our third-party bonds by July 1, 2016; (2) provide additional financial assurance as may be required under the applicable BOEM requirements with respect to any of our pending or future plans or activities for offshore leasing, exploration or development, including any permitting or assignment associated with such plans or activities (but excluding certain internal restructuring assignments or transfers between us and our subsidiaries or our affiliates, EPL and M21K); (3) pursue a multi-obligee security acceptable to the BOEM with respect to letters of credit covering certain properties acquired by us by July 1, 2016, or submit to the BOEM a plan for providing to the BOEM other satisfactory forms of financial assurance with respect those properties covered by such letters of credit; (4) with respect to certain of our operated properties with active non-waived co-lessees, make diligent efforts to negotiate with our co-lessees to achieve full financial assurance for certain of such offshore facility interests by submitting a plan for these properties by July 1, 2016; (5) work with the third-party operators of our non-operated interests to address our proportionate share of any supplemental bond demands on these non-operated properties; and (6) work with BOEM and our insurers to potentially receive credit for our energy insurance package. If we are unable to provide sufficient financial assurance to BOEM under this plan, after July 1, 2016, BOEM may assess additional supplemental financial assurance and/or bonding requirements on us, which could negatively impact our operations, financial condition and liquidity. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, it is anticipated that the Company will continue to perform its obligations under the Long-Term Plan during the pendency of the Chapter 11 Cases and in connection with the consummation of its restructuring.

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Note 16 — Commitments and Contingencies  – (continued)

The BOEM may also bolster its financial assurance requirements mandated by rule for all companies operating in federal waters. The cost of compliance with our existing supplemental bonding requirements, including the directives and other correspondence issued by the BOEM in April 2015 and thereafter, as reflected in the Long-Term Plan, any other future BOEM directives, or any other changes to the BOEM’s current supplemental bonding requirements or supplemental bonding regulations applicable to us or our subsidiaries’ properties could materially and adversely affect our financial condition, cash flows, and results of operations. In addition, although we currently have $49.3 million in cash collateral provided to surety companies associated with the bonding requirements of the BOEM and third party assignors (including $7.6 million provided in April 2016), we may be required to provide additional cash collateral or letters of credit to support the issuance of such bonds or other surety. Such letters of credit would likely be issued under our Revolving Credit Facility and would reduce the amount of borrowings available under such facility in the amount of any such letter of credit obligations.

We can provide no assurance that we can continue to obtain bonds or other surety in all cases or that we will have sufficient availability under our Revolving Credit Facility to support such supplemental bonding requirements. If we are unable to obtain the additional required bonds or assurances as requested, the BOEM may require any of our operations on federal leases to be suspended or cancelled or otherwise impose monetary penalties and one or more of such actions could have a material effect on our business, prospects, results of operations, financial condition, and liquidity.

Grand Isle Gathering System Lease.  On June 30, 2015, Energy XXI GIGS Services, LLC, an indirect wholly-owned subsidiary of the Company (the “Tenant”), entered into a triple-net lease (the “Lease”) with Grand Isle Corridor, LP, a wholly-owned subsidiary of CorEnergy Infrastructure Trust, Inc. (“Grand Isle Corridor”), pursuant to which the Tenant will continue to operate the real and personal property constituting a subsea pipeline gathering system located in the shallow Gulf of Mexico shelf and storage and onshore processing facilities on Grand Isle, Louisiana sold to Grand Isle Corridor in June 2015.

Under the Lease, an event of default would be triggered by the Tenant upon (i) the filing by either the Tenant or the Company of a Bankruptcy Petition or (ii) the failure of either the Tenant or the Company to make any payment of principal or interest with respect to certain material debt of the Tenant or the Company, as a guarantor, after giving effect to any applicable cure period or the failure to perform under an agreement or instrument relating to such material debt (collectively, the “Specified Defaults”). Although the Tenant did not file a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, the Company’s Bankruptcy Petition and failure to comply with its material debt instruments, would, among other things, allow Grand Isle Corridor to terminate the Lease.

