UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

ý

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

For the quarterly period ended June 30, 2018 March 31, 2019

or

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________________to____________________________

 

Commission File No. 000-53895

 

Ridgewood Energy A-1 Fund, LLC

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

01-0921132

(I.R.S. Employer

Identification No.)

 

14 Philips Parkway, Montvale, NJ  07645

(Address of principal executive offices) (Zip code)

 

(800) 942-5550

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesxNoo

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yesx     Noo

 

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

 

Large accelerated fileroAccelerated filero

Non-accelerated filer

(Do not check if a smaller reporting company)

ox

Smaller reporting company

Emerging growth company

x


o

 

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.o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox

 

Securities registered pursuant to Section 12(b) of the Act: None.

As of August 14, 2018May 10, 2019, there were 207.7026 shares of LLC Membership Interest outstanding.

 

 

 

   

 

Table of Contents

 

  PAGE
PART I - FINANCIAL INFORMATION 
Item 1.Financial Statements1
    Unaudited Condensed Balance Sheets as of June 30, 2018March 31, 2019 and December 31, 201720181
Unaudited Condensed Statements of Operations and Comprehensive Income (Loss) for the
three months ended March 31, 2019 and 2018
2
Unaudited Condensed Statements of Changes in Members’ Capital for the three months ended
March 31, 2019 and 2018
3
  

Unaudited Condensed Statements of Operations and Comprehensive LossCash Flows for the three and six
months ended June 30,
March 31, 2019 and 2018 and 2017

24
    Unaudited Condensed Statements of Cash Flows for the six months ended
June 30, 2018 and 2017
3
Notes to Unaudited Condensed Financial Statements45
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1110
Item 3.Quantitative and Qualitative Disclosures About Market Risk1715
Item 4.Controls and Procedures1815
   
PART II - OTHER INFORMATION 
Item 1.Legal Proceedings1816
Item 1A.Risk Factors1816
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1816
Item 3.Defaults Upon Senior Securities1816
Item 4.Mine Safety Disclosures1816
Item 5.Other Information1816
Item 6.Exhibits1916
   
  SIGNATURES1917

 

   
Table of Contents 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED BALANCE SHEETS

(in thousands, except share data)

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
AssetsAssets        
Current assets:                
Cash and cash equivalents $2,545  $2,423  $1,677  $2,124 
Salvage fund  880   1,191 
Production receivable  456   491   371   338 
Due from affiliate (Note 2)  15   50 
Other current assets  -   52   24   48 
Total current assets  3,881   4,157   2,087   2,560 
Salvage fund  747   355   1,749   1,710 
Oil and gas properties:                
Proved properties  21,792   20,498   20,711   20,663 
Less: accumulated depletion and amortization  (9,353)  (7,391)  (9,899)  (9,405)
Total oil and gas properties, net  12,439   13,107   10,812   11,258 
Total assets $17,067  $17,619  $14,648  $15,528 
                
Liabilities and Members' Capital                
Current liabilities:                
Due to operators $756  $609  $312  $618 
Accrued expenses  41   54   40   43 
Current portion of long-term borrowings  2,197   1,566   1,135   945 
Asset retirement obligations  880   1,191 
Other current liabilities  40   40 
Total current liabilities  3,914   3,460   1,487   1,606 
Long-term borrowings  4,515   5,639   1,897   2,256 
Asset retirement obligations  517   210   1,452   1,446 
Total liabilities  8,946   9,309   4,836   5,308 
Commitments and contingencies (Note 5)        
Commitments and contingencies (Note 4)        
Members' capital:                
Manager:                
Distributions  (5,058)  (5,058)  (5,207)  (5,129)
Retained earnings  5,773   5,484   6,146   6,054 
Manager's total  715   426   939   925 
Shareholders:                
Capital contributions (250 shares authorized;                
207.7026 issued and outstanding)  41,143   41,143   41,143   41,143 
Syndication costs  (4,804)  (4,804)  (4,804)  (4,804)
Distributions  (35,427)  (35,427)  (36,266)  (35,829)
Retained earnings  6,493   6,970   8,799   8,784 
Shareholders' total  7,405   7,882   8,872   9,294 
Accumulated other comprehensive income  1   2   1   1 
Total members' capital  8,121   8,310   9,812   10,220 
Total liabilities and members' capital $17,067  $17,619  $14,648  $15,528 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  1 
Table of Contents 

 

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSSINCOME (LOSS)

(in thousands, except per share data)

 

 Three months ended June 30,  Six months ended June 30,  Three months ended March 31, 
 2018  2017  2018  2017  2019  2018 
Revenue              
Oil and gas revenue $1,261  $1,004  $2,627  $1,915  $872  $1,366 
Other revenue  61   - 
Total revenue  933   1,366 
Expenses                        
Depletion and amortization  1,003   1,210   1,962   2,168   472   959 
Management fees to affiliate (Note 3)  94   93   187   187 
Management fees to affiliate (Note 2)  93   93 
Operating expenses  155   162   287   351   149   132 
General and administrative expenses  47   46   93   88   45   46 
Total expenses  1,299   1,511   2,529   2,794   759   1,230 
(Loss) income from operations  (38)  (507)  98   (879)
Income from operations  174   136 
Interest expense, net  (144)  (185)  (286)  (370)  (67)  (142)
Net loss  (182)  (692)  (188)  (1,249)
Net income (loss)  107   (6)
Other comprehensive loss                        
Unrealized loss on marketable securities  -   (1)  (1)  (1)  -   (1)
Total comprehensive loss $(182) $(693) $(189) $(1,250)
Total comprehensive income (loss) $107  $(7)
                        
Manager Interest                        
Net income $135  $93  $289  $171  $92  $154 
                        
Shareholder Interest                        
Net loss $(317) $(785) $(477) $(1,420)
Net loss per share $(1,521) $(3,783) $(2,294) $(6,836)
Net income (loss) $15  $(160)
Net income (loss) per share $71  $(773)

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  2 
Table of Contents 

 

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWSCHANGES

IN MEMBERS’ CAPITAL

(in thousands)thousands, except share data)

 

 Six months ended June 30, 
  2018  2017 
Cash flows from operating activities      
Net loss $(188) $(1,249)
Adjustments to reconcile net loss to net cash        
   provided by operating activities:        
Depletion and amortization  1,962   2,168 
Accretion expense  8   15 
Amortization of debt discounts and deferred financing costs  -   61 
Changes in assets and liabilities:        
Decrease in production receivable  35   32 
Decrease in other current assets  52   119 
(Decrease) increase in due to operators  (36)  26 
(Decrease) increase in accrued expenses  (13)  213 
Settlement of asset retirement obligation  (13)  (81)
Net cash provided by operating activities  1,807   1,304 
         
Cash flows from investing activities        
Capital expenditures for oil and gas properties  (1,110)  (1,791)
(Increase) decrease in salvage fund  (82)  52 
Net cash used in investing activities  (1,192)  (1,739)
         
Cash flows from financing activities        
Repayment of long-term borrowings  (493)  - 
Net cash used in financing activities  (493)  - 
         
Net increase (decrease) in cash and cash equivalents  122   (435)
Cash and cash equivalents, beginning of period  2,423   3,458 
Cash and cash equivalents, end of period $2,545  $3,023 
         
Supplemental disclosure of cash flow information        
Cash paid for interest, net of amounts capitalized $290  $94 
         
Supplemental disclosure of non-cash investing activities        
Due to operators for accrued capital expenditures for
oil and gas properties
 $683  $158 
  Three months ended March 31, 2019 
          Accumulated Other    
          Comprehensive    
  # of Shares Manager  Shareholders  Income  Total 
Balances, December 31, 2018  207.7026 $925  $9,294  $1  $10,220 
 Distributions  -  (78)  (437)  -   (515)
 Net income    -  92   15   -   107 
Balances, March 31, 2019  207.7026 $939  $8,872  $1  $9,812 

 

