UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2017

OR

For the transition period from            to           

Commission file number: 001-35317

 

TITAN ENERGY, LLC

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: 800-251-0171

 

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  ☒     No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

The number of outstanding common shares of the registrant on November 27, 2017 was 5,444,794.

 

 

 

 

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TITAN ENERGY, LLC

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

TABLE OF CONTENTS

 

 

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FORWARD-LOOKING STATEMENTS

The matters discussed within this report include forward-looking statements.  These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology.  In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report are forward-looking statements.  We have based these forward-looking statements on our current expectations, assumptions, estimates and projections.  While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control.  These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.  Some of the key factors that could cause actual results to differ from our expectations include:

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Other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described under “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.  Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  The forward-looking statements included in this report are made only as of the date hereof.  We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of these statements to reflect future events or developments.

Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement.  This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

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PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

TITAN ENERGY, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

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TITAN ENERGY, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

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TITAN ENERGY, LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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TITAN ENERGY, LLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY (DEFICIT)

(in thousands, except unit data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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TITAN ENERGY, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

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TITAN ENERGY, LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – ORGANIZATION

We are a publicly traded (OTCQX: TTEN) Delaware limited liability company and an independent developer and producer of natural gas, crude oil and NGLs with operations in basins across the United States but primarily focused on the horizontal development of  resource potential from the Eagle Ford Shale in South Texas. As discussed further below, we are the successor to the business and operations of Atlas Resource Partners, L.P. (“ARP”). Unless the context otherwise requires, references to “Titan Energy, LLC,” “Titan,” “the Company,” “we,” “us,” and “our,” refer to Titan Energy, LLC and our consolidated subsidiaries (and our predecessor, where applicable).

Titan Energy Management, LLC (“Titan Management”) manages us and holds our Series A Preferred Share, which entitles Titan Management to receive 2% of the aggregate of distributions paid to shareholders (as if it held 2% of our members’ equity, subject to dilution as discussed below) and to appoint four of our seven directors.  Titan Management is a wholly owned subsidiary of Atlas Energy Group, LLC (“ATLS”; OTCQX: ATLS), which is a publicly traded company.

In addition to its preferred member interest in us, ATLS also holds general and limited partner interests in Atlas Growth Partners, L.P. (“AGP”), a Delaware limited partnership and an independent developer and producer of natural gas, oil and NGLs, with operations primarily focused in the Eagle Ford Shale, and in Lightfoot Capital Partners, L.P. and Lightfoot Capital Partners GP, LLC, which incubate new MLPs and invest in existing MLPs.

At September 30, 2017, we had 5,427,547 common shares representing limited liability company interests issued and outstanding.

ARP Restructuring and Emergence from Chapter 11 Proceedings

On July 25, 2016, ARP and certain of its subsidiaries and ATLS, solely with respect to certain sections thereof, entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with certain of their lenders (the “Restructuring Support Parties”) to support ARP’s restructuring pursuant to a pre-packaged plan of reorganization (the “Plan”).

On July 27, 2016, ARP and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court,” and the cases commenced thereby, the “Chapter 11 Filings”). The cases commenced thereby were jointly administered under the caption “In re: ATLAS RESOURCE PARTNERS, L.P., et al.”

On August 26, 2016, an order confirming the Plan was entered by the Bankruptcy Court. On September 1, 2016, (the “Plan Effective Date”), pursuant to the Plan, the following occurred:

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NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting and include all adjustments that are necessary for a fair presentation of our consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. For a more complete discussion of our accounting policies and certain other information, refer to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

In connection with the Chapter 11 Filings, we were subject to the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852 Reorganizations (“ASC 852”).

Upon emergence from bankruptcy on the Plan Effective Date, we adopted fresh-start accounting in accordance with ASC 852. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Plan Effective Date, which differed materially from the recorded values of ARP’s assets and liabilities.

As a result, our condensed consolidated statement of operations subsequent to the Plan Effective Date is not comparable to ARP’s condensed consolidated statement of operations prior to the Plan Effective Date. Our condensed consolidated financial statements and related footnotes are presented with a black line division which delineates the lack of comparability between amounts presented on or after the Plan Effective Date and dates prior. Our financial results for future periods following the application of fresh-start accounting will be different from historical trends and the differences may be material.

References to “Successor” relate to the Company on and subsequent to the Plan Effective Date. References to “Predecessor” refer to the Company prior to the Plan Effective Date. The condensed consolidated financial statements of the Successor have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.

Reclassifications

Certain reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year, specifically related to our discontinued operations (see Note 3) and our segment information on the condensed consolidated statement of operations and segment footnote disclosures (see Note 11).

Principles of Consolidation

Our condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. Transactions between us and other ATLS managed operations have been identified in the condensed consolidated financial statements as transactions between affiliates, where applicable. All material intercompany transactions have been eliminated.

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We sponsored and continue to manage tax-advantaged investment partnerships (the “Drilling Partnerships”), in which we coinvested, to finance a portion of our natural gas, crude oil and NGL production activities. In accordance with established practice in the oil and gas industry, our condensed consolidated financial statements include our pro-rata share of assets, liabilities, income and lease operating and general and administrative costs and expenses of the Drilling Partnerships in which we have an interest. Such interests generally approximate 10-30%. Our condensed consolidated financial statements do not include proportional consolidation of the depletion or impairment expenses of the Drilling Partnerships. Rather, we calculate these items specific to our own economics.

Liquidity and Capital Resources and Ability to Continue as a Going Concern

Since the Plan Effective Date, we have funded our operations through cash flows generated from our operations and cash on hand. We currently do not have the capacity to access additional liquidity from our First Lien Credit Facility and our ability to access public equity and debt markets may be limited. Our future cash flows are subject to a number of variables, including oil and natural gas prices. Prices for oil and natural gas began to decline significantly during the fourth quarter of 2014 and continue to remain low in 2017. These lower commodity prices have negatively impacted our revenues, earnings and cash flows, which has negatively impacted our ability to remain in compliance with the covenants under our credit facilities. Sustained low commodity prices could have a material and adverse effect on our liquidity position.

Even following the amendments described below, we continue to face liquidity issues and are currently considering, and are likely to make, changes to our capital structure to maintain sufficient liquidity, meet our debt obligations and manage and strengthen our balance sheet. If we are not able to enter into further amendments with our lenders prior to the expiration of the standstill period, we may be forced to seek further options as described below.

We were not in compliance with certain of the financial covenants under our credit facilities as of December 31, 2016, as well as the requirement to deliver audited financial statements without a going concern qualification. As a result of the amendment referenced below, our financial covenants will not be tested again until the quarter ending December 31, 2017. We do not currently have sufficient liquidity to repay all of our outstanding indebtedness, and as a result, there is substantial doubt regarding our ability to continue as a going concern. We have classified $538.1 million of outstanding indebtedness under our credit facilities, which is net of $1.7 million of deferred financing costs, as current portion of long term debt, net within our condensed consolidated balance sheet as of September 30, 2017, based on the occurrence of the event of default, the lenders under our credit facilities, as applicable, could elect to declare all amounts outstanding immediately due and payable and the lenders could terminate all commitments to extend further credit.

On April 19, 2017, we entered into an amendment to our First Lien Credit Facility (which has been superseded by subsequent amendments as described further below). This amendment provided for, among other things, waivers of our non-compliance, increases in certain financial covenant ratios and scheduled decreases in our borrowing base (refer to Note 5 – Debt for further information regarding the specific amended terms and provisions). As part of our overall business strategy, we have continued to execute on our sales of non-core assets, which has included the sale of our Appalachia and Rangely operations.  The proceeds of the consummated asset sales were used to repay borrowings under our First Lien Credit Facility. Our strategy is to continue to sell non-core assets to reduce our leverage position, which will also help us to comply with the requirements of our First Lien Credit Facility amendments.

In addition to the amendments to the financial ratio covenants, the First Lien Credit Facility lenders waived certain defaults by us with respect to the fourth quarter of 2016, including compliance with the ratios of Total Debt to EBITDA and First Lien Debt to EBITDA, as well as our obligation to deliver financial statements without a “going concern” qualification. The First Lien Credit Facility lenders’ waivers were subject to revocation in certain circumstances, including the exercise of remedies by junior lenders (including pursuant to our Second Lien Credit Facility), the failure to extend the standstill period under the intercreditor agreement at least 15 business days prior to its expiration, and the occurrence of additional events of default under the First Lien Credit Facility.  

On April 21, 2017, the lenders under the our Second Lien Credit Facility delivered a notice of events of default and reservation of rights, pursuant to which they noticed events of default related to financial covenants and the failure to deliver financial statements without a “going concern” qualification. The delivery of such notice began the 180-day standstill period under the intercreditor agreement, during which the lenders under the Second Lien Credit Facility were prevented from pursuing remedies against the collateral securing our obligations under the Second Lien Credit Facility. The lenders have not accelerated the payment of amounts outstanding under the Second Lien Credit Facility.

On May 4, 2017, we entered into a definitive agreement to sell our conventional Appalachia and Marcellus assets to Diversified Gas & Oil, PLC (“Diversified”) for $84.2 million. The transaction included the sale of approximately 8,400 oil and gas wells across Pennsylvania, Ohio, Tennessee, New York and West Virginia, along with the associated infrastructure (the “Appalachian Assets”). We retained our Utica Shale position, Indiana assets and West Virginia CBM assets in the region. On June 30, 2017, we completed a majority of the Appalachian Assets sale for net cash proceeds of $65.6 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility.