As a result, the Tenant and Grand Isle Corridor entered into a Waiver to Lease, dated as of April 13, 2016 (the “Waiver”), whereby Grand Isle Corridor waived its right to exercise its remedies set forth under the Lease in the event of the Specified Defaults except its ability to exercise observer rights. The Waiver will terminate if any of the following events occur: (i) a dismissal of the Company’s Bankruptcy Petition, (ii) conversion of the pending case from a Chapter 11 bankruptcy to a chapter 7 bankruptcy case or other liquidation proceeding, (iii) relief from the automatic stay or other relief which allows the creditors of the material debt to take action to enforce such material debt against the Company or its property or (iv) a tenant event of default (as defined in the Lease) under the Lease other than arising out of the specified defaults expressly waived.

Other.  We maintain restricted escrow funds as required by certain contractual arrangements. At March 31, 2016, our restricted cash primarily related to $30 million related to the First Lien Credit Agreement, $25.5 million in cash collateral associated with our bonding requirements, $3.3 million related to the Grand Isle Gathering System (“GIGS”) transaction and approximately $6 million in a trust for future

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Note 16 — Commitments and Contingencies  – (continued)

plugging, abandonment and other decommissioning costs related to the East Bay field which will be transferred to the buyer of our interests in that field.

We and our oil and natural 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 to our net costs or revenues and the related cash flows. 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. We do not believe any such adjustments will be material.

Effect of Automatic Stay.  As described in Note 1 — Organization and Chapter 11 Proceedings, the Debtors filed voluntary petitions for relief under the Bankruptcy Code on April 14, 2016 (the “Petition Date”) in the Bankruptcy Court. Each of the Debtors continues to operate its business and manage its property as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases, pursuant to Section 362(a) of the Bankruptcy Code, automatically enjoined, or stayed, among other things, the continuation of most judicial or administrative proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under regulatory powers. Thus, the automatic stay may have no effect on certain matters described above.

Note 17 — Fair Value of Financial Instruments

Certain assets and liabilities are measured at fair value on a recurring basis in our consolidated balance sheets. Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:

For cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities and certain notes payable, the carrying amounts approximate fair value due to the short-term nature or maturity of the instruments. For the 11.0% Notes, 9.25% Senior Notes, 8.25% Senior Notes, 7.75% Senior Notes, 7.5% Senior Notes, 6.875% Senior Notes and 3.0% Senior Convertible Notes, the fair value is estimated based on quoted prices in a market that is not an active market, which are considered Level 2 inputs within the fair value hierarchy. The carrying value of the Revolving

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Note 17 — Fair Value of Financial Instruments  – (continued)

Credit 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.

We do not presently have any commodity derivative instruments. Our commodity derivative instruments historically consisted of financially settled crude oil and natural gas puts, swaps, put spreads, zero-cost collars and three way collars. We estimated 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 based on published LIBOR rates. The fair values of commodity derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published issuer-weighted corporate default rates. See Note 9 — Derivative Financial Instruments.

The fair values of our stock based units are based on the period-end stock price for our Restricted Stock Units and Time-Based Performance Units and the results of the Monte Carlo simulation model are used for our TSR Performance-Based Units. The Monte Carlo simulation model uses inputs relating to stock price, unit value expected volatility and expected rate of return. A change in any input can have a significant effect on the valuation of the TSR Performance-Based Units.

During the three and nine months ended March 31, 2016, we did not have any transfers from or to Level 3. The following table presents the fair value of our Level 1 and Level 2 financial instruments (in thousands):

		Level 1								Level 2
		As of March 31, 2016				As of June 30, 2015				As of March 31, 2016				As of June 30, 2015
Assets:
Oil and natural gas derivatives		$	—			$	—			$	—			$	63,004
Liabilities:
Oil and natural gas derivatives		$	—			$	—			$	—			$	40,896
Restricted stock units			826				6,325				—				—
Time-based performance units			752				1,978				—				—
Total liabilities		$	1,578			$	8,303			$	—			$	40,896

The following table sets forth the outstanding and estimated fair values of our long-term debt instruments which are classified as Level 2 financial instruments (in thousands):