  Three months ended March 31, 2018 
          Accumulated Other    
          Comprehensive    
  # of Shares Manager  Shareholders  Income  Total 
Balances, December 31, 2017  207.7026 $426  $7,882  $2  $8,310 
 Net income (loss)  -  154   (160)  -   (6)
 Other comprehensive loss  -  -   -   (1)  (1)
Balances, March 31, 2018  207.7026 $580  $7,722  $1  $8,303 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  3 

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 Three months ended March 31, 
  2019  2018 
Cash flows from operating activities        
Net income (loss) $107  $(6)
Adjustments to reconcile net income (loss) to net cash        
   provided by operating activities:        
Depletion and amortization  472   959 
Accretion expense  6   4 
Amortization of debt discounts  1   - 
Changes in assets and liabilities:        
(Increase) decrease in production receivable  (33)  83 
Decrease in due from affiliate  35   - 
Decrease in other current assets  24   23 
Decrease in due to operators  (48)  (16)
(Decrease) increase in accrued expenses  (3)  3 
Net cash provided by operating activities  561   1,050 
         
Cash flows from investing activities        
Capital expenditures for oil and gas properties  (284)  (913)
Investments in marketable securities  -   - 
Increase in salvage fund  (39)  (46)
Net cash used in investing activities  (323)  (959)
         
Cash flows from financing activities        
Repayments of long-term borrowings  (170)  (247)
Distributions  (515)  - 
Net cash used in financing activities  (685)  (247)
         
Net decrease in cash and cash equivalents  (447)  (156)
Cash and cash equivalents, beginning of period  2,124   2,423 
Cash and cash equivalents, end of period $1,677  $2,267 
         
Supplemental disclosure of cash flow information        
Cash paid for interest $69  $144 
         
Supplemental disclosure of non-cash investing activities        
Due to operators for accrued capital expenditures for
oil and gas properties
 $252  $200 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 4

 

RIDGEWOOD ENERGY A-1 FUND, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

1.       Organization and Summary of Significant Accounting Policies

1.Organization and Summary of Significant Accounting Policies

 

Organization

The Ridgewood Energy A-1 Fund, LLC (the “Fund”), a Delaware limited liability company, was formed on February 3, 2009 and operates pursuant to a limited liability company agreement (the “LLC Agreement”) dated as of March 2, 2009 by and among Ridgewood Energy Corporation (the “Manager”) and the shareholders of the Fund, which addresses matters such as the authority and voting rights of the Manager and shareholders, capitalization, transferability of membership interests, participation in costs and revenues, distribution of assets and dissolution and winding up. The Fund was organized to primarily acquire interests in oil and gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico.

 

The Manager has direct and exclusive control over the management of the Fund’s operations. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for the Fund’s operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations, the preparation, review and dissemination of tax and other financial information and the management of the Fund’s investments in projects. In addition, the Manager provides office space, equipment and facilities and other services necessary for the Fund’s operations. The Manager also engages and manages contractual relations with unaffiliated custodians, depositories, accountants, attorneys, corporate fiduciaries, insurers, banks and others as required. See Notes 2, 3 4 and 5.4.

 

Basis of Presentation

These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements. The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results. These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 20172018 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K (“20172018 Annual Report”) filed with the Securities and Exchange Commission (“SEC”). The year-end condensed balance sheet data was derived from audited financial statements for the year ended December 31, 2017,2018, but does not include all annual disclosures required by GAAP.

 

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, depletion and amortization, determination of proved reserves, impairment of long-lived assets and asset retirement obligations. Actual results may differ from those estimates.

Summary of Significant Accounting Policies

The Fund has provided discussion of significant accounting policies in Note 1 of “Notes to Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 8. “Financial Statements and Supplementary Data” within its 20172018 Annual Report. There have been no significant changes to the Fund’s significant accounting policies during the three and six months ended June 30, 2018, exceptMarch 31, 2019.

Fair Value Measurements

The Fund follows the accounting guidance for fair value measurement for measuring fair value of assets and liabilities in its financial statements. The Fund’s financial instruments consist of cash and cash equivalents, production receivable, due from affiliate, other current assets, salvage fund, due to operators, accrued expenses and long-term debt. Except for long-term debt, the carrying amounts of these instruments approximate fair value due to their short-term nature.

 5

Mortgage-backed securities within the salvage fund are recorded based on Level 2 inputs, as noted belowsuch instruments trade in over-the-counter markets. The Fund’s long-term debt is valued using an income approach and classified as Level 3 in the fair value hierarchy. The fair value of long-term debt is estimated by discounting future cash payments of principal and interest to a present value amount using a market yield for revenue recognition. See Note 2. “Revenue Recognition” for discussiondebt instruments with similar terms, maturities and credit ratings. The Fund also applies the provisions of the Fund’s updatedfair value measurement accounting policies relatedguidance to revenue recognition for revenue from contracts with customers.its non-financial assets and liabilities, such as oil and gas properties and asset retirement obligations, on a non-recurring basis.

 

Salvage Fund

The Fund deposits cash in a separate interest-bearing account, or salvage fund, to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives in accordance with applicable federal and state laws and regulations. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the Fund had investments in federal agency mortgage-backed securities as detailed in the following table, which are classified as available for sale.available-for-sale. Available-for-sale securities are carried in the financial statements at fair value. Mortgage-backed securities within the salvage fund are recorded based on Level 2 inputs, as such instruments trade in over-the-counter markets and the inputs are consistent with the Level 2 definition.

 

 4
     Gross    
  Amortized  Unrealized  Fair 
  Cost  Gains  Value 
  (in thousands) 
Government National Mortgage Association security (GNMA July 2041)   
March 31, 2019 $36  $1  $37 
December 31, 2018 $36  $1  $37 

 

    Gross    
  Amortized  Unrealized  Fair 
  Cost  Gains  Value 
 (in thousands) 
Government National Mortgage Association security (GNMA July 2041)
June 30, 2018 $46  $1  $47 
December 31, 2017 $46  $2  $48 

 

The unrealized gains on the Fund's investments in federal agency mortgage-backed securities were the result of fluctuations in market interest rates. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Unrealized gains or losses on available-for-sale debt securities are reported in other comprehensive income until realized.

 

For all investments, interest income is accrued as earned and amortization of premium or discount, if any, is included in interest income. Interest earned on the account will become part of the salvage fund. There are no restrictions on withdrawals from the salvage fund.

 

Asset Retirement Obligations

For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. Upon the determination that a property is either proved or dry, a retirement obligation is incurred. The Fund recognizes the fair value of a liability for an asset retirement obligation in the period incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs. Annually, or more frequently if an event occurs that would dictate a change in assumptions or estimates underlying the obligations, the Fund reassesses its asset retirement obligations to determine whether any revisions to the obligations are necessary. The Fund maintains a salvage fund to provide for the funding of future asset retirement obligations.

Revenue Recognition

Oil and gas revenues are recognized at the point when control of oil and natural gas is transferred to the customers. Natural gas liquid sales are included within gas sales. The following table presents changesFund’s oil and natural gas generally is sold to its customers at prevailing market prices based on an index in asset retirementwhich the prices are published, adjusted for pricing differentials, quality of oil and pipeline allowances. Under the Fund’s oil and natural gas contracts, each unit of oil and natural gas represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and the transaction price related to the remaining performance obligations foris the following periods:variable index-based price attributable to each unit of oil and natural gas that is transferred to the customer. The Fund invoices customers once its performance obligations have been satisfied, at which point the payment is unconditional. Accordingly, the Fund’s oil and natural gas contracts do not give rise to contract assets or liabilities. The receivables related to the Fund’s oil and gas revenue are included within “Production receivable” on the balance sheets.