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On June 12, 2017, we entered into a definitive agreement to sell our 25% interest in Rangely Field to an affiliate of Merit Energy Company, LLC for $105 million. Rangely is a CO₂ flood located in Rio Blanco County, Colorado, and operated by Chevron. The transaction includes the sale of our interest in Rangely Field, its 22% interest in Raven Ridge Pipeline, a CO₂ transportation line, as well as surrounding acreage in Rio Blanco and Moffat Counties, Colorado (collectively, the “Rangely Assets”). On August 7, 2017, we completed the Rangely Assets sale for net cash proceeds of $103.5 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility and achieve compliance with the requirement to reduce our First Lien Credit Facility borrowings below $360 million, as required by August 31, 2017.

On September 27, 2017, the lenders under our Second Lien Credit Facility entered into a letter agreement with us and the lenders under our First Lien Credit Facility (the “Extension Letter”) (which has been superseded by subsequent amendments as described further below). Pursuant to the Extension Letter, the Second Lien Credit Facility lenders agreed to extend the 180-day standstill period under the intercreditor agreement (during which the lenders under the Second Lien Credit Facility were prevented from pursuing remedies against the collateral securing the Company’s obligations under the Second Lien Credit Facility) by an additional 35 days from October 18, 2017 to November 22, 2017. In addition, the extension of the standstill period extends the waiver of certain defaults under the First Lien Credit Facility, which terminates 15 business days prior to the expiration of the standstill period. The parties agreed to extend the standstill period to provide the Company with additional time to negotiate proposed amendments to each of the First Lien Credit Facility and the Second Lien Credit Facility.

On September 29, 2017, we completed the remainder of the Appalachia Assets sale for additional cash proceeds of $10.4 million, all of which was used to repay a portion of outstanding borrowings under our First Lien Credit Facility.

On November 6, 2017, we entered into a fourth amendment to our First Lien Credit Facility. The fourth amendment has an effective date of October 31, 2017 and confirms the conforming and non-conforming tranches of the borrowing base at $228.7 million and $30 million, respectively, but requires us to take actions (which can include asset sales and equity offerings) to reduce the conforming tranche of the borrowing base to $190 million by December 8, 2017 and to $150 million by August 31, 2018. The maturity date of the non-conforming tranche of the borrowing base was confirmed as May 1, 2018. We are required to use proceeds from asset sales to make prepayments.

In addition to the requirements above, the First Lien Credit Facility lenders also agreed to a limited waiver of certain existing defaults with respect to financial covenants, required repayments of borrowings and other related matters. The waiver terminates upon the earliest of (i) December 8, 2017, (ii) the occurrence of additional events of default under the First Lien Credit Facility and (iii) the exercise of remedies under our Second Lien Credit Facility.  Pursuant to the fourth amendment, we are required to hedge at least 50% and 80% of our 2019 projected proved developed producing production by December 31, 2017 and March 31, 2018, respectively.

In connection with, and as a condition to, the effectiveness of the fourth amendment to our First Lien Credit Facility, the lenders under our Second Lien Credit Facility agreed to extend the standstill period under the intercreditor agreement (during which the lenders under the Second Lien Credit Facility are prevented from pursuing remedies against the collateral securing our obligations under the Second Lien Credit Facility) until December 29, 2017.

We continually review and may make changes to our capital structure from time to time, with the goal of strengthening our balance sheet and meeting our debt service obligations. We could pursue options such as refinancing, restructuring or reorganizing our indebtedness or capital structure or seek to raise additional capital through debt or equity financing to address our liquidity concerns and high debt levels. We are evaluating various options, but there is no certainty that we will be able to implement any such options, and we cannot provide any assurances that any refinancing or changes in our debt or equity capital structure would be possible or that additional equity or debt financing could be obtained on acceptable terms, if at all, and such options may result in a wide range of outcomes for our stakeholders.

We cannot assure you that we will be able to implement the above actions, if necessary, on commercially reasonable terms, or at all, in a manner that will be permitted under the terms of our debt instruments or in a manner that does not negatively impact the price of our securities. Additionally, there can be no assurance that the above actions will allow us to meet our debt obligations and capital requirements.

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Use of Estimates

The preparation of our condensed 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 that exist at the date of our condensed consolidated financial statements, as well as the reported amounts of revenue and costs and expenses during the reporting periods. Our condensed consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depletion of gas and oil properties, fair value of derivative instruments, and the fair value of assets held for sale. The oil and gas industry principally conducts its business by processing actual transactions as many as 60 days after the month of delivery. Consequently, the most recent two months’ financial results were recorded using estimated volumes and contract market prices. Actual results could differ from those estimates.

Assets Held For Sale

Assets are classified as held for sale when we commit to a plan to sell the assets and there is reasonable certainty the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to identify and expense any excess of carrying value over fair value less estimated costs to sell. Any subsequent changes to the fair value less estimated costs to sell impact the measurement of assets held for sale, with any gain or loss reflected in the loss on divestitures line item in our condensed consolidated statements of operations.  See Note 3 for additional disclosures regarding assets held for sale.

Discontinued Operations

A disposal of a component of our entity is classified as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on our operations and financial results. For components classified as discontinued operations, the balance sheet amounts and results of operations are reclassified from their historical presentation to assets and liabilities held for sale on the condensed consolidated balance sheet and to net income (loss) from discontinued operations on the condensed consolidated statement of operations for all periods presented. The gains or losses associated with these divested components are recorded in net income (loss) from discontinued operations on the condensed consolidated statement of operations. See Note 3 for additional disclosures regarding discontinued operations.

Predecessor’s Reorganization Items, Net

Incremental costs incurred as a result of the Chapter 11 Filings, net gain on settlement of liabilities subject to compromise and reorganization adjustments, and net impact of fresh start adjustments are classified as “Reorganization items, net” in the Predecessor’s condensed consolidated statement of operations. The following table summarizes the reorganization items:

 

 

Income Taxes

Our effective tax rates for the Successor three and nine months ended September 30, 2017 were 1.27% and 0.74%, respectively, which represent our expected Texas Franchise Tax liability. Our income tax provision differs from the provision computed by applying the U.S. Federal statutory corporate income tax rate of 35% primarily due to the valuation allowance on our deferred tax assets. For the Successor three and nine months ended September 30, 2017, we recognized a provision for income taxes of $0.2 million and $11.5 million, respectively, in net income (loss) from discontinued operations on our condensed consolidated statement of operations. For the Successor three and nine months ended September 30, 2017, we recognized a corresponding income tax benefit of $0.2 million and $11.5 million, respectively, in net income (loss) from continuing operations on our condensed consolidated statement of operations, which represents a direct offset of the provision for income taxes included within our discontinued operations.

Successor’s Management Incentive Plan

 

Pursuant to the Titan Energy, LLC Management Incentive Plan (the “MIP”) plan, participants are allowed to withhold or surrender shares for the payment of taxes. These shares are available for re-issuance under the MIP. For the three months ended September 30, 2017, 91,710 shares under the MIP became unrestricted.  Of these shares, 42,251 were withheld for taxes, which resulted in $0.2 million recognized in our consolidated statement of changes in members’ equity. For the nine months ended

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September 30, 2017, 91,710 shares under the MIP became unrestricted and 37,324 shares were granted and vested immediately.  Of these shares, 57,562 were withheld for taxes, which resulted in $0.3 million recognized in our consolidated statement of changes in members’ equity.  For the Successor period September 1, 2016 through September 30, 2016, 138,750 shares were granted and vested immediately.

Predecessor’s 2012 Long-Term Incentive Plan

On May 12, 2016, due to the income tax ramifications of the potential options our Predecessor was considering, our Predecessor’s Board of Directors delayed the vesting date of approximately 110,000 units granted to employees, directors and officers until March 2017.  The phantom units were set to vest between May 15, 2016 and August 31, 2016. The delayed vesting schedule did not have a significant impact on the compensation expense recorded in general and administrative expenses on the condensed consolidated statement of operations for the Predecessor period from January 1, 2016 through August 31, 2016 or our Predecessor’s remaining unrecognized compensation expense related to such awards. As a result of the Chapter 11 Filings, our Predecessor’s 2012 LTIP phantom units were cancelled. The remaining unrecognized compensation cost of $0.8 million was recognized upon the cancellation and was recorded in general and administrative expenses on the condensed consolidated statement of operations for the Predecessor period from July 1, 2016 through August 31, 2016.

Successor’s Net Income Attributable to Common Shareholders Per Share

The Successor’s basic net income attributable to common shareholders per share is computed by dividing net income attributable to our common shareholders by the weighted-average number of common shares outstanding, excluding any unvested restricted shares, for the period. The Successor’s diluted net income attributable to common shareholders per share is similarly calculated except that the common shares outstanding for the period are increased using the treasury stock method to reflect the potential dilution that could occur if outstanding share based awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that are excluded from the computation of diluted net income attributable to common shareholders per share as their impact would be anti-dilutive. We determine if potentially dilutive shares are anti-dilutive based on their impact to net income (loss) from continuing operations.