		March 31, 2016								June 30, 2015
		Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
Revolving credit facility		$	99,412			$	99,412			$	150,000			$	150,000
11% Senior Secured Second Lien Notes due 2020			1,450,000				206,625				1,398,896				1,276,000
8.25% Senior Notes due 2018			213,677				10,684				539,459				306,000
6.875% Senior Notes due 2024			143,993				7,344				650,000				211,250
3.0% Senior Convertible Notes due 2018			363,018				1,089				354,218				94,000
7.5% Senior Notes due 2021			238,071				8,332				500,000				164,925
7.75% Senior Notes due 2019			101,077				4,043				250,000				92,135
9.25% Senior Notes due 2017			249,452				15,466				750,000				413,160
		$	2,858,700			$	352,995			$	4,592,573			$	2,707,470

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Note 17 — Fair Value of Financial Instruments  – (continued)

The 11.0% Notes, the 8.25% Senior Notes, the 6.875% Senior Notes, and the 7.5% Senior Notes each contain an option to redeem up to 35% of the aggregate principal amount of the respective notes outstanding with the net cash proceeds of certain equity offerings. Such options are considered embedded derivatives and are classified as Level 3 financial instruments for which the estimated fair values at March 31, 2016 are not material.

The following table sets forth the changes in our Level 3 financial instruments (in thousands):

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Liabilities:
Performance-based performance units
Balance at beginning of period		$	842			$	109			$	33			$	6,910
Vested			(775	)			—				(775	)			—
Grants charged to general and administrative expense			56				266				865				(6,535	)
Balance at end of period		$	123			$	375			$	123			$	375

Note 18 — Prepayments and Accrued Liabilities

Prepayments and accrued liabilities consist of the following (in thousands):

		March 31, 2016				June 30, 2015
Prepaid expenses and other current assets
Advances to joint interest partners		$	1,012			$	1,294
Insurance			12,259				3,427
Inventory			398				7,867
Royalty deposit			2,168				3,137
Other			18,008				8,573
Total prepaid expenses and other current assets		$	33,845			$	24,298
Accrued liabilities
Advances from joint interest partners			2,633				3,060
Employee benefits and payroll			7,784				18,927
Interest payable			115,311				83,384
Accrued hedge payable			—				1,399
Undistributed oil and gas proceeds			14,715				19,776
Severance taxes payable			682				843
Other			15,428				27,917
Total accrued liabilities		$	156,553			$	155,306

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(Unaudited)

Note 19 — Supplemental Guarantor Information

Our indirect, 100% wholly owned subsidiary, EGC, issued the 6.875% Senior Notes, the 7.5% Senior Notes, the 9.25% Senior Notes and the 7.75% Senior Notes, each of which were replaced with identical notes issued in registered offerings. These notes are jointly, severally, fully and unconditionally guaranteed by the Bermuda parent company and each of EGC’s existing and future material domestic subsidiaries other than EPL and its subsidiaries, except that a guarantor can be automatically released and relieved of its obligations under certain customary circumstances contained in the senior note indentures. These customary circumstances include: when a guarantor is declared “unrestricted” for covenant purposes, when the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, when the guarantor is sold or sells all of its assets or the guarantor no longer guarantees any obligations under EGC’s Revolving Credit Facility. When securities that are guaranteed are issued in a registered offering, Rule 3-10 of Regulation S-X of the SEC generally requires the issuer and guarantors to file separate financial statements. We meet the conditions in Rule 3-10 to instead report information about the assets, liabilities, results of operations and cash flows of the parent, subsidiary issuer and subsidiary guarantors using an alternative approach, which is to include in a footnote to our financial statements, condensed consolidating financial information for the same periods as those presented in our financial statements.

The information is presented using the equity method of accounting for investments in subsidiaries. Transactions between entities are presented on a gross basis in the Bermuda parent company, EGC, guarantor subsidiaries, and non-guarantor subsidiaries columns with consolidating entries presented in the eliminations column. The principal consolidating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. The following 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 and should be read in conjunction with our consolidated financial statements and notes thereto included in the 2015 Annual Report.