 

  Six months ended June 30, 
  2018  2017 
  (in thousands) 
Balance, beginning of period $1,401  $1,675 
Liabilities incurred  1   1 
Liabilities settled  (13)  (81)
Accretion expense  8   15 
Revision of estimates  -   (122)
Balance, end of period $1,397  $1,488 

Other revenue is generated from the Fund’s production handling, gathering and operating services agreement with an affiliated entity and other third parties. The Fund simply earns a fee for its services and recognizes these fees as revenue at the time its performance obligations are satisfied as the control of oil and natural gas is never transferred to the Fund, thus there are no unsatisfied performance obligations. The Fund’s project operator performs joint interest billing once the performance obligations have been satisfied, at which point the payment is unconditional. Accordingly, the Fund’s production handling, gathering and operating services agreement with an affiliated entity and other third parties does not give rise to contract assets or liabilities. The receivables related to the Fund’s proportionate share of revenue from an affiliate are included within “Due from affiliate” on the Fund’s balance sheets. The receivables related to the Fund’s proportionate share of revenue from third parties are presented as a reduction from “Due to operator” on the Fund’s balance sheets. The receivables are settled by issuance of a non-cash credit from the Beta Project operator to the Fund when the operator performs the joint interest billing of the lease operating expenses due from the Fund.

 

During

 6

The Fund also has an estimation process for revenue and related accruals, and any identified difference between its revenue estimates and actual revenue have not been significant. For the six months ended June 30, 2017, the Fund recorded credits to depletion expense totaling $0.1 million related to an adjustment to the asset retirement obligation for a fully depleted property.period ending March 31, 2019 and 2018, revenue recognized from performance obligations satisfied in previous periods is not significant.

 

Impairment of Long-Lived Assets

The Fund reviews the carrying value of its oil and gas properties for impairment whenever events and circumstances indicate that the recorded carrying value of the assets may not be recoverable. Impairments are determined by comparing estimated future net undiscounted cash flows to the carrying value of the assets at the time of the review. If the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the asset is written down to estimated fair value, which is determined using a valuation techniquetechniques that considersinclude both market and income approaches and usinguse Level 3 inputs. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment.

 

There were no impairments of oil and gas properties during each of the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. Fluctuations in oil and natural gas commodity prices may impact the fair value of the Fund’s oil and gas properties. If oil and natural gas commodity prices decline, even if only for a short period of time, it is possible that impairments of oil and gas properties will occur.

 5

 

Recent Accounting Pronouncements

In May 2014,August 2018, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on revenue recognition (“New Revenue Standard”),fair value measurement, which providesadds, among other things, disclosure requirements for a single five-step modelthe range and weighted average of significant unobservable inputs used to be applied to all revenue contracts with customers. In July 2015,develop Level 3 fair value measurements. This accounting guidance is effective for the FASB issued a deferral ofFund in the effective date of the New Revenue Standard to 2018,first quarter 2020 with early adoption permitted in 2017. permitted. The Fund does not expect this accounting guidance will have a material impact on its financial statements upon adoption.

In MarchFebruary 2016, the FASB issued accounting guidance which clarifies the implementation guidance on principal versus agent considerations in the New Revenue Standard. In April 2016, the FASB issued guidance on identifying performance obligations and licensing and in May 2016, the FASB issued final amendments which provided narrow scope improvements and practical expedients related to the implementation of the New Revenue Standard. The New Revenue Standard may be applied either retrospectively or through the use of a modified-retrospective method. Under the New Revenue Standard, the revenue associated with the Fund’s existing contracts will be recognized in the period that control of the related commodity is transferred to the customer, which is generally consistent with the Fund’s previous revenue recognition model. The Fund adopted the New Revenue Standard using the modified retrospective methodleases as amended on January 1, 2018. See Note 2. “Revenue Recognition” for the required disclosures related to the impact of adopting this guidance and a discussion of the Fund’s updated policies related to revenue recognition for revenue from contracts with customers.

2.       Revenue Recognition

The Fund adopted the New Revenue Standard on January 1, 2018 using the modified retrospective method for all new contracts entered into after January 1, 2018 and July 2018, which requires an entity to recognize all lease assets and liabilities with a term greater than one year on the balance sheet, disclose key quantitative and qualitative information about leasing arrangements, and permits an entity not to evaluate existing contracts for which revenues haveor expired land easements that were not been recognizedpreviously assessed under the previous revenue guidance as of December 31, 2017. Although the Fund did not identify changes to its revenue recognition that resulted in a cumulative adjustment to retained earnings on January 1, 2018, the adoption of theexisting lease guidance. The accounting guidance resulted in enhanced disclosures relateddoes not apply to revenue recognition policies, the Fund’s performance obligations and significant judgments used in applying the New Revenue Standard.

Revenue from Contracts with Customers

Oil and gas revenues are recognized at the point when controlleases of mineral rights to explore for or use of oil and natural gas is transferredgas. The accounting guidance was effective for the Fund beginning January 1, 2019. Although the Fund, as a non-operator, does not enter into lease agreements to support its operations, the customers. Natural gas liquid (“NGL”) sales are included within gas sales. The Fund’s oilFund completed its evaluation of existing contracts that may have a lease impact and natural gas generally is soldembedded lease features to its customers at prevailing market prices based on an index indetermine the contracts to which the prices are published, adjusted for pricing differentials, quality of the oil and pipeline allowances.

Oil and Gas Revenue

Generally,new guidance applies. Based on this evaluation, the Fund sells oildetermined its existing contracts did not meet the definition of leases under the new accounting guidance and natural gas under two types of agreements, which are common in the oil and gas industry. In the first type of agreement, or a netback agreement, the Fund receives a price, net of pricing differentials as well as transportation expense incurred by the customer, and the Fund records revenue at the wellhead at the net price received where control transfers to the customer. In the second type of agreement, the Fund delivers oil and natural gas to the customer at a contractually agreed-upon delivery point where the customer takes control. The Fund pays a third-party to transport the oil and natural gas and receives a specific market price from the customer net of pricing adjustments. The Fund records the transportation expense within operating expenses in the statements of operations.

Under the Fund’s natural gas processing contracts, the Fund delivers natural gas to a midstream processing company at the inlet of the midstream processing company’s facility. The midstream processing company gathers and processes the natural gas and remits the proceeds to the Fundtherefore, did not qualify for the sale of NGLs. In this type of arrangement, the Fund evaluates whether it is the principal or agent in the transaction. For those contracts where the Fund concluded that it is the principal and the ultimate third-party purchaser is the customer, the Fund recognizes revenue on a gross basis, with transportation, gathering and processing fees recorded as an expense within operating expenses in the statements of operations.

In certain instances, the Fund may elect to take its residue gas and NGLs in-kind at the tailgate of the midstream company’s processing plant and subsequently market such volumes. Through its marketing process, the Fund delivers the residue gas and NGLs to the ultimate third-party customer at a contractually agreed-upon delivery point and receives a specified market price from the customer. In this arrangement, the Fund recognizes revenue when control transfers to the customer at the delivery point based on the market price received from the customer. The transportation, gathering and processing fees are recorded as expense within operating expenses in the statements of operations.lease accounting.

 

 62.Related Parties

The Fund assesses the performance obligations promised in its oil and natural gas contracts based on each unit of oil and natural gas that will be transferred to its customer because each unit is capable of being distinct. The Fund satisfies its performance obligation when control transfers at a point in time when its customer is able to direct the use of, and obtain substantially all of the benefits from, the oil and natural gas delivered. Under each of the Fund’s oil and natural gas contracts, contract prices are variable and based on an index in which the prices are published, which fluctuate as a result of related industry variables, adjusted for pricing differentials, quality of the oil and pipeline allowances. The use of index-based pricing with predictable differentials reduces the level of uncertainty related to oil and gas prices. Additionally, any variable consideration is not constrained. Payments are received in the month following the oil and natural gas production month. Adjustments that occur after delivery, such as quality bank adjustments, are reflected in revenue in the month payments are received.

Transaction price allocated to remaining performance obligations

Under the Fund’s oil and natural gas contracts, each unit of oil and natural gas represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and the transaction price related to the remaining performance obligations is the variable index-based price attributable to each unit of oil and natural gas that is transferred to the customer.

Contract balances

The Fund invoices customers once its performance obligations have been satisfied, at which point the payment is unconditional. Accordingly, the Fund’s oil and natural gas contracts do not give rise to contract assets or liabilities under the New Revenue Standard. The receivables related to the Fund’s oil and gas revenue are included within “Production receivable” on the balance sheets.