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The following is a reconciliation of net income attributable to our Successor’s common shareholders for purposes of calculating net income attributable to our Successor’s common shareholders per share (in thousands):

 

 

The following table is a reconciliation of the Successor’s basic and diluted weighted average number of common shares used to calculate basic and diluted net income attributable to common shareholders per share (in thousands):

 

 

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Predecessor’s Net Income (Loss) Per Common Unit

The following is a reconciliation of net income (loss) allocated to our Predecessor’s common limited partners for purposes of calculating net income (loss) attributable to our Predecessor’s common limited partners per unit (in thousands):

 

 

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The following table sets forth the reconciliation of our Predecessor’s weighted average number of common limited partner units used to compute basic net income (loss) attributable to our Predecessor’s common limited partners per unit with those used to compute diluted net income attributable to our Predecessor’s common limited partners per unit (in thousands):

 

 

Recently Issued Accounting Standards

In February 2016, the FASB updated the accounting guidance related to leases. The updated accounting guidance requires lessees to recognize a lease asset and liability at the commencement date of all leases (with the exception of short-term leases), initially measured at the present value of the lease payments. The updated guidance is effective for us as of January 1, 2019 and requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest period presented.  We are currently in the process of determining the impact that the updated accounting guidance will have on our condensed consolidated financial statements.

In May 2014, the FASB updated the accounting guidance related to revenue recognition. The updated accounting guidance provides a single, contract-based revenue recognition model to help improve financial reporting by providing clearer guidance on when an entity should recognize revenue, and by reducing the number of standards to which an entity has to refer. In July 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. We have made progress on our contract reviews and documentation. Substantially all of our revenue is earned pursuant to agreements under which we have currently interpreted one performance obligation, which is satisfied at a point-in-time. We are currently unable to reasonably estimate the expected financial statement impact; however, we do not believe the new accounting guidance will have a material impact on our financial position, results of operations or cash flows. We intend to adopt the new accounting guidance using the modified retrospective method. The new accounting guidance will require that our revenue recognition policy disclosures include further detail regarding our performance obligations as to the nature, amount, timing, and estimates of revenue and cash flows generated from our contracts with customers.

NOTE 3 – DISCONTINUED OPERATIONS AND DIVESTITURES

Appalachia Divestiture – Discontinued Operations

As disclosed in Note 2, on June 30, 2017, we completed a majority of the Appalachian Assets sale for net cash proceeds of $65.6 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility. On September 29, 2017, we completed the remainder of the Appalachian Assets sale for additional cash proceeds of $10.4 million, all of which was used to repay a portion of outstanding borrowings under our First Lien Credit Facility.

We determined the Appalachian Assets represent discontinued operations as they constitute a disposal of a group of components and a strategic shift that will have a major effect on our operations and financial results. We evaluated the Appalachian Assets sale on our gas and oil production and Drilling Partnership management segments’ results of operations and cash flows, as well as expected

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asset retirement obligations, and concluded the impact will have a major effect on our expected operations and financial results.  As a result, we reclassified the Appalachian Assets from their historical presentation to assets and liabilities held for sale on the condensed consolidated balance sheet and to net income (loss) from discontinued operations on the condensed consolidated statement of operations for all periods presented.

We determined that the carrying value of the remainder of our Appalachian Assets exceeded the fair value less costs to sell, which resulted in an impairment of $4.3 million recognized in net income (loss) from discontinued operations on our condensed consolidated statement of operations during the nine months ended September 30, 2017.

The following table reconciles the major classes of line items from the discontinued operations of the Appalachian Assets included within net income (loss) from discontinued operations, in thousands:

 

 

We allocated First Lien Credit Facility interest expense to our discontinued operations based on the relative proportion of the net cash proceeds from the sale of the Appalachian Assets used to repay outstanding indebtedness under our First Lien Credit Facility to the total outstanding indebtedness under our First Lien Credit Facility for the periods presented.

We allocated gain (loss) on mark-to-market natural gas commodity derivatives to our discontinued operations based on the relative proportion of the Appalachian Assets’ natural gas production volumes to our total natural gas production volumes for the periods presented.

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The following table details the major classes of assets and liabilities of the Appalachian Assets discontinued operations classified as held for sale for the prior period presented, in thousands: 

 

We allocated natural gas commodity derivatives assets and liabilities to our discontinued operations held for sale based on the relative proportion of the Appalachian Assets’ natural gas production volumes to our total natural gas production volumes as of December 31, 2016.

Rangely Divestiture

As disclosed in Note 2, on August 7, 2017, we completed the Rangely Assets sale for net cash proceeds of $103.5 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility. We determined that the carrying value of the Rangely Assets exceeded the fair value less costs to sell, which resulted in an impairment of $38.2 million recognized in loss on divesture on our condensed consolidated statement of operations during the Successor nine months ended September 30, 2017. We recognized a $5.2 million loss on asset sale from the closing of the Rangely Assets sale during the Successor three and nine months ended September 30, 2017 resulting from final negotiations and settlement of working capital adjustments in connection with the preliminary purchase price adjustments.

We considered the Rangely Assets to be an individually significant component of our operations. The following table presents the net income (loss) before income taxes of the Rangely Assets for the periods presented, in thousands:

 

 

 

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NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment at the dates indicated (in thousands):

 

 

During the Successor nine months ended September 30, 2017, the Successor period from September 1, 2016 through September 30, 2016 and the Predecessor period from January 1, 2016 through August 31, 2016, we recognized $0.7 million, $3.5 million and $19.6 million, respectively, of non-cash investing activities capital expenditures, which was reflected within the changes in accounts payable and accrued liabilities on our condensed consolidated statements of cash flows.

We capitalize interest on borrowed funds related to capital projects only for periods that activities are in progress to bring these projects to their intended use. The weighted average interest rate used to capitalize interest on borrowed funds during the Successor three and nine months ended September 30, 2017, the Successor period September 1, 2016 through September 30, 2016, and the Predecessor periods from July 1, 2016 through August 31, 2016 and January 1, 2016 through August 31, 2016 were 9.5%, 8.4%, 7.6%, 6.0% and 6.5%, respectively. The aggregate amount of interest capitalized during the Successor three and nine months ended September 30, 2017, the Successor period September 1, 2016 through September 30, 2016, and the Predecessor periods from July 1, 2016 through August 31, 2016 and January 1, 2016 through August 31, 2016 were $0.2 million, $0.4 million, $0.7 million, $1.7 million and $6.5 million, respectively.

For the Successor three and nine months ended September 30, 2017, the Successor period September 1, 2016 through September 30, 2016, and the Predecessor periods from July 1, 2016 through August 31, 2016 and January 1, 2016 through August 31, 2016, we recorded $0.4 million, $1.1 million, $0.5 million, $1.3 million and $4.6 million, respectively, of accretion expense related to our asset retirement obligations within depreciation, depletion and amortization in our condensed consolidated statements of operations.

NOTE 5 – DEBT

Total debt consists of the following at the dates indicated (in thousands):

 

 

Cash Interest. Total cash payments for interest for the Successor three and nine months ended September 30, 2017, the Successor period September 1, 2016 through September 30, 2016 and the Predecessor period from January 1, 2016 through August 31, 2016, were $7.3 million, $21.2 million, $0.5 million and $53.7 million, respectively. There were no cash payments for interest for the Predecessor period from July 1, 2016 through August 31, 2016 due to our Predecessor’s Chapter 11 Filings.

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First Lien Credit Facility

On September 1, 2016, we entered into our $440 million First Lien Credit Facility with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the lenders party thereto. A summary of the key provisions of the First Lien Credit Facility is as follows (of which certain provisions have been modified through subsequent amendments as described further below):

We were not in compliance with certain of the financial covenants under our credit facilities as of December 31, 2016, as well as the requirement to deliver audited financial statements without a going concern qualification. On April 19, 2017, we, Titan Energy Operating, LLC (our wholly owned subsidiary), as borrower, and certain subsidiary guarantors entered into a third amendment to the First Lien Credit Facility with Wells Fargo, as administrative agent, and the lenders party thereto. Pursuant to the third amendment, certain of the financial ratio covenants were revised upwards. Specifically, beginning December 31, 2017, we will be required to maintain a ratio of Total Debt to EBITDA (each as defined in the First Lien Credit Facility) of not more than 5.50 to 1.00 for each fiscal quarter through December 31, 2018 and of not more than 5.00 to 1.00 thereafter. We will also be required, beginning December 31, 2017, to maintain a ratio of First Lien Debt (as defined in the First Lien Credit Facility) to EBITDA of not more than 4.00 to 1.00 for each fiscal quarter through December 31, 2018 and of not more than 3.50 to 1.00 thereafter.

In addition to the amendments to the financial ratio covenants, the First Lien Credit Facility lenders waived certain defaults by us with respect to the fourth quarter of 2016, including compliance with the ratios of Total Debt to EBITDA and First Lien Debt to EBITDA, as well as our obligation to deliver financial statements without a “going concern” qualification. The First Lien Credit Facility lenders’ waivers were subject to revocation in certain circumstances, including the exercise of remedies by junior lenders (including pursuant to our second lien credit facility), the failure to extend the 180-day standstill period under the intercreditor agreement at least 15 business days prior to its expiration, and the occurrence of additional events of default under the First Lien Credit Facility.

The third amendment to the First Lien Credit Facility confirmed the conforming and non-conforming tranches of the borrowing base at $410 million and $30 million, respectively, but required us to take actions (which included asset sales) to reduce the conforming tranche of the borrowing base to $330 million by August 31, 2017 and to $190 million by October 1, 2017 (subject to extension at the administrative agent’s option to October 31, 2017). Similarly, the non-conforming tranche of the borrowing base was required to be reduced to $10 million by November 1, 2017. In addition, we were required to use excess asset sale proceeds (after application in accordance with the existing terms of the First Lien Credit Facility) to repay outstanding borrowings and reduce the applicable borrowing base to the required level.