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Note 19 — Supplemental Guarantor Information  – (continued)

ENERGY XXI LTD
 
CONDENSED CONSOLIDATING BALANCE SHEET
(Unaudited)

		March 31, 2016
		EXXI Bermuda Parent				EGC Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Reclassifications & Eliminations				Consolidated
		(In Thousands)
ASSETS
Current Assets
Cash and cash equivalents		$	24,418			$	158,377			$	3,895			$	—			$	(3,243	)		$	183,447
Accounts receivable
Oil and natural gas sales			—				—				34,927				20,524				(2,878	)			52,573
Joint interest billings			—				4,562				1,468				9,802				—				15,832
Other			42				13,807				2,499				5,310				—				21,658
Prepaid expenses and other current assets			508				23,799				3,073				6,465				—				33,845
Restricted cash			—				—				350				9,360				—				9,710
Derivative financial instruments			—				—				—				—				—				—
Total Current Assets			24,968				200,545				46,212				51,461				(6,121	)			317,065
Property and Equipment
Oil and natural gas properties, net			—				76				407,097				389,939				(76	)			797,036
Other property and equipment, net			—				—				1,556				16,925								18,481
Total Property and Equipment, net			—				76				408,653				406,864				(76	)			815,517
Other Assets
Derivative financial instruments			—				—				—				—								—
Equity investments			—				—				—				1,812,128				(1,812,128	)			—
Intercompany receivables			133,964				1,848,059				—				—				(1,982,023	)			—
Restricted cash			—				25,529				—				30,030								55,559
Other assets and debt issuance costs, net			170,998				334,321				832				7,105				(498,952	)			14,304
Total Other Assets			304,962				2,207,909				832				1,849,263				(4,293,103	)			69,863
Total Assets		$	329,930			$	2,408,530			$	455,697			$	2,307,588			$	(4,299,300	)		$	1,202,445
LIABILITIES
Current Liabilities
Accounts payable		$	—			$	20,235			$	25,075			$	35,262			$	(5,651	)		$	74,921
Accrued liabilities			6,019				108,359				11,216				162,254				(131,295	)			156,553
Asset retirement obligations			—				—				14,490				38,056								52,546
Current maturities of long-term debt due to EGC			—				—				—				266,567				(266,567	)			—
Current maturities of long-term debt			363,018				2,182,593				—				317,876				—				2,863,487
Total Current Liabilities			369,037				2,311,187				50,781				820,015				(403,513	)			3,147,507
Long-term debt, less current maturities			—				—				—				245,000				(245,000	)			—
Deferred income taxes			27,943				—				—				—				(27,943	)			—
Intercompany notes payable			—				—				—				496,000				(496,000	)			—
Asset retirement obligations			—				50				299,513				204,310				(7,681	)			496,192
Accumulated losses in excess of equity investments			2,391,294				2,205,738				—				—				(4,597,032	)			—
Intercompany payables			—				—				1,775,181				70,999				(1,846,180	)			—
Other liabilities			—				5,258				2,669				9,163								17,090
Total Liabilities			2,788,274				4,522,233				2,128,144				1,845,487				(7,623,349	)			3,660,789
Stockholders’ Equity (Deficit)
Preferred stock
7.25% Convertible perpetual preferred stock			—				—				—				—				—				—
5.625% Convertible perpetual preferred stock			1				—				—				—				—				1
Common stock			486				1				—				12				(13	)			486
Additional paid-in capital			1,845,523				2,248,240				114,825				7,373,882				(9,736,947	)			1,845,523
Accumulated deficit			(4,304,354	)			(4,361,944	)			(1,787,272	)			(6,911,793	)			13,061,009				(4,304,354	)
Total Stockholders’ Equity (Deficit)			(2,458,344	)			(2,113,703	)			(1,672,447	)			462,101				3,324,049				(2,458,344	)
Total Liabilities and Stockholders’ Equity (Deficit)		$	329,930			$	2,408,530			$	455,697			$	2,307,588			$	(4,299,300	)		$	1,202,445