Prior period performance obligations

The Fund records oil and gas revenue in the month production is delivered to its customers. However, settlement statements for residue gas and NGLs sales may not be received for 30 to 60 days after the date production is delivered. As a result, the Fund is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the residue gas and NGLs. The Fund records the differences between its estimates and the actual amounts received in the month that the payment is received from the customer. The Fund has an estimation process for revenue and related accruals, and any identified difference between its revenue estimates and actual revenue historically have not been significant. There was no material revenue recognized in the current period from performance obligations satisfied in previous periods.

3.       Related Parties

 

Pursuant to the terms of the LLC Agreement, the Manager is entitled to receive an annual management fee, payable monthly, of 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, however, the Manager is permitted to waive the management fee at its own discretion. Therefore, the management fee may be temporarily waived to accommodate the Fund’s short-term commitments. Management fees during each of the three and six months ended June 30,March 31, 2019 and 2018 and 2017 were $0.1 million and $0.2 million, respectively.million.

 

The Manager is also entitled to receive 15% of the cash distributions from operations made by the Fund. Distributions paid to the Manager during the three months ended March 31, 2019 were $0.1 million. The Fund did not pay distributions during the three and six months ended June 30, 2018 and 2017.March 31, 2018.

 

The Fund utilizes Beta Sales and Transport, LLC, a wholly-owned subsidiary of the Manager, to facilitate the transportation and sale of oil and natural gas produced from the Beta Project.

 7

During 2016, the Fund and other third-party working interest owners in the Beta Project entered into a production handling, gathering and operating services agreement (“PHA”) with Ridgewood Claiborne, LLC, a wholly-owned entity of Ridgewood Energy Oil & Gas Fund II, L.P. (“Institutional Fund II”), and other third-party working interest owners in the Claiborne Project. Institutional Fund II is an entity that is managed by the Fund’s Manager. During the three months ended March 31, 2019, the Fund earned $15 thousand representing its proportionate share of the production handling fees earned from Institutional Fund II, which is included within “Other revenue” on the Fund’s statements of operations. There were no such amounts recorded during the three months ended March 31, 2018. As of March 31, 2019 and December 31, 2018, the Fund’s receivables of $15 thousand and $0.1 million related to the Fund’s proportionate share of revenue from Institutional Fund II are included within “Due from affiliate” on the Fund’s balance sheets. The receivables are settled by issuance of a non-cash credit from the Beta Project operator to the Fund on behalf of the Claiborne Project working interest owners when the operator performs the joint interest billing of the lease operating expenses due from the Fund. The revenue received from the PHA will be utilized by the Fund to repay a portion of the long-term debt outstanding under its credit agreement until the loan is repaid in full, in no event later than December 31, 2022.

 

At times, short-term payables and receivables, which do not bear interest, arise from transactions with affiliates in the ordinary course of business.

 

The Fund has working interest ownership in certain oil and natural gas projects, which are also owned by other entities that are likewise managed by the Manager.

 

4.       

3.Credit Agreement – Beta Project Financing

 

OnAs of March 31, 2019 and December 31, 2018, the Fund had outstanding borrowings of $3.0 million and $3.2 million, respectively, under its credit agreement dated November 27, 2012, as amended on September 30, 2016, September 15, 2017, June 1, 2018 the Fund and other participating funds managed by the Manager, Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendmentAugust 10, 2018 (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the certain credit agreement, dated as of November 27, 2012 (as amended by the first amendment to credit agreement, dated September 30, 2016, and the second amendment to credit agreement and reaffirmation of waiver, dated September 15, 2017, the “Existing Credit Agreement”, and as amended by the Third Amendment, the “Credit Agreement”). As of March 31, 2019, the estimated fair value of the debt was $3.0 million.

 

 7

The Third Amendment extends the loan maturity from December 31, 2020 to December 31, 2022, revises theCredit Agreement bears interest rateat 8.75% compounded monthly. Principal and requires a monthly payment amountinterest payments are based on athe fixed percentage of the Fund’s Net Revenue, as defined in the Credit Agreement, derived fromAgreement. As of March 31, 2019, the Beta Project. TheFund’s fixed percentage and interest rate will be determinedis 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project. BeginningProject determined on September 1, 2018 up to and including March 31, 2019, the Fund’s fixed percentage will be at a rate that is based on the ratio of outstanding debt to working interest determined at that time, as scheduled in the Credit Agreement. Beginning on April 1, 2019 and each April 1st1st thereafter, the Fund’s fixed percentage will be the greater of (i) the rate determined on September 1, 201830% or (ii) the Fixed Reassessment Percentage, as defined in the Credit Agreement. The Fixed Reassessment Percentage is determined annually beginning April 1, 2019 and each April 1st thereafter, and will be based on the Fund’s ratio of its outstanding debt as of the reassessment date relative to 80% of third-party reserve engineers’engineer’s proved plus probable future undiscounted cash flows attributable to the Beta Project through the maturity of the loan. Beginning on the Third Amendment Effective Date and thereafter until the loan is repaid in full, in no event later than December 31, 2022, the loan will bear interest at a rate that is based on the ratio of outstanding debt to working interest determined at that time, as scheduled in the Credit Agreement.

The Fund reviewed the terms of the Third Amendment and determined that the conditions have been met, pursuant to Accounting Standard Codification 470-50Debt: Modification and Extinguishments (“ASC 470-50”) guidance, to treat the Third Amendment as a debt modification in a non-troubled debt restructuring. Pursuant to ASC 470-50 guidance, debt modifications are accounted for prospectively, new fees paid to the creditor and unamortized debt discounts and deferred financing costs are capitalized and amortized over the term of the amended debt and any third party fees that are directly related to the modification of the debt are expensed as incurred.

As of June 30, 2018 and December 31, 2017,April 1, 2019, the Fund had borrowings of $6.7 million and $7.2 million, respectively, under the Existing Credit Agreement.Fixed Reassessment Percentage was determined to be 30%. The loan may be prepaid by the Fund without premium or penalty. Pursuant to the Credit Agreement, the Fund also agreed to convey a fixed percentage of 10.81% overriding royalty interest in its working interest in the Beta Project to the lenders, which will become payable to the lenders on January 1, 2023.

 

There were noAs of March 31, 2019 and December 31, 2018, the unamortized debt discounts related to the Credit Agreement of $14 thousand and deferred financing costs$15 thousand, respectively, were presented as a reduction of June 30, 2018 and December 31, 2017.“Long-term borrowings” on the balance sheets. Amortization expense during the three and six months ended June 30, 2017March 31, 2019 of $31$1 thousand and $0.1 million, respectively, were expensed andwas included on the statements of operations within “Interest expense, net”. There were no such amounts recorded during the three and six months ended June 30,March 31, 2018.

As of June 30, 2018March 31, 2019 and December 31, 2017,2018, there were no accrued interest costs outstanding. Interest costs incurred during each of the three months ended June 30,March 31, 2019 and 2018 and 2017 of $0.1 million and $0.2 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”. Interest costs incurred during each of the six months ended June 30, 2018 and 2017 of $0.3 million were expensed and included on the statements of operations within “Interest expense, net”.

 

As additional consideration to the Lenders, the Fund has agreed to convey an overriding royalty interest (“ORRI”) in its working interest in the Beta Project to the Lenders. The Third Amendment fixes the Fund’s ORRI assigned to the Lenders at 10.81%. Such ORRI will not become payable to the Lenders until January 1, 2023. The Existing Credit Agreement contains customary covenants, with which the Fund was in compliance as of June 30, 2018March 31, 2019 and December 31, 2017.2018.

 

5.        Commitments and Contingencies

4.Commitments and Contingencies

 

Capital Commitments

As of June 30, 2018,March 31, 2019, the Fund’s estimated capital commitments related to its oil and gas properties were $3.7$2.8 million (which include asset retirement obligations for the Fund’s projects of $2.1$1.9 million), of which $1.8$0.1 million is expected to be spent during the next twelve months. Additionally, current liabilities exceed current assets as of June 30, 2018. Future results of operations and cash flows are dependent on the continued successful development and the related production of oil and gas revenues from the Beta Project.