On June 30, 2017, we completed a majority of the Appalachian Assets sale for net cash proceeds of $65.6 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility. On August 7, 2017, we completed the Rangely Assets sale for net cash proceeds of $103.5 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility and achieve compliance with the requirement to reduce our First Lien Credit Facility borrowings below $360 million, as required by August 31, 2017.  On September 29, 2017, we completed the remainder of the Appalachia Assets sale for additional cash proceeds of $10.4 million, all of which was used to repay a portion of outstanding borrowings under our First Lien Credit Facility.

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On November 6, 2017, we entered into a fourth amendment to our First Lien Credit Facility. The fourth amendment has an effective date of October 31, 2017 and confirms the conforming and non-conforming tranches of the borrowing base at $228.7 million and $30 million, respectively, but requires us to take actions (which can include asset sales and equity offerings) to reduce the conforming tranche of the borrowing base to $190 million by December 8, 2017 and to $150 million by August 31, 2018. The maturity date of the non-conforming tranche of the borrowing base was confirmed as May 1, 2018. We are required to use proceeds from asset sales to make prepayments.

In addition to the requirements above, the First Lien Credit Facility lenders also agreed to a limited waiver of certain existing defaults with respect to financial covenants, required repayments of borrowings and other related matters. The waiver terminates upon the earliest of (i) December 8, 2017, (ii) the occurrence of additional events of default under the First Lien Credit Facility and (iii) the exercise of remedies under our Second Lien Credit Facility.  Pursuant to the fourth amendment, we are required to hedge at least 50% and 80% of our 2019 projected proved developed producing production by December 31, 2017 and March 31, 2018, respectively.

Second Lien Credit Facility

On September 1, 2016, we entered into our Second Lien Credit Facility with Wilmington Trust, National Association, as administrative agent, and the lenders party thereto for an aggregate principal amount of $252.5 million maturing on February 23, 2020. A summary of the key provisions of the Second Lien Credit Facility is as follows (of which certain provisions have been modified through subsequent amendments as described further below):

On April 21, 2017, the lenders under the our Second Lien Credit Facility delivered a Notice, pursuant to which they noticed events of default related to financial covenants and the failure to deliver financial statements without a “going concern” qualification. The delivery of the Notice began the 180-day standstill period under the intercreditor agreement, during which the lenders under the Second Lien Credit Facility were prevented from pursuing remedies against the collateral securing our obligations under the Second Lien Credit Facility. The lenders have not accelerated the payment of amounts outstanding under the Second Lien Credit Facility.

On September 27, 2017, the lenders under our Second Lien Credit Facility entered into the Extension Letter with us and the lenders under our First Lien Credit Facility. Pursuant to the Extension Letter, the Second Lien Credit Facility lenders agreed to extend the 180-day standstill period under the intercreditor agreement (during which the lenders under the Second Lien Credit Facility were prevented from pursuing remedies against the collateral securing the Company’s obligations under the Second Lien Credit Facility) by

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an additional 35 days from October 18, 2017 to November 22, 2017. In addition, the extension of the standstill period extends the waiver of certain defaults under the First Lien Credit Facility, which terminates 15 business days prior to the expiration of the standstill period. The parties agreed to extend the standstill period to provide the Company with additional time to negotiate proposed amendments to each of the First Lien Credit Facility and the Second Lien Credit Facility.

In connection with, and as a condition to, the effectiveness of the fourth amendment to our First Lien Credit Facility, on November 6, 2017, the lenders under our Second Lien Credit Facility agreed to extend the standstill period under the intercreditor agreement (during which the lenders under the Second Lien Credit Facility are prevented from pursuing remedies against the collateral securing our obligations under the Second Lien Credit Facility) until December 29, 2017.

NOTE 6 – DERIVATIVE INSTRUMENTS

We use a number of different derivative instruments, principally swaps and options, in connection with our commodity price risk management activities. We do not apply hedge accounting to any of our derivative instruments. As a result, gains and losses associated with derivative instruments are recognized in earnings.

We enter into commodity future option contracts to achieve more predictable cash flows by hedging our exposure to changes in commodity prices. At any point in time, such contracts may include regulated New York Mercantile Stock Exchange (“NYMEX”) futures and options contracts and non-regulated over-the-counter futures contracts with qualified counterparties. NYMEX contracts are generally settled with offsetting positions, but may be settled by the physical delivery of the commodity. Crude oil contracts are based on a West Texas Intermediate (“WTI”) index. NGL fixed price swaps are priced based on a WTI crude oil index, while ethane, propane, butane and iso butane contracts are priced based on the respective Mt. Belvieu price. These contracts were recorded at their fair values.

Pursuant to the Restructuring Support Agreement, our Predecessor completed the sale of substantially all of its commodity hedge positions on July 25, 2016 and July 26, 2016 and used the proceeds to repay $233.5 million of borrowings outstanding under the Predecessor’s first lien credit facility.

The following table summarizes the commodity derivative activity and presentation in our condensed consolidated statements of operations for the periods indicated (in thousands):

 

 

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The following table summarizes the gross fair values of our derivative instruments, presenting the impact of offsetting the derivative assets and liabilities included on our condensed consolidated balance sheets for the periods indicated (in thousands):

 

 

At September 30, 2017, we had the following commodity derivatives instruments:

 

 

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Assets and Liabilities Measured on a Recurring Basis

We use a market approach fair value methodology to value our outstanding derivative contracts. The fair value of a financial instrument depends on a number of factors, including the availability of observable market data over the contractual term of the underlying instrument. We separate the fair value of our financial instruments into the three level hierarchy (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value.  As of September 30, 2017 and December 31, 2016, all of our derivative financial instruments were classified as Level 2.

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Information for financial instruments measured at fair value were as follows (in thousands):

 

 

 

Other Financial Instruments

Our other current assets and liabilities on our condensed consolidated balance sheets are considered to be financial instruments. The estimated fair values of these instruments approximate their carrying amounts due to their short-term nature and thus are categorized as Level 1. The estimated fair value of our long-term debt at September 30, 2017, which consists of our First Lien Credit Facility and Second Lien Credit Facility, approximated carrying value of $539.8 million. At September 30, 2017, the carrying value of outstanding borrowings under our First Lien Credit Facility, which bears interest at variable interest rates, approximated estimated fair value. The estimated fair value of our Second Lien Credit Facility was based upon the market approach and calculated using yields of our Second Lien Credit Facility as provided by financial institutions and thus were categorized as Level 3 values.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We estimated the fair value less estimated costs to sell of our remaining Appalachia Assets and Rangely Assets held for sale (see Note 3) based on the respective negotiated purchase prices that were derived from discounted cash flow models, which considered the estimated remaining lives of the wells based on reserve estimates, future operating and development costs of the assets, the respective natural gas, oil and natural gas liquids forward price curves, external estimates of recovery values, and other market multiples. These estimates of fair value are Level 3 measurements as they are based on unobservable inputs.

Our Predecessor’s management estimated the fair values of natural gas and oil properties transferred to our Predecessor upon consolidation of certain Drilling Partnerships (see Note 8) based on a discounted cash flow model, which considered the estimated remaining lives of the wells based on reserve estimates, our Predecessor’s future operating and development costs of the assets, the respective natural gas, oil and natural gas liquids forward price curves and estimated salvage values using our historical experience and external estimates of recovery values. These estimates of fair value were Level 3 measurements as they were based on unobservable inputs.

Our Predecessor’s management estimated the fair value of asset retirement obligations transferred to our Predecessor upon consolidation of certain Drilling Partnerships (see Note 8) based on discounted cash flow projections using our Predecessor’s historical experience in plugging and abandoning wells, the estimated remaining lives of those wells based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future considering inflation rates, federal and state regulatory requirements, and our Predecessor’s assumed credit-adjusted risk-free interest rate. These estimates of fair value were Level 3 measurements as they were based on unobservable inputs.

We estimated the fair value of our enterprise value and reorganizational value of assets and liabilities upon our emergence from bankruptcy through fresh-start accounting (see Note 2) utilizing the discounted cash flow method for both our gas and oil production business and our partnership management business based on the financial projections in our disclosure statement. The resulting fair value of our equity was used to value shares issued under our incentive plan.  These estimates of fair value are Level 3 measurements as they are based on unobservable inputs.

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NOTE 8 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Relationship with ATLS. Except for our named executive officers, we do not directly employ any persons to manage or operate our business. These functions are provided by employees of ATLS and/or its affiliates. As of September 30, 2017, we had a $1.8 million payable to ATLS for payroll and benefit costs related to ATLS employees managing and operating our business, which was recorded as a current liability within advances from affiliates on our condensed consolidated balance sheet. As of September 30, 2017 we reclassified $15.1 million of receivables from ATLS originating prior to our Chapter 11 Filings to non-current due to the uncertainty of collecting this balance within the next twelve months, which was recorded within non-current advances to affiliates on our condensed consolidated balance sheet. As of December 31, 2016, we had net receivables of $3.3 million from ATLS related to the timing of funding cash accounts related to general and administrative expenses, such as payroll and benefits, and amounts originating prior to our Chapter 11 Filings, which was recorded as a net current asset within in advances to affiliates in our condensed consolidated balance sheets.