TABLE OF CONTENTS

ENERGY XXI LTD
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 19 — Supplemental Guarantor Information  – (continued)

ENERGY XXI LTD
 
CONDENSED CONSOLIDATING BALANCE SHEET

		June 30, 2015
		EXXI Bermuda Parent				EGC Issuer				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Reclassifications & Eliminations				Consolidated
		(In Thousands)
ASSETS
Current Assets
Cash and cash equivalents		$	37,053			$	719,609			$	—			$	186			$	—			$	756,848
Accounts receivable
Oil and natural gas sales			—				—				68,514				36,963				(5,234	)			100,243
Joint interest billings			—				2,015				—				10,418				—				12,433
Other			622				17,819				140				24,932				—				43,513
Prepaid expenses and other current assets			280				13,211				—				11,469				(662	)			24,298
Restricted cash							—				—				9,359				—				9,359
Derivative financial instruments			—				21,341				—				888				—				22,229
Total Current Assets			37,955				773,995				68,654				94,215				(5,896	)			968,923
Property and Equipment
Oil and natural gas properties, net			—				—				2,112,635				1,408,585				49,539				3,570,759
Other property and equipment, net			—				—				—				21,820				—				21,820
Total Property and Equipment, net			—				—				2,112,635				1,430,405				49,539				3,592,579
Other Assets
Derivative financial instruments			—				3,898				—				—				—				3,898
Equity investments			—				428,368				—				3,591,757				(4,009,290	)			10,835
Intercompany receivables			122,039				1,626,679				—				93,844				(1,842,562	)			—
Restricted cash			—				31,000				—				1,667				—				32,667
Other assets and debt issuance costs, net			176,861				464,617				—				8,729				(568,280	)			81,927
Total Other Assets			298,900				2,554,562				—				3,695,997				(6,420,132	)			129,327
Total Assets		$	336,855			$	3,328,557			$	2,181,289			$	5,220,617			$	(6,376,489	)		$	4,690,829
LIABILITIES
Current Liabilities
Accounts payable		$	—			$	39,378			$	41,027			$	81,052			$	(5,118	)		$	156,339
Accrued liabilities			976				69,566				16,060				166,851				(98,147	)			155,306
Deferred income taxes			24,174				—				—				—				(24,174	)			—
Asset retirement obligations			—				—				624				32,662				—				33,286
Derivative financial instruments			—				1,603				—				1,058				—				2,661
Current maturities of long-term debt			—				7,283				—				4,112				—				11,395
Total Current Liabilities			25,150				117,830				57,711				285,735				(127,439	)			358,987
Long-term debt, less current maturities			354,218				3,548,896				—				938,923				(245,000	)			4,597,037
Intercompany notes payable			—				—				—				565,105				(565,105	)			—
Asset retirement obligations			—				50				251,444				209,431				(7,126	)			453,799
Derivative financial instruments			—				1,358				—				—				—				1,358
Accumulated losses in excess of equity investments			686,209				—				—				—				(686,209	)			—
Intercompany payables			—				—				1,721,211				—				(1,721,211	)			—
Other liabilities			—				5,332				—				3,038				—				8,370
Total Liabilities			1,065,577				3,673,466				2,030,366				2,002,232				(3,352,090	)			5,419,551
Stockholders’ Equity (Deficit)
Preferred stock
7.25% Convertible perpetual preferred stock			—				—				—				—				—				—
5.625% Convertible perpetual preferred stock			1				—				—				—				—				1
Common stock			472				1				—				12				(13	)			472
Additional paid-in capital			1,843,918				2,252,142				78,599				7,377,784				(9,708,525	)			1,843,918
Accumulated earnings (deficit)			(2,573,113	)			(2,597,052	)			72,324				(4,159,411	)			6,684,139				(2,573,113	)
Total Stockholders’ Equity (Deficit)			(728,722	)			(344,909	)			150,923				3,218,385				(3,024,399	)			(728,722	)
Total Liabilities and Stockholders’ Equity (Deficit)		$	336,855			$	3,328,557			$	2,181,289			$	5,220,617			$	(6,376,489	)		$	4,690,829