 8

 

Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, borrowing repayments and ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision. However, if cash flow from operations is not sufficient to meet the Fund’s commitments, the Manager will temporarily waive all or a portion of the management fee as well as provide short-term financing to accommodate the Fund’s short-term commitments if needed.

 

 8

Environmental and Governmental Regulations

Many aspects of the oil and gas industry are subject to federal, state and local environmental laws and regulations. The Manager and operators of the Fund’s properties are continually taking action they believe appropriate to satisfy applicable federal, state and local environmental regulations. However, due to the significant public and governmental interest in environmental matters related to those activities, the Manager cannot predict the effects of possible future legislation, rule changes, or governmental or private claims. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, there were no known environmental contingencies that required adjustment to, or disclosure in, the Fund’s financial statements.

 

Oil and gas industry legislation and administrative regulations are periodically changed for a variety of political, economic, and other reasons. Any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which could have a material adverse effect on the Fund’s operating results and cash flows. It is not possible at this time to predict whether such legislation or regulation, if proposed, will be adopted as initially written, if at all, or how legislation or new regulation that may be adopted would impact the Fund’s business.

 

BOEM Notice to Lessees on Supplemental Bonding

On July 14, 2016, the Bureau of Ocean Energy Management (“BOEM”) issued a Notice to Lessees (“NTL”) that discontinued and materially replaced existing policies and procedures regarding financial security (i.e. supplemental bonding) for decommissioning obligations of lessees of federal oil and gas leases and owners of pipeline rights-of-way, rights-of use and easements on the Outer Continental Shelf (“Lessees”).  Generally, the new NTL (i) ended the practice of excusing Lessees from providing such additional security where co-lessees had sufficient financial strength to meet such decommissioning obligations, (ii) established new criteria for determining financial strength and additional security requirements of such Lessees, (iii) provided acceptable forms of such additional security and (iv) replaced the waiver system with one of self-insurance. The new rule became effective as of September 12, 2016; however on January 6, 2017, the BOEM announced that it was suspending the implementation timeline for six months in certain circumstances. On June 22, 2017, the BOEM announced that the implementation timeline extension will remain in effect pending the completion of its review of the new NTL. The Fund, as well as other industry participants, are working withAs of March 31, 2019, the BOEM has not completed its operators and working interest partners to determine and agree uponreview nor has the correct level of decommissioning obligations to which they may be liable and the manner in which such obligations will be secured.NTL been enforced.  The impact of the NTL, if enforced without change or amendment, may require the Fund to fully secure all of its potential abandonment liabilities to the BOEM’s satisfaction using one or more of the enumerated methods for doing so.  Potentially this could increase costs to the Fund if the Fund is required to obtain additional supplemental bonding, fund escrow accounts or obtain letters of credit.

 

Insurance Coverage

The Fund is subject to all risks inherent in the oil and natural gas business. Insurance coverage as is customary for entities engaged in similar operations is maintained, but losses may occur from uninsurable risks or amounts in excess of existing insurance coverage. The occurrence of an event that is not insured or not fully insured could have a material adverse impact upon earnings and financial position. Moreover, insurance is obtained as a package covering all of the entities managed by the Manager. Depending on the extent, nature and payment of claims made by the Fund or other entities managed by the Manager, yearly insurance coverage may be exhausted and become insufficient to cover a claim by the Fund in a given year.

 

  9 

6.        Subsequent Events

On August 10, 2018, the Fund entered into a purchase and sale agreement (“PSA”) to sell a portion of the Fund’s working interest in the Beta Project to Walter Oil & Gas Corporation and Gordy Oil Company (collectively the “Buyers”) with an effective date of January 1, 2018. Certain other funds managed by the Manager were also parties to the PSA. The Fund has a 2.0% working interest in the Beta Project and sold a 0.364% working interest to the Buyers for a total purchase price of $3.3 million in cash, subject to purchase price and customary post-closing adjustments. The transaction closed on August 10, 2018 and the Fund received $3.1 million in cash, which included preliminary purchase price adjustments primarily related to the net cash flows from the effective date to the closing date.

The net carrying value of the working interest sold as of the closing date was approximately $2.2 million and the related asset retirement obligation was approximately $40 thousand. A gain to the Fund of approximately $0.9 million will be recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale are required to be utilized to repay a portion of the Existing Credit Agreement.

In conjunction with the sale and the repayment of the existing agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager, entered into a fourth amendment (the “Fourth Amendment”) effective as of September 1, 2018 (“Fourth Amendment Effective Date”), to the Credit Agreement. The Fourth Amendment principally reduces the schedule of fixed percentage depending on the Fund’s ratio of outstanding debt to working interest ownership, which is the basis for the calculation of the monthly payment amount, and amends the interest calculation. The Fund is currently evaluating the impact of the Fourth Amendment on its financial statements.

 10

 

ITEM 2.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the documents Ridgewood Energy A-1 Fund, LLC (the “Fund”) has incorporated by reference into this Quarterly Report, other than purely historical information, including estimates, projections, statements relating to the Fund’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. You are therefore cautioned against relying on any such forward-looking statements. Forward-looking statements can generally be identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will,” “will likely result,” and similar expressions and references to future periods. Examples of events that could cause actual results to differ materially from historical results or those anticipated include weather conditions, such as hurricanes, changes in market and other conditions affecting the pricing, production and demand of oil and natural gas, the cost and availability of equipment, and changes in domestic and foreign governmental regulations. Examples of forward-looking statements made herein include statements regarding projects, investments, insurance, capital expenditures and liquidity. Forward-looking statements made in this document speak only as of the date on which they are made. The Fund undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Critical Accounting Policies and Estimates

 

There were no changes to the Fund’s critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017, except for the revenue recognition for revenue from contracts with customers. See Note 2 of “Notes to Unaudited Condensed Financial Statements” - “Revenue Recognition” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for a discussion of the Fund’s updated accounting policies on revenue recognition upon adoption of the related new standard.2018.

 

Overview of the Fund’s Business

 

The Fund was organized primarily to acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico. The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of oil and natural gas projects. Distributions to shareholders are made in accordance with the Fund’s limited liability company agreement (the “LLC Agreement”).

 

Ridgewood Energy Corporation (the “Manager”) is the Manager, and as such, has direct and exclusive control over the management of the Fund’s operations. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for the Fund’s operations. As compensation for its services, the Manager is entitled to an annual management fee, payable monthly, equal to 2.5% of the total capital contributions made by the Fund’s shareholders, net of cumulative dry-hole and related well costs incurred by the Fund. The Fund does not currently, nor is there any plan to, operate any project in which the Fund participates. The Manager enters into operating agreements with third-party operators for the management of all exploration, development and producing operations, as appropriate. The Manager also participates in distributions.

 

Subsequent Events

On August 10, 2018, the Fund entered into a purchase and sale agreement (“PSA”) to sell a portion of the Fund’s working interest in the Beta Project to Walter Oil & Gas Corporation and Gordy Oil Company (collectively the “Buyers”) with an effective date of January 1, 2018. Certain other funds managed by the Manager were also parties to the PSA. The Fund has a 2.0% working interest in the Beta Project and sold a 0.364% working interest to the Buyers for a total purchase price of $3.3 million in cash, subject to purchase price and customary post-closing adjustments. The transaction closed on August 10, 2018 and the Fund received $3.1 million in cash, which included preliminary purchase price adjustments primarily related to the net cash flows from the effective date to the closing date.

The net carrying value of the working interest sold as of the closing date was approximately $2.2 million and the related asset retirement obligation was approximately $40 thousand. A gain to the Fund of approximately $0.9 million will be recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale are required to be utilized to repay a portion of the existing credit agreement.

In conjunction with the sale and repayment of the existing agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager, entered into a fourth amendment (the “Fourth Amendment”) effective as of September 1, 2018 (“Fourth Amendment Effective Date”), to the credit agreement. The Fourth Amendment principally reduces the schedule of fixed percentage depending on the Fund’s ratio of outstanding debt to working interest ownership, which is the basis for the calculation of the monthly payment amount, and amends the interest calculation. The Fund is currently evaluating the impact of the Fourth Amendment on its financial statements.