Relationship with Drilling Partnerships. We conduct certain activities through, and a portion of our revenues are attributable to, sponsorship of the Drilling Partnerships. We serve as general partner and operator of the Drilling Partnerships and assume customary rights and obligations for the Drilling Partnerships. As the general partner, we are liable for the Drilling Partnerships’ liabilities and can be liable to limited partners of the Drilling Partnerships if we breach our responsibilities with respect to the operations of the Drilling Partnerships. We are entitled to receive management fees, reimbursement for administrative costs incurred and to share in the Drilling Partnership’s revenue and costs and expenses according to the respective partnership agreements. On June 30, 2017, in connection with the completion of the sale of the majority of the Appalachian Assets, we delegated the operational activities to an affiliate of Diversified for all the Drilling Partnerships’ natural gas and oil wells in Pennsylvania and Tennessee.

In March 2016, our Predecessor transferred $36.7 million of investor capital raised and $13.3 million of accrued well drilling and completion costs incurred by our Predecessor to the Atlas Eagle Ford 2015 L.P. private drilling partnership for activities directly related to their program. In June 2016, our Predecessor transferred $3.8 million of funds to certain of the Drilling Partnerships that were projected to make monthly or quarterly distributions to their limited partners over the next several months and/or quarters to ensure accessible distribution funding coverage in accordance with the respective Drilling Partnerships’ operations and partnership agreements in the event that our Predecessor experienced a prolonged restructuring period as our Predecessor performed all administrative and management functions for the Drilling Partnerships.  

During the Predecessor period from January 1, 2016 to August 31, 2016, our Predecessor recorded $7.2 million and $12.4 million of gas and oil properties and asset retirement obligations, respectively, transferred to our Predecessor as a result of certain Drilling Partnership consolidations. The gas and oil properties and asset retirement obligations were recorded at their fair values on the respective dates of the Drilling Partnerships’ consolidation and transfer to our Predecessor (see Note 7) and resulted in a non-cash loss of $6.1 million, net of consolidation and transfer adjustments, for the Predecessor period from January 1, 2016 through August 31, 2016, which was recorded in net income (loss) from discontinued operations in the consolidated statements of operations.

During the Predecessor periods from July 1, 2016 to August 31, 2016 and from January 1, 2016 to August 31, 2016, we recognized a $10.9 million provision for losses on Drilling Partnership receivables related to the write down of certain receivables to their estimated net realizable values, which is recorded in loss from discontinued operations on our consolidated statement of operations. As of December 31, 2016, we had trade receivables of $0.1 million from certain of the Drilling Partnerships, which were recorded in accounts receivable in our condensed consolidated balance sheet. As of September 30, 2017 and December 31, 2016, we had trade payables of $3.2 million and $5.6 million, respectively, to certain of the Drilling Partnerships, which were recorded in accounts payable in our condensed consolidated balance sheets.

Relationship with AGP. At the direction of ATLS, we charge direct costs, such as salaries and wages, and allocate indirect costs, such as rent and other general and administrative costs, to AGP based on the number of ATLS employees who devoted time to AGP’s activities. As of September 30, 2017 and December 31, 2016, we had receivables of $0.1 million and $0.8 million, respectively, from AGP related to AGP’s direct costs and indirect cost allocation, which was recorded in advances to affiliates in our condensed consolidated balance sheets.

Other Relationships. We have other related party transactions with regard to certain funds advised and sub-advised by GSO Capital Partners LP and its affiliates (“GSO”) as GSO funds are majority lenders under our Second Lien Credit Facility and GSO funds hold an excess of ten-percent of our common shares.

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NOTE 9 – COMMITMENTS AND CONTINGENCIES

Drilling Partnership Commitments

 

As of September 30, 2017, we are committed to expend approximately $2.8 million, principally on a new enterprise resource planning system and drilling and completion expenditures.

 

Environmental Matters

 

We and our subsidiaries are subject to various federal, state and local laws and regulations relating to the protection of the environment. We have established procedures for the ongoing evaluation of our and our subsidiaries’ operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. We and our subsidiaries maintain insurance which may cover in whole or in part certain environmental expenditures. We and our subsidiaries had no environmental matters requiring specific disclosure or requiring the recognition of a liability as of September 30, 2017 and December 31, 2016.

 

Legal Proceedings

We are party to various routine legal proceedings arising out of the ordinary course of our business. We believe that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.

NOTE 10 – PREDECESSOR CASH DISTRIBUTIONS

Our Predecessor had a monthly cash distribution program whereby it distributed all of its available cash (as defined in its partnership agreement) for that month to its unitholders within 45 days from the month end. If our Predecessor’s common unit distributions in any quarter exceed specified target levels, ATLS received between 13% and 48% of such distributions in excess of the specified target levels.

During the Predecessor period from January 1, 2016 through August 31, 2016, our Predecessor paid four monthly cash distributions totaling $5.1 million to its common limited partners ($0.0125 per unit per month); $2.5 million to its Preferred Class C limited partners ($0.0125 per unit per month); and $0.2 million to its General Partner Class A holder ($0.0125 per unit per month).

During the Predecessor period from January 1, 2016 through August 31, 2016, our Predecessor paid two distributions totaling $4.4 million to its Class D Preferred limited partners ($0.5390625 per unit) for the period October 15, 2015 through April 14, 2016. During the Predecessor period from January 1, 2016 through August 31, 2016, our Predecessor paid two distributions totaling $0.3 million to its Class E Preferred limited partners ($0.671875 per unit) for the period October 15, 2015 through April 14, 2016. On June 16, 2016, our Predecessor’s Board of Directors elected to suspend its quarterly distributions on its Class D Preferred Units and our Class E Preferred Units, beginning with the second quarter 2016 distribution, due to the continued lower commodity price environment. The Class D Preferred Units and Class E Preferred Units accrued distributions of $3.4 million and $0.3 million, respectively, from April 15, 2016 through August 31, 2016. However, due to the distribution suspension and our Predecessor’s Chapter 11 filings, these amounts were not earned as the preferred units were cancelled without receipt of any consideration on the Plan Effective Date.

NOTE 11 – OPERATING SEGMENT INFORMATION

Our operations include two reportable operating segments: gas and oil production and Drilling Partnership management. The Drilling Partnership management segment includes all of our managing and operating activities specific to the Drilling Partnerships including well construction and completion, administration and oversight, well services, and gathering and processing. These operating segments reflect the way we manage our operations and make business decisions.

We previously presented three reportable operating segments; however, due to the decline in investor capital funds raised in recent years, anticipated lower levels of future investor capital fund raise, and the consolidation of certain historical Drilling Partnerships in 2016, we aggregated our well construction and completion segment with our other partnership management segment to report all of our Drilling Partnership management activities in one combined segment as they do not meet the quantitative threshold for reporting individual segment information. As a result of this change, we have restated our prior year condensed consolidated statements of operations and segment footnote disclosures to conform to our current presentation.

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Operating segment data for the periods indicated were as follows (in thousands):

 

 

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BUSINESS OVERVIEW

We are a publicly traded (OTCQX: TTEN) Delaware limited liability company and an independent developer and producer of natural gas, crude oil and NGLs with operations in basins across the United States but primarily focused on the horizontal development of  resource potential from the Eagle Ford Shale in South Texas. As discussed further below, we are the successor to the business and operations of Atlas Resource Partners, L.P. (“ARP”). Unless the context otherwise requires, references to “Titan Energy, LLC,” “Titan,” “the Company,” “we,” “us,” and “our,” refer to Titan Energy, LLC and our consolidated subsidiaries (and our predecessor, where applicable).

Titan Energy Management, LLC (“Titan Management”) manages us and holds our Series A Preferred Share, which entitles Titan Management to receive 2% of the aggregate of distributions paid to shareholders (as if it held 2% of our members’ equity, subject to dilution as discussed below) and to appoint four of our seven directors.  Titan Management is a wholly owned subsidiary of Atlas Energy Group, LLC (“ATLS”; OTCQX: ATLS), which is a publicly traded company.

In addition to its preferred member interest in us, ATLS also holds general and limited partner interests in Atlas Growth Partners, L.P. (“AGP”), a Delaware limited partnership and an independent developer and producer of natural gas, oil and NGLs, with operations primarily focused in the Eagle Ford Shale, and in Lightfoot Capital Partners, L.P. and Lightfoot Capital Partners GP, LLC, which incubate new MLPs and invest in existing MLPs.

ARP Restructuring and Emergence from Chapter 11 Proceedings

On July 25, 2016, ARP and certain of its subsidiaries and ATLS, solely with respect to certain sections thereof, entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with certain of their lenders (the “Restructuring Support Parties”) to support ARP’s restructuring pursuant to a pre-packaged plan of reorganization (the “Plan”).

On July 27, 2016, ARP and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court,” and the cases commenced thereby, the “Chapter 11 Filings”). The cases commenced thereby were jointly administered under the caption “In re: ATLAS RESOURCE PARTNERS, L.P., et al.”

On August 26, 2016, an order confirming the Plan was entered by the Bankruptcy Court. On September 1, 2016, (the “Plan Effective Date”), pursuant to the Plan, the following occurred:

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LIQUIDITY AND ABILITY TO CONTINUE AS A GOING CONCERN

Since the Plan Effective Date, we have funded our operations through cash flows generated from our operations and cash on hand. We currently do not have the capacity to access additional liquidity from our First Lien Credit Facility and our ability to access public equity and debt markets may be limited. Our future cash flows are subject to a number of variables, including oil and natural gas prices. Prices for oil and natural gas began to decline significantly during the fourth quarter of 2014 and continue to remain low in 2017. These lower commodity prices have negatively impacted our revenues, earnings and cash flows, which has negatively impacted our ability to remain in compliance with the covenants under our credit facilities. Sustained low commodity prices could have a material and adverse effect on our liquidity position.

Even following the amendments described below, we continue to face liquidity issues and are currently considering, and are likely to make, changes to our capital structure to maintain sufficient liquidity, meet our debt obligations and manage and strengthen our balance sheet. If we are not able to enter into further amendments with our lenders prior to the expiration of the standstill period, we may be forced to seek further options as described below.

We were not in compliance with certain of the financial covenants under our credit facilities as of December 31, 2016, as well as the requirement to deliver audited financial statements without a going concern qualification. As a result of the amendment referenced below, our financial covenants will not be tested again until the quarter ending December 31, 2017. We do not currently have sufficient liquidity to repay all of our outstanding indebtedness, and as a result, there is substantial doubt regarding our ability to continue as a going concern. We have classified $538.1 million of outstanding indebtedness under our credit facilities, which is net of $1.7 million of deferred financing costs, as current portion of long term debt, net within our condensed consolidated balance sheet as of September 30, 2017, based on the occurrence of the event of default, the lenders under our credit facilities, as applicable, could elect to declare all amounts outstanding immediately due and payable and the lenders could terminate all commitments to extend further credit.

On April 19, 2017, we entered into an amendment to our First Lien Credit Facility (which has been superseded by subsequent amendments as described further below). This amendment provided for, among other things, waivers of our non-compliance, increases in certain financial covenant ratios and scheduled decreases in our borrowing base (refer to Note 5 of our condensed consolidated financial statements for further information regarding the specific amended terms and provisions). As part of our overall business strategy, we have continued to execute on our sales of non-core assets, which has included the sale of our Appalachia and Rangely operations (see “Recent Developments”). The proceeds of the consummated asset sales were used to repay borrowings under our First Lien Credit Facility. Our strategy is to continue to sell non-core assets to reduce our leverage position, which will also help us to comply with the requirements of our First Lien Credit Facility amendments.

In addition to the amendments to the financial ratio covenants, the First Lien Credit Facility lenders waived certain defaults by us with respect to the fourth quarter of 2016, including compliance with the ratios of Total Debt to EBITDA and First Lien Debt to EBITDA, as well as our obligation to deliver financial statements without a “going concern” qualification. The First Lien Credit Facility lenders’ waivers were subject to revocation in certain circumstances, including the exercise of remedies by junior lenders (including pursuant to our Second Lien Credit Facility), the failure to extend the standstill period under the intercreditor agreement at least 15 business days prior to its expiration, and the occurrence of additional events of default under the First Lien Credit Facility.  

On April 21, 2017, the lenders under the our Second Lien Credit Facility delivered a notice of events of default and reservation of rights, pursuant to which they noticed events of default related to financial covenants and the failure to deliver financial statements without a “going concern” qualification. The delivery of such notice began the 180-day standstill period under the intercreditor agreement, during which the lenders under the Second Lien Credit Facility were prevented from pursuing remedies against the collateral securing our obligations under the Second Lien Credit Facility. The lenders have not accelerated the payment of amounts outstanding under the Second Lien Credit Facility.

On September 27, 2017, the lenders under our Second Lien Credit Facility entered into a letter agreement with us and the lenders under our First Lien Credit Facility (the “Extension Letter”) (which has been superseded by subsequent amendments as described further below). Pursuant to the Extension Letter, the Second Lien Credit Facility lenders agreed to extend the 180-day standstill period under the intercreditor agreement (during which the lenders under the Second Lien Credit Facility were prevented from pursuing remedies against the collateral securing the Company’s obligations under the Second Lien Credit Facility) by an additional 35 days from October 18, 2017 to November 22, 2017. In addition, the extension of the standstill period extended the waiver of certain defaults under the First Lien Credit Facility, which terminates 15 business days prior to the expiration of the standstill period. The parties agreed to extend the standstill period to provide the Company with additional time to negotiate proposed amendments to each of the First Lien Credit Facility and the Second Lien Credit Facility.

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On September 29, 2017, we completed the remainder of the Appalachia Assets sale for additional cash proceeds of $10.4 million, all of which was used to repay a portion of outstanding borrowings under our First Lien Credit Facility.

On November 6, 2017, we entered into a fourth amendment to our First Lien Credit Facility. The fourth amendment has an effective date of October 31, 2017 and confirms the conforming and non-conforming tranches of the borrowing base at $228.7 million and $30 million, respectively, but requires us to take actions (which can include asset sales and equity offerings) to reduce the conforming tranche of the borrowing base to $190 million by December 8, 2017 and to $150 million by August 31, 2018. The maturity date of the non-conforming tranche of the borrowing base was confirmed as May 1, 2018. We are required to use proceeds from asset sales to make prepayments.

In addition to the requirements above, the First Lien Credit Facility lenders also agreed to a limited waiver of certain existing defaults with respect to financial covenants, required repayments of borrowings and other related matters. The waiver terminates upon the earliest of (i) December 8, 2017, (ii) the occurrence of additional events of default under the First Lien Credit Facility and (iii) the exercise of remedies under our Second Lien Credit Facility.  Pursuant to the fourth amendment, we are required to hedge at least 50% and 80% of our 2019 projected proved developed producing production by December 31, 2017 and March 31, 2018, respectively.

In connection with, and as a condition to, the effectiveness of the fourth amendment to our First Lien Credit Facility, the lenders under our Second Lien Credit Facility agreed to extend the standstill period under the intercreditor agreement (during which the lenders under the Second Lien Credit Facility are prevented from pursuing remedies against the collateral securing our obligations under the Second Lien Credit Facility) until December 29, 2017.

We continually review and may make changes to our capital structure from time to time, with the goal of strengthening our balance sheet and meeting our debt service obligations. We could pursue options such as refinancing, restructuring or reorganizing our indebtedness or capital structure or seek to raise additional capital through debt or equity financing to address our liquidity concerns and high debt levels. We are evaluating various options, but there is no certainty that we will be able to implement any such options, and we cannot provide any assurances that any refinancing or changes in our debt or equity capital structure would be possible or that additional equity or debt financing could be obtained on acceptable terms, if at all, and such options may result in a wide range of outcomes for our stakeholders.

We cannot assure you that we will be able to implement the above actions, if necessary, on commercially reasonable terms, or at all, in a manner that will be permitted under the terms of our debt instruments or in a manner that does not negatively impact the price of our securities. Additionally, there can be no assurance that the above actions will allow us to meet our debt obligations and capital requirements.

RECENT DEVELOPMENTS

Appalachia Divestiture

On May 4, 2017, we entered into a definitive agreement to sell our conventional Appalachia and Marcellus assets to Diversified Gas & Oil, PLC (“Diversified”) for $84.2 million. The transaction includes the sale of approximately 8,400 oil and gas wells across Pennsylvania, Ohio, Tennessee, New York and West Virginia, along with the associated infrastructure (the “Appalachian Assets”).  We retained our Utica Shale position, Indiana assets and West Virginia CBM assets in the region. On June 30, 2017, we completed a majority of the Appalachian Assets sale for net cash proceeds of $65.6 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility.

On September 29, 2017, we completed the remainder of the Appalachia Assets sale for additional cash proceeds of $10.4 million, all of which was used to repay a portion of outstanding borrowings under our First Lien Credit Facility.

Rangely Divestiture

On June 12, 2017, we entered into a definitive agreement to sell our 25% interest in Rangely Field to an affiliate of Merit Energy Company, LLC for $105 million. Rangely is a CO₂ flood located in Rio Blanco County, Colorado, and operated by Chevron. The transaction includes the sale of our interest in Rangely Field, its 22% interest in Raven Ridge Pipeline, a CO₂ transportation line, as well as surrounding acreage in Rio Blanco and Moffat Counties, Colorado (collectively, the “Rangely Assets”). On August 7, 2017, we completed the Rangely Assets sale for net cash proceeds of $103.5 million, which included customary preliminary purchase price adjustments, all of which was used to repay a portion of the outstanding indebtedness under our First Lien Credit Facility and achieve compliance with the requirement to reduce our First Lien Credit Facility borrowings below $360 million, as required by August 31, 2017.

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GENERAL TRENDS AND OUTLOOK

We expect our business to be affected by key trends in natural gas and oil production markets. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

The natural gas, oil and natural gas liquids commodity price markets have suffered significant declines since the fourth quarter of 2014 and continue to remain low in 2017. The causes of these declines are based on a number of factors, including, but not limited to, a significant increase in natural gas, oil and NGL production. While we anticipate continued high levels of exploration and production activities over the long-term in the areas in which we operate, fluctuations in energy prices can greatly affect production rates and investments in the development of new natural gas, oil and NGL reserves.