 11

Commodity Price Changes

 

Changes in oil and natural gas commodity prices may significantly affect liquidity and expected operating results. Declines in oil and natural gas commodity prices not only reduce revenues and profits but could also reduce the quantities of reserves that are commercially recoverable and result in non-cash charges to earnings due to impairment.

 

Oil and natural gas commodity prices have been subject to significant fluctuations during the past several years. The Fund anticipates price cyclicality in its planning and believes it is well positioned to withstand price volatility. Despite operating in a volatile oil and natural gas commodity price environment, the Fund continued to advance the development of the Beta Project, which commenced production in 2016. The Fund has suspended distributionswill continue to closely manage and continues to conservecoordinate its capital spending estimates within its expected cash flows to provide for the continuedfuture development costs of the Beta Project.its producing projects, as budgeted. See “Results of Operations” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for more information on the average oil and natural gas prices received by the Fund during the three and six months ended June 30,March 31, 2019 and 2018 and 2017 and the effect of such average prices on the Fund’s results of operations. If oil and natural gas commodity prices decline, even if only for a short period of time, the Fund’s results of operations and liquidity will be adversely impacted.

 10

 

Market pricing for oil and natural gas is volatile and is likely to continue to be volatile in the future. This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence. Therefore, it is impossible to predict the future price of oil and natural gas with any certainty. Factors affecting market pricing for oil and natural gas include:

 

·weather conditions;
·economic conditions, including demand for petroleum-based products;
·actions by OPEC, the Organization of Petroleum Exporting Countries;
·political instability in the Middle East and other major oil and gas producing regions;
·governmental regulations, both domestic and foreign;
·domestic and foreign tax policy;
·the pace adopted by foreign governments for the exploration, development, and production of their national reserves;
·the supply and price of foreign oil and gas;
·the cost of exploring for, producing and delivering oil and gas;
·the discovery rate of new oil and gas reserves;
·the rate of decline of existing and new oil and gas reserves;
·available pipeline and other oil and gas transportation capacity;
·the ability of oil and gas companies to raise capital;
·the overall supply and demand for oil and gas; and
·the price and availability of alternate fuel sources.

 

 12

Business Update

 

Information regarding the Fund’s current projects, all of which are located in the United States offshore waters in the Gulf of Mexico, is provided in the following table. See “Liquidity Needs” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for information regarding the funding of the Fund’s capital commitments.

 

  Total Spent  Total    Total Spent Total   
 Working through Fund     Working through Fund   
Project Interest June 30, 2018  Budget  Status  Interest  March 31, 2019  Budget  Status
   (in thousands)    (in thousands)   
Producing Properties                     
Beta Project 2.0% $18,604  $21,104  The Beta Project is expected to include the development of six wells.  Wells #1 and #2 commenced production in 2016.  Wells #3  and #4 commenced production in second  quarter 2017 and  third quarter 2017, respectively. Well #5 commenced production in first quarter 2018. Well #6, which began drilling in second quarter 2018, is expected to commence production in third quarter 2018. The Fund expects to spend $1.6 million for additional development costs and $0.9 million for asset retirement obligations.  On August 10, 2018, the Fund sold a portion of its working interest in the Beta Project. See “Subsequent Events” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for more information.  1.64% $16,152 $17,766  The Beta Project is expected to include the development of seven wells.  Wells #1 and #2 commenced production in 2016.  Wells #3  and #4 commenced production in 2017. Wells #5 and #6 commenced production in first quarter 2018 and third quarter 2018, respectively. Well #7 commenced production in first quarter 2019. The Fund expects to spend $0.8 million for additional development costs and $0.8 million for asset retirement obligations.
Liberty Project 2.0% $3,004  $3,268  The Liberty Project, a single-well project, commenced production in 2010.  The Fund expects to spend $0.3 million for asset retirement obligations.  2.0% $3,004 $3,268  The Liberty Project, a single-well project, commenced production in 2010.  The Fund expects to spend $0.3 million for asset retirement obligations.

 

  1311 

 

Results of Operations

 

The following table summarizes the Fund’s results of operations during the three and six months ended June 30,March 31, 2019 and 2018, and 2017, and should be read in conjunction with the Fund’s financial statements and notes thereto included within Item 1. “Financial Statements” in Part I of this Quarterly Report.

 

 Three months ended June 30,  Six months ended June 30,   Three months ended March 31, 
 2018  2017  2018  2017  2019  2018 
   (in thousands)    (in thousands) 
Revenue              
Oil and gas revenue $1,261  $1,004  $2,627  $1,915  $872  $1,366 
Other revenue  61   - 
Total revenue  933   1,366 
Expenses                        
Depletion and amortization  1,003   1,210   1,962   2,168   472   959 
Management fees to affiliate  94   93   187   187   93   93 
Operating expenses  155   162   287   351   149   132 
General and administrative expenses  47   46   93   88   45   46 
Total expenses  1,299   1,511   2,529   2,794   759   1,230 
(Loss) income from operations  (38)  (507)  98   (879)
Income from operations  174   136 
Interest expense, net  (144)  (185)  (286)  (370)  (67)  (142)
Net loss  (182)  (692)  (188)  (1,249)
Net income (loss)  107   (6)
Other comprehensive loss                        
Unrealized loss on marketable securities  -   (1)  (1)  (1)  -   (1)
Total comprehensive loss $(182) $(693) $(189) $(1,250)
Total comprehensive income (loss) $107  $(7)

Overview.Overview. The following table provides information related to the Fund’s oil and natural gas production and oil and gas revenue during the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. Natural gas liquid (“NGL”) sales are included within gas sales.

 

  Three months ended June 30,  Six months ended June 30, 
  2018  2017  2018  2017 
Number of wells producing  6   4   6   4 
Total number of production days  419   319   851   579 
Oil sales (in thousands of barrels)  20   21   41   40 
Average oil price per barrel $64  $42  $62  $43 
Gas sales (in thousands of mcfs)  27   29   59   53 
Average gas price per mcf $3.58  $3.21  $3.45  $3.28 

  Three months ended March 31, 
 2019  2018 
Number of wells producing  8   6 
Total number of production days  609   432 
Oil sales (in thousands of barrels)  14   21 
Average oil price per barrel $58  $60 
Gas sales (in thousands of mcfs)  19   29 
Average gas price per mcf $2.98  $3.50 

 

The increases in the number of wells producing and production days were primarily related to the commencement of production of two additional wells in the Beta Project.Project, one well during third quarter 2018 and one well during first quarter 2019. The increasesdecreases in oil and gas sales volume during the six months ended June 30, 2018volumes were primarily related to the Beta and Liberty projects. The decrease in the Beta Project production was primarily related to the partial sale of working interest in the project during third quarter 2018 coupled with periodic shut-ins during first quarter 2019 due to certain drilling and completion operations performed at the project’s production facility. The Liberty Project which experienced increaseda decrease in production as a result of recompletion work in thirda shut-in during first quarter 2017.2019 due to mechanical work. See additional discussion in “Business Update” section above.

 

Oil and Gas Revenue. Oil and gas revenue during the three months ended June 30, 2018March 31, 2019 was $1.3$0.9 million, an increasea decrease of $0.3$0.5 million from the three months ended June 30, 2017.March 31, 2018. The increasedecrease was primarily attributable to increased oil and gas prices totaling $0.4 million, partially offset by decreased sales volume totaling $0.1 million.

Oil and gas revenue during the six months ended June 30, 2018 was $2.6 million, an increase of $0.7 million from the six months ended June 30, 2017. The increase was attributable to increased oil and gas prices totaling $0.7 million coupled with increased sales volume totaling $0.1 million.volume.

 

See “Overview” above for factors that impact the oil and gas revenue volume and rate variances.

Depletion and Amortization. Depletion and amortization during the three months ended June 30, 2018 was $1.0 million, a decrease of $0.2 million from the three months ended June 30, 2017. The decrease was attributable to a decrease in the average depletion rate totaling $0.1 million coupled with a decrease in production volumes totaling $0.1 million.