Our future gas and oil reserves, production, cash flow, and our ability to make payments on our debts, depend on our success in producing our current reserves efficiently, developing our existing acreage and acquiring additional proved reserves economically. We face the challenge of natural production declines and volatile natural gas, oil and NGL prices. As initial reservoir pressures are depleted, natural gas and oil production from particular wells decrease. We attempt to overcome this natural decline by drilling to find additional reserves and acquiring more reserves than we produce. To the extent we do not have sufficient capital, our ability to drill and acquire more reserves will be negatively impacted.  Based on current market conditions, we believe that a reduction in our debt and cash interest obligations is needed to improve our financial position and flexibility and to position us to take advantage of opportunities that may arise out of the current industry downturn.

RESULTS OF OPERATIONS

We sponsored and continue to manage tax-advantaged investment partnerships (the “Drilling Partnerships”), in which we coinvested, to finance a portion of our natural gas, crude oil and NGL production activities.

Matters Impacting Comparability of Results

Fresh Start Accounting. Upon our emergence from bankruptcy, we adopted fresh-start accounting in accordance with ASC 852. We qualified for fresh-start accounting because (i) the reorganization value of our assets immediately prior to the confirmation was less than the post-petition liabilities and allowed claims and (ii) the holders of existing voting shares of our predecessor company received less than 50% of the voting shares of the post-emergence successor entity.

As a result of the application of fresh start accounting, at the Plan Effective Date, our assets and liabilities were recorded at their estimated fair values which, in some cases, are significantly different than amounts included in our financial statements prior to the Plan Effective Date. Accordingly, our financial condition, results of operations, and cash flows on and after the Plan Effective Date are not comparable to our financial condition, results of operations, and cash flows prior to the Plan Effective Date. References to “Successor” relate to Titan on and subsequent to the Plan Effective Date. References to “Predecessor” refer to ARP prior to the Plan Effective Date.  We have presented our financial condition, results of operations, and cash flows with a black line division to delineate the lack of comparability between the amounts presented on or after September 1, 2016 and dates prior.

Reclassifications. Certain reclassifications have been made to our condensed consolidated financial statements for the prior year periods to conform to classifications used in the current year, specifically related to our Appalachian Assets presented as discontinued operations in the condensed consolidated financial statements and footnote disclosures and our segment information on the condensed consolidated statement of operations and segment footnote disclosures.  

Discontinued operations. We determined the Appalachian Assets represent discontinued operations as they constitute a disposal of a group of components and a strategic shift that will have a major effect on our operations and financial results. We evaluated the Appalachian Assets sale on our gas and oil production and Drilling Partnership management segments’ results of operations and cash flows, as well as expected asset retirement obligations, and concluded the impact will have a major effect on our expected operations and financial results. As a result, we reclassified the Appalachian Assets from their historical presentation to assets and liabilities held for sale on the condensed consolidated balance sheet and to net income (loss) from discontinued operations on the condensed consolidated statement of operations for all periods presented.

Segments. Our operations include two reportable operating segments: gas and oil production and Drilling Partnership management. The Drilling Partnership management segment includes all of our managing and operating activities specific to the Drilling Partnerships including well construction and completion, administration and oversight, well services, and gathering and processing. These operating segments reflect the way we manage our operations and make business decisions.

We previously presented three reportable operating segments; however, due to the decline in investor capital funds raised in recent years, anticipated lower levels of future investor capital fund raise, and the consolidation of certain historical Drilling

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Partnerships in 2016, we aggregated our well construction and completion segment with our other partnership management segment to report all of our Drilling Partnership management activities in one combined segment as they do not meet the quantitative threshold for reporting individual segment information. As a result of this change, we have restated our prior year condensed consolidated statements of operations and segment footnote disclosures to conform to our current presentation.

GAS AND OIL PRODUCTION

Production Profile. Currently, we have natural gas, crude oil and NGL production operations in various plays throughout the United States. We have established production positions in the following operating areas:

We also had a production position in the Rangely field in northwest Colorado, a mature tertiary CO2 flood with low-decline oil production, where we had a 25% non-operated net working interest position which we acquired in 2014 and subsequently sold in August 2017.

The following table presents the number of wells we drilled and the number of wells we turned in line, both gross and for our interest, during the periods indicated:

 

 

 

 

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Production Volumes. The following table presents our total net natural gas, crude oil, and NGL production volumes per day in each of our operating areas and total production for each of the periods indicated:

 

 

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Production Revenues, Prices and Costs. Our production revenues and estimated gas and oil reserves are substantially dependent on prevailing market prices for natural gas and oil. The following table presents our production revenues and average sales prices for our natural gas, oil, and natural gas liquids production, along with our average production costs, which include lease operating expenses, taxes, and transportation costs, for each of the periods indicated:

 

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Our gas and oil production revenues were lower during in the current quarter than the Successor period from September 1, 2016 through September 30, 2016 and the Predecessor period from July 1, 2016 through August 31, 2016 due to decreases in production volumes at our operating areas due to natural declines and cost control operating decisions and the sale of our interests in Rangely, partially offset by an increase in volumes at our Eagle Ford operating area due to 15 wells turned inline since the end of the third quarter 2016 and higher  average realized sales prices before hedging activities resulting from the improved commodity pricing environment.

Our gas and oil production revenues were higher in the nine months ended September 30, 2017 than the Successor period from September 1, 2016 through September 30, 2016 and the Predecessor period from January 1, 2016 through August 31, 2016 due to higher average realized sales prices before hedging activities resulting from the improved commodity pricing environment and an increase in volumes at our Eagle Ford operating area due to 15 wells turned inline since the end of the third quarter 2016, partially offset by decreases in production volumes at our operating areas due to natural declines and cost control operating decisions and the sale of our interests in Rangely.

Our total production costs were lower in the current quarter than the Successor period from September 1, 2016 through September 30, 2016 and the Predecessor period from July 1, 2016 through August 31, 2016 primarily due to a decrease in lease operating expenses related to lower labor costs from employee reductions and other production cost control measures in each of our operating areas, a decrease in transportation costs due to contract negotiations for lower rates, a decrease in property taxes, and the sale of our interests in Rangely.

Our total production costs were lower in the nine months ended September 30, 2017 than the Successor period from September 1, 2016 through September 30, 2016 and the Predecessor period from January 1, 2016 through August 31, 2016 primarily due to a decrease in lease operating expenses related to lower labor costs from employee reductions and other production cost control measures in each of our operating areas, a decrease in transportation costs due to contract negotiations for lower rates, and the sale of our interests in Rangely; partially offset by an increase in production taxes due to higher realized sales prices.

DRILLING PARTNERSHIP MANAGEMENT

We sponsored and continue to manage tax-advantaged investment partnerships (the “Drilling Partnerships”), in which we coinvested, to finance a portion of our natural gas, crude oil and NGL production activities and generated revenues as the manager and operator of the Drilling Partnerships. Drilling Partnership investor capital raised by us is deployed to drill and complete wells included within the partnership. As we deploy Drilling Partnership investor capital, we recognize certain management fees we are entitled to receive, including well construction and completion revenues and a portion of administration and oversight revenues. At each period end, if we have Drilling Partnership investor capital that has not yet been deployed, we recognize a current liability titled “Liabilities Associated with Drilling Contracts” on our condensed consolidated balance sheet. After the Drilling Partnership well is completed and turned in line, we are entitled to receive additional well services and operating fee revenues, administration and oversight fee revenues, and gathering and processing fee revenues on a monthly basis while the well is operating and as the services are performed.

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In addition, we are also entitled to our pro-rata share of Drilling Partnership gas and oil production revenue, which generally approximates 10-30%, which is recognized in our gas and oil production segment. 

 

Drilling partnership management revenues. Our Drilling partnership management revenues were lower in the current quarter and in the nine months ended September 30, 2017 compared to each of our Successor period from September 1, 2016 and the Predecessor periods from July 1, 2016 through August 31, 2016 and from January 1, 2016 through August 31, 2016 primarily due to a decrease in well construction and completion revenues related to the timing of drilling and completion activities for the partnership wells, which are recognized on a cost plus basis.

Drilling partnership management expenses. Our drilling partnership management expenses were lower in the current quarter and in the nine months ended September 30, 2017 compared to each of our Successor period from September 1, 2016 and the Predecessor periods from July 1, 2016 through August 31, 2016 and from January 1, 2016 through August 31, 2016 due to a decrease in well construction and completion expenses related to the timing of drilling and completion activities for the partnership wells, which are recognized on a percentage of completion basis.

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OTHER REVENUES AND EXPENSES

 

 

Gain (Loss) on Mark-to-Market Derivatives. We recognize changes in the fair value of our derivatives immediately within gain (loss) on mark-to-market derivatives on our condensed consolidated statements of operations. The gains on mark-to-market derivatives during the Successor nine months ended September 30, 2017 and the Predecessor period from July 1, 2016 through August 31, 2016 were due to decreases in commodity future prices relative to our derivative positions as of the respective prior period end. The losses on mark-to-market derivatives during the Successor three months ended September 30, 2017, the Successor period from September 1, 2016 through September 30, 2016 and the Predecessor period from January 1, 2016 through August 31, 2016 were due to increases in commodity future prices relative to our Successor’s and our Predecessor’s derivative positions as of the respective prior period end.

General and Administrative. General and administrative expenses during the three months ended September 30, 2017 as compared to the Predecessor period from July 1, 2016 through August 31, 2016 and the Successor period from September 1, 2016 through September 30, 2016 reflect increases in non-recurring transaction costs and salaries, wages and benefits, partially offset by decreases in stock compensation, syndication expense, and other corporate activities.