Depletion and amortization during the six months ended June 30, 2018 was $2.0 million, a decrease of $0.2 million from the six months ended June 30, 2017. The decrease was attributable to a decrease in the average depletion rate totaling $0.4 million, partially offset by an increase in production volumes totaling $0.1 million and an adjustment to the asset retirement obligation related to a fully depleted property totaling $0.1 million, which was recorded in first quarter 2017.

  1412 

Other Revenue.Other revenue is generated from the Fund’s production handling, gathering and operating services agreement with an affiliated entity and other third parties. There were no such amounts recorded during the three months ended March 31, 2018.

Depletion and Amortization. Depletion and amortization during the three months ended March 31, 2019 was $0.5 million, a decrease of $0.5 million from the three months ended March 31, 2018. The decreasesdecrease was attributable to a decrease in production volumes totaling $0.3 million coupled with a decrease in the average depletion rate totaling $0.2 million. The decrease in the average depletion rate was primarily attributable to lower cost of reserves from the Fund’s producing projects. Depletion and amortization was also impacted by the partial sale of working interest in the Beta Project. Project during third quarter 2018.

See “Overview” above for certain factors that impact the depletion and amortization volume and rate variances. Depletion and amortization rates may also be impacted by changes in reserve estimates provided annually by the Fund’s independent petroleum engineers.

 

Management Fees to Affiliate. An annual management fee, totaling 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, is paid monthly to the Manager. Such fee may be temporarily waived by the Manager to accommodate the Fund’s short-term commitments.

 

Operating Expenses. Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells, as detailed in the following table.

 

 Three months ended June 30, Six months ended June 30,  Three months ended March 31, 
 2018  2017  2018  2017  2019  2018 
 (in thousands)  (in thousands) 
Lease operating expense $110  $103  $202  $235  $75  $92 
Transportation and processing expense  37   8 
Insurance expense  29   37   52   61   24   23 
Transportation and processing expense  10   11   18   16 
Accretion expense  4   8   8   15   6   4 
Workover expense and other  2   3   7   24   7   5 
 $155  $162  $287  $351  $149  $132 

 

Lease operating expense and transportation and processing expense relate to the Fund’s producing properties.projects. Insurance expense represents premiums related to the Fund’s properties,projects, which vary depending upon the number of wells producing or drilling. Accretion expense relates to the asset retirement obligations established for the Fund’s oil and gas properties. Workover expense represents costs to restore or stimulate production of existing reserves.

  

The average production cost,Production costs, which includesinclude lease operating expense, transportation and processing expense and insurance expense, was $6.26were $0.1 million ($7.70 per barrel of oil equivalent (“BOE”or “BOE”) and $5.39 per BOE during the three and six months ended June 30, 2018, respectively,March 31, 2019, compared to $5.76$0.1 million ($4.72 per BOE and $6.39 per BOEBOE) during the three and six months ended June 30, 2017, respectively. The decrease in the averageMarch 31, 2018. Although production cost per BOEcosts remained relatively consistent during the six months ended June 30, 2018first quarter 2019 compared to first quarter 2018, the six months ended June 30, 2017 was primarily attributable to the Beta Project. The Beta Project has lower cost per BOE as compared to the Liberty Project due to the processing of production through its standalone facility. The production costs per BOE may decline over time as throughput increases from the project or other projects expected to tie-inincreased primarily due to the facility.impact of ongoing costs for the Beta Project, which experienced decreased production volumes due to periodic shut-ins during first quarter 2019. See “Overview” above for factors that impact oil and natural gas production.

 

General and Administrative Expenses. General and administrative expenses represent costs specifically identifiable or allocable to the Fund, such as accounting and professional fees and insurance expenses.

 

Interest Expense, Net. Interest expense, net is comprised of interest expense and amortization of debt discounts and deferred financing costs related to the Fund’s long-term borrowings (see “Liquidity Needs”Needs -Credit Agreement below for additional information), and interest income earned on cash and cash equivalents and salvage fund.

 

Unrealized Loss on Marketable Securities.The Fund has available-for-sale investments within its salvage fund in federal agency mortgage-backed securities. Available-for-sale debt securities are carried in the financial statements at fair value and unrealized gains and losses related to the securities’ changes in fair value are recorded in other comprehensive income until realized.

 

Capital Resources and Liquidity

 

Operating Cash Flows

Cash flows provided by operating activities during the sixthree months ended June 30, 2018March 31, 2019 were $1.8$0.6 million, primarily related to revenue received of $2.7 million, partially offset by interest payments of $0.3 million, operating expenses of $0.3 million, management fees of $0.2 million and general and administrative expenses of $0.1 million.

Cash flows provided by operating activities during the six months ended June 30, 2017 were $1.3 million, primarily related to revenue received of $1.9$0.9 million, partially offset by operating expenses of $0.2$0.1 million, management fees of $0.2$0.1 million and interest payments of $0.1 million, general and administrative expenses of $0.1 million and the settlement of an asset retirement obligation of $0.1 million.

  1513 

Cash flows provided by operating activities during the three months ended March 31, 2018 were $1.1 million, primarily related to revenue received of $1.4 million, partially offset by interest payments of $0.1 million, operating expenses of $0.1 million and management fees of $0.1 million.

 

Investing Cash Flows

Cash flows used in investing activities during the sixthree months ended June 30, 2018March 31, 2019 were $1.2$0.3 million, primarily related to capital expenditures for oil and gas properties of $1.1 million and investments in salvage fund of $0.1 million.properties.

  

Cash flows used in investing activities during the sixthree months ended June 30, 2017March 31, 2018 were $1.7$1.0 million, primarily related to capital expenditures for oil and gas properties of $1.8 million, partially offset by proceeds from salvage fund of $0.1 million.properties.

 

Financing Cash Flows

Cash flows used in financing activities during the sixthree months ended June 30,March 31, 2019 were $0.7 million, related to manager and shareholder distributions of $0.5 million and the repayments of long-term borrowings of $0.2 million.

Cash flows used in financing activities during the three months ended March 31, 2018 were $0.5$0.2 million, related to the repayment of long-term borrowings.

There were no cash flows from financing activities during the six months ended June 30, 2017.

 

Estimated Capital Expenditures

 

Capital expenditures for oil and gas properties have been funded with the capital raised by the Fund in its private placement offering and through debt financing. The Fund’s remaining capital has been fully allocated to its projects. As a result, the Fund will not invest in any new projects and will limit its investment activities, if any, to those projects in which it currently has a working interest. See “Business Update” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for information regarding the Fund’s current projects. See “Liquidity Needs” below for additional information.

 

Liquidity Needs

 

The Fund’s primary short-term liquidity needs are to fund its operations, capital expenditures for its oil and gas properties and borrowing repayments. Such needs are funded utilizing operating income and existing cash on-hand.

 

As of June 30, 2018,March 31, 2019, the Fund’s estimated capital commitments related to its oil and gas properties were $3.7$2.8 million (which include asset retirement obligations for the Fund’s projects of $2.1$1.9 million), of which $1.8$0.1 million is expected to be spent during the next twelve months. Additionally, current liabilities exceed current assets as of June 30, 2018. Future results of operations and cash flows are dependent on the continued successful development and the related production of oil and gas revenues from the Beta Project.

 

Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, borrowing repayments and ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision. However, if cash flow from operations is not sufficient to meet the Fund’s commitments, the Manager will temporarily waive all or a portion of the management fee as well as provide short-term financing to accommodate the Fund’s short-term commitments if needed.

 

The Manager is entitled to receive an annual management fee from the Fund regardless of the Fund’s profitability in that year. However, pursuant to the terms of the LLC Agreement, the Manager is also permitted to waive the management fee at its own discretion.

 

Distributions, if any, are funded from available cash from operations, as defined in the LLC Agreement, and the frequency and amount are within the Manager’s discretion. Due to the significant capital required to develop the Beta Project, distributions have been impacted, and may be impacted in the future, by amounts reserved to provide for its ongoing development costs, borrowing repayments and funding its estimated asset retirement obligations.