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General and administrative expenses during the nine months ended September 30, 2017 as compared to the Predecessor period from January 1, 2016 through August 31, 2016 and the Successor period from September 1, 2016 through September 30, 2016 reflect decreases in non-recurring transaction costs, salaries, wages and benefits, syndication expense, and other corporate activities.

Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization expenses decreased in the current quarter as compared to the Successor period from September 1, 2016 through December 31, 2016 and the Predecessor period from July 1, 2016 through August 31, 2016 due to the application of fresh-start accounting to our proved properties on September 1, 2016, which reduced the depletable cost basis of our proved gas and oil properties resulting in lower depletion expense, lower production volumes, and the sale of our interests in Rangely.

Our depreciation, depletion and amortization expenses were lower in the nine months ended September 30, 2017 as compared to the Successor period from September 1, 2016 through December 31, 2016 and the Predecessor period from January 1, 2016 through August 31, 2016 due to the application of fresh-start accounting to our proved properties on September 1, 2016, which reduced the depletable cost basis of our proved gas and oil properties resulting in lower depletion expense, lower production volumes, and the sale of our interests in Rangely.

Loss on Divestiture. We determined that the carrying value of the Rangely Assets exceeded the fair value less costs to sell, which resulted in an impairment of $38.2 million recognized in loss on divesture on our condensed consolidated statement of operations during the nine months ended September 30, 2017.  We recognized a $5.2 million loss on asset sale from the closing of the Rangely Assets sales during the Successor three and nine months ended September 30, 2017 resulting from final negotiations and settlement of working capital adjustments in connection with the preliminary purchase price adjustments.

Interest Expense. Interest expense during the Successor three months ended September 30, 2017 primarily consisted of $10.1 million related to our Second Lien Credit Facility, $4.0 million related to our First Lien Credit Facility, and $1.4 million related to amortization of deferred financing costs, partially offset by $0.2 million in capitalized interest. Interest expense during the Successor period from September 1, 2016 through September 30, 2016 consisted of $2.5 million related to our Second Lien Credit Facility, $1.5 million related to our First Lien Credit Facility and $0.1 million related to amortization of deferred financing costs, partially offset by $0.6 million in capitalized interest. Interest expense during the Predecessor period from July 1, 2016 through August 31, 2016 consisted of $4.8 million related to our Predecessor’s second lien term loan, $4.1 million related to our Predecessor’s senior notes, $3.6 million related to our Predecessor’s first lien credit facility and $3.3 million related to amortization of deferred financing costs and debt discounts, partially offset by $1.7 million in capitalized interest.

Interest expense during the Successor nine months ended September 30, 2017 primarily consisted of $26.6 million related to our Second Lien Credit Facility, $13.1 million related to our First Lien Credit Facility, and $2.5 million related to amortization of deferred financing costs, partially offset by $0.4 million in capitalized interest. Interest expense during the Successor period from September 1, 2016 through September 30, 2016 consisted of $2.5 million related to our Second Lien Credit Facility, $1.5 million related to our First Lien Credit Facility and $0.1 million related to amortization of deferred financing costs, partially offset by $0.6 million in capitalized interest. Interest expense during the Predecessor period from January 1, 2016 through August 31, 2016 consisted of $32.6 million related to our Predecessor’s senior notes, $17.4 million related to our Predecessor’s second lien term loan, $14.5 million related to amortization of deferred financing costs and debt discounts and $13.1 million related to our Predecessor’s first lien credit facility, partially offset by $6.5 million in capitalized interest.

Gain on Early Extinguishment of Debt. The gain on early extinguishment of debt for the Predecessor period from January 1, 2016 through August 31, 2016 represents a $26.5 million gain related to the repurchase of a portion of our Predecessor’s senior notes. Of the $26.5 million gain, $27.4 million related to the gain from the redemption of the principal values and accrued interest, partially offset by $0.9 million related to the accelerated amortization of the related deferred financing costs.

Reorganization Items, Net. Incremental costs incurred as a result of the Chapter 11 Filings, net gain on settlement of liabilities subject to compromise and reorganization adjustments, and net impact of fresh start adjustments are classified as “Reorganization items, net” in the Predecessor’s condensed consolidated statement of operations. The following table summarizes the reorganization items:

 

 

Other income (loss). The $0.8 million loss for the Successor three months ended September 30, 2017, includes a $1.3 million adjustment to net realizable value related to a settled escrow account receivable, partially offset by $0.6 million in transition service

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agreement fees related to the Appalachian Assets sale. The $0.9 million loss for the Successor nine months ended September 30, 2017, represents a $1.3 million adjustment to net realizable value related to a settled escrow account and the $0.6 million write-off of promotional items, partially offset by $0.6 million in transition service agreement fees related to the Appalachian Assets sale and $0.4 million sales tax refund for equipment purchased for our Texas operations. The $3.0 million loss for the Predecessor periods from July 1, 2016 through August 31, 2016 and from January 1, 2016 through August 31, 2016 represent non-cash losses for the write-off of notes receivables with certain investors of our Drilling Partnerships.

Income Tax Provision (Benefit). For the Successor nine months ended September 30, 2017, we recorded a full valuation allowance against our net deferred tax asset balance, which reduced our effective tax rate to 0.74%. We continue to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits and other deferred tax assets will be utilized prior to their expiration. Our effective tax rate fluctuates as a result of the impact of state income taxes and permanent differences between our accounting for certain revenue or expense items and their corresponding treatment for income tax purposes. Our effective tax rate for the nine months ended September 30, 2017 was 0.74%, which represents our expected Texas Franchise Tax liability. Our income tax provision differs from the provision computed by applying the U.S. Federal statutory corporate income tax rate of 35% primarily due to the valuation allowance on our deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

See “Liquidity and Ability to Continue as a Going Concern” for additional disclosures.

Cash Flows  

 

 

Cash Flows From Operating Activities:

Successor Period from January 1, 2017 through September 30, 2017

Successor Period from September 1, 2016 through September 30, 2016

Predecessor Period from January 1, 2016 through August 31, 2016

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Cash Flows From Investing Activities:

Successor Nine Months Ended September 30, 2017

 

Successor Period from September 1, 2016 through September 30, 2016

 

Predecessor Period from January 1, 2016 through August 31, 2016

Cash Flows From Financing Activities:

Successor Nine Months Ended September 30, 2017

 

Predecessor Period from January 1, 2016 through August 31, 2016

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Capital Requirements

At September 30, 2017, the capital expenditures of our natural gas and oil production assets primarily consist of discretionary expenditures to maintain or increase production margin in future periods, as well as land, gathering and processing, and other non-drilling capital expenditures.

As of September 30, 2017, we are committed to expend approximately $2.8 million on a new enterprise resource planning system and drilling and completion and other capital expenditures. We expect to fund these capital expenditure commitments with our cash flows from operations.

OFF BALANCE SHEET ARRANGEMENTS

As of September 30, 2017, our off-balance sheet arrangements were limited to our letters of credit outstanding of $2.8 million and commitments to spend $2.8 million related to a new enterprise resource planning system and our drilling and completion and capital expenditures.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

There have been no material changes to our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, except for our well drilling and completion commitments is $0.4 million as of September 30, 2017 as compared to $19.4 million as of December 31, 2016, and our commitments for a new enterprise resource planning system of $1.9 million at September 30, 2017 as compared to zero as of December 31, 2016.

CREDIT FACILITIES

First Lien Credit Facility

On September 1, 2016, we entered into our $440 million First Lien Credit Facility with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. See Note 5 to our condensed consolidated financial statements for a summary of the key provisions of our First Lien Credit Facility and subsequent amendments.

Second Lien Credit Facility

On September 1, 2016, we entered into our Second Lien Credit Facility with Wilmington Trust, National Association, as administrative agent, and the lenders party thereto for an aggregate principal amount of $252.5 million. See Note 5 to our condensed consolidated financial statements for a summary of the key provisions of our Second Lien Credit Facility and subsequent amendments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a more complete discussion of the accounting policies and estimates that we have identified as critical in the preparation of our condensed consolidated financial statements, please refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recently Issued Accounting Standards

See Note 2 to our condensed consolidated financial statements for additional information related to recently issued accounting standards.

 

 

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in interest rates and commodity prices. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonable possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of the market risk-sensitive instruments were entered into for purposes other than trading.

We are exposed to various market risks, principally fluctuating interest rates and changes in commodity prices. These risks can impact our results of operations, cash flows and financial position. We manage these risks through regular operating and financing activities and periodic use of derivative financial instruments such as forward contracts and interest rate cap and swap agreements. The following analysis presents the effect on our results of operations as if the hypothetical changes in market risk factors occurred on September 30, 2017. Only the potential impact of hypothetical assumptions was analyzed. The analysis does not consider other possible effects that could impact our business.

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Interest Rate Risk. At September 30, 2017, $256.3 million was outstanding under our First Lien Credit Facility and $283.5 million was outstanding under our Second Lien Credit Facility. Holding all other variables constant, a hypothetical 1% change in variable interest rates would change our condensed consolidated interest expense for the twelve-month period ending September 30, 2018 by approximately $5.4 million.

Commodity Price Risk. Holding all other variables constant, including the effect of commodity derivatives, a 10% change in average commodity prices would result in a change to our condensed consolidated operating income for the twelve-month period ending September 30, 2018 of approximately $0.3 million.

At September 30, 2017, we had the following commodity derivatives:

 

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our disclosure committee appointed by such officers, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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