 

Credit Agreement

OnAs of March 31, 2019 and December 31, 2018, the Fund had outstanding borrowings of $3.0 million and $3.2 million, respectively, under its credit agreement dated November 27, 2012, as amended on September 30, 2016, September 15, 2017, June 1, 2018 the Fund and other participating funds managed by the Manager, Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendmentAugust 10, 2018 (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the certain credit agreement, dated as of November 27, 2012 (as amended by the first amendment to credit agreement, dated September 30, 2016, and the second amendment to credit agreement and reaffirmation of waiver, dated September 15, 2017, the “Existing Credit Agreement”, and as amended by the Third Amendment, the “Credit Agreement”). The Existing Credit Agreement provided for an aggregate loan commitment to the Fund of approximately $8.3 million to provide capital towards the funding of the Fund’s share of development costs on the Beta Project. As of June 30, 2018 and December 31, 2017, the Fund had borrowings of $6.7 million and $7.2 million, respectively, under the Existing Credit Agreement.

 

  1614 

 

The Third Amendment extends the loan maturity from December 31, 2020 to December 31, 2022, revises theCredit Agreement bears interest rateat 8.75% compounded monthly. Principal and requires a monthly payment amountinterest payments are based on athe fixed percentage of the Fund’s Net Revenue, as defined in the Credit Agreement, derived from the Beta Project.Agreement. The Fund’s fixed percentage and interest rate will be determinedis 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project. BeginningProject determined on September 1, 2018, up to and including March 31, 2019, the Fund’s fixed percentage will be at a rate that is based on the ratio of outstanding debt to working interest determined at that time, as scheduled in the Credit Agreement. Beginning on April 1, 2019 and each April 1st1st thereafter, the Fund’s fixed percentage will be the greater of (i) the rate determined on September 1, 201830% or (ii) the Fixed Reassessment Percentage, as defined in the Credit Agreement. The Fixed Reassessment Percentage is determined annually beginning April 1, 2019 and every April 1st thereafter, and will be based on the Fund’s ratio of its outstanding debt as of the reassessment date relative to 80% of third-party reserve engineers’engineer’s proved plus probable future undiscounted cash flows attributable to the Beta Project through the maturity of the loan. Beginning onAs of April 1, 2019, the Third Amendment Effective Date and thereafter until the loan is repaid in full, in no event later than December 31, 2022, the loan will bear interest at a rate that is based on the ratio of outstanding debtFixed Reassessment Percentage was determined to working interest determined at that time, as scheduled in the Credit Agreement. See “Subsequent Events” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for additional information.

be 30%. The loan may be prepaid by the Fund without premium or penalty. As additional consideration to the Lenders, the Fund has agreed to convey anThe Credit Agreement also provides for a fixed percentage of 10.81% overriding royalty interest (“ORRI”) in its working interest in the Beta Project to the Lenders. The Third Amendment fixes the Fund’s ORRI assigned to the Lenders at 10.81%. Such ORRIlenders, which will not become payable to the Lenders untillenders in January 1, 2023.

 

The Existing Credit Agreement contains customary negative covenants including covenants that limit the Fund’s ability to, among other things, grant liens, change the nature of its business, or merge into or consolidate with other persons. The events which constitute events of default are also customary for credit facilities of this nature and include payment defaults, breaches of representations, warrants and covenants, insolvency and change of control. Upon the occurrence of a default, in some cases following a notice and cure period, the Lenderslenders under the Existing Credit Agreement may accelerate the maturity of the loan and require full and immediate repayment of all borrowings under the Existing Credit Agreement. The Fund believes it is in compliance with all covenants under the Existing Credit Agreement as of June 30, 2018March 31, 2019 and December 31, 2017.2018.

 

Off-Balance Sheet Arrangements

 

The Fund had no off-balance sheet arrangements as of June 30, 2018March 31, 2019 and December 31, 20172018 and does not anticipate the use of such arrangements in the future.

 

Contractual Obligations

 

The Fund enters into participation and joint operating agreements with operators. On behalf of the Fund, an operator enters into various contractual commitments pertaining to exploration, development and production activities. The Fund does not negotiate such contracts. No contractual obligations exist as of June 30, 2018March 31, 2019 and December 31, 2017,2018, other than those discussed in “Estimated Capital Expenditures” and “Liquidity Needs –Credit Agreement”Agreement above.

 

Recent Accounting Pronouncements

 

See Note 1 of “Notes to Unaudited Condensed Financial Statements” - “Organization and Summary of Significant Accounting Policies” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for a discussion of recent accounting pronouncements.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

 17

ITEM 4.CONTROLS AND PROCEDURES

 

In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Fund’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Fund’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective as of June 30, 2018.March 31, 2019.

 

There has been no change in the Fund’s internal control over financial reporting that occurred during the three months ended June 30, 2018March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.

 15

  

PART II – OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.RISK FACTORS

 

Not required.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.OTHER INFORMATION

 

None.

 

 18

ITEM 6.EXHIBITS

 

EXHIBIT

NUMBER

TITLE OF EXHIBITMETHOD OF FILING
   
31.1

Certification of Robert E. Swanson, Chief Executive Officer of
the Fund, pursuant to Exchange Act Rule 13a-14(a)

Filed herewith
   
31.2

Certification of Kathleen P. McSherry, Executive Vice President
and Chief Financial Officer of the Fund, pursuant to Exchange
Act Rule 13a-14(a)

Filed herewith
   
32

Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Robert E. Swanson, Chief Executive Officer of the
Fund and Kathleen P. McSherry, Executive Vice President and
Chief Financial Officer of the Fund

Filed herewith
10.4

Third Amendment to Credit Agreement dated June 1, 2018 by and among Ridgewood Energy O Fund, LLC, Ridgewood Energy Q Fund, LLC, Ridgewood Energy S Fund, LLC, Ridgewood Energy T Fund, LLC, Ridgewood Energy V Fund, LLC, Ridgewood Energy W Fund, LLC, Ridgewood Energy A-1 Fund, LLC, Ridgewood Energy B-1 Fund, LLC, Rahr Energy Investments LLC, as Administrative Agent, and certain Lenders party thereto 

Incorporated by reference to the Fund’s Form 8-K filed on June 7, 2018
10.5Fourth Amendment to Credit Agreement dated August 10, 2018 by and among Ridgewood Energy O Fund, LLC, Ridgewood Energy Q Fund, LLC, Ridgewood Energy S Fund, LLC, Ridgewood Energy T Fund, LLC, Ridgewood Energy V Fund, LLC, Ridgewood Energy W Fund, LLC, Ridgewood Energy A-1 Fund, LLC, Ridgewood Energy B-1 Fund, LLC, Rahr Energy Investments LLC, as Administrative Agent, and certain Lenders party theretoFiled herewith
10.6Purchase and Sale Agreement dated August 10, 2018 by and among Ridgewood Energy O Fund, LLC, Ridgewood Energy S Fund, LLC, Ridgewood Energy T Fund, LLC, Ridgewood Energy V Fund, LLC, Ridgewood Energy W Fund, LLC, Ridgewood Energy A-1 Fund, LLC, Ridgewood Energy B-1 Fund, LLC, as Sellers and each individually a Seller and Walter Oil & Gas Corporation and Gordy Oil Company as Buyers and each individually a BuyerFiled herewith
   
101.INSXBRL Instance DocumentFiled herewith
   
101.SCHXBRL Taxonomy Extension SchemaFiled herewith
   
101.CALXBRL Taxonomy Extension Calculation LinkbaseFiled herewith
   
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentFiled herewith
   
101.LABXBRL Taxonomy Extension Label LinkbaseFiled herewith
   
101.PREXBRL Taxonomy Extension Presentation LinkbaseFiled herewith

 

  1916 

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.

 

      

RIDGEWOOD ENERGY A-1 FUND, LLC

 

Dated:August 14, 2018May 10, 2019By:/s/  ROBERT E. SWANSON
   Name:  Robert E. Swanson
   Title:  Chief Executive Officer
      (Principal Executive Officer)
       
       
Dated:August 14, 2018May 10, 2019By:/s/  KATHLEEN P. MCSHERRY
   Name:  Kathleen P. McSherry
   Title:  Executive Vice President and Chief Financial Officer
      (Principal Financialand Accounting Officer)

 

 

2017