| | | June 30, | |
| | | 2009 | |
| ASSETS | | | |
| Current assets: | | | |
Cash and cash equivalents | | $ | 481 | |
Accounts receivable: | | | | |
Oil, natural gas and natural gas liquids revenues | | | 214 | |
Related party | | | 60 | |
Other | | | 25 | |
Derivative asset | | | 903 | |
Prepaid expenses and other current assets | | | 14 | |
Total current assets | | | 1,697 | |
| | | | | |
Oil and natural gas properties, net of accumulated depreciation, depletion and amortization of $1,926 | | | 14,914 | |
| Other property, net of accumulated depreciation and amortization of $6 | | | 3 | |
| Long–term derivative asset | | | 1,645 | |
| Other assets | | | 69 | |
| Total assets | | $ | 18,328 | |
| | | | | |
| LIABILITIES AND PARTNERS’ CAPITAL | | | | |
| Current liabilities: | | | | |
Accounts payable and accrued liabilities | | $ | 192 | |
Derivative liability | | | 10 | |
Total current liabilities | | | 202 | |
| | | | | |
| Asset retirement obligations | | | 704 | |
| Long–term debt | | | 7,040 | |
| Other long–term liabilities | | | 7,495 | |
| | | | | |
| Commitments and contingencies | | | | |
| | | | | |
| Partners’ capital: | | | | |
General partner | | | – | |
Limited partners | | | 2,887 | |
Total partners’ capital | | | 2,887 | |
| Total liabilities and partners’ capital | | $ | 18,328 | |
See accompanying notes to unaudited condensed consolidated balance sheet.
EV Energy GP, L.P.
Notes to Unaudited Condensed Consolidated Balance Sheet
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
EV Energy GP, L.P. (“we,” “our” or “us”), a Delaware limited partnership, is the general partner of EV Energy Partners, L.P. (“EVEP”), a publicly held limited partnership that engages in the acquisition, development and production of oil and natural gas properties. We own a 2% general partner interest in EVEP and all of its incentive distribution rights. Our general partner is EV Management, LLC (“EV Management”), a Delaware limited liability company. EV Management is a wholly owned subsidiary of EnerVest, Ltd. (“EnerVest”), a Texas limited partnership. EnerVest and its affiliates have a significant interest in EVEP through their 71.25% ownership of us.
Our unaudited condensed consolidated balance sheet includes the aggregate results of our financial position and our proportionate share of EVEP’s assets and liabilities. There is a $7.5 million difference between our investment in EVEP and our proportionate share of EVEP’s net assets as a result of various factors, including our receipt of a disproportionate share of quarterly distributions from our ownership of EVEP’s incentive distribution rights and EVEP’s acquisition of oil and natural gas properties from one of our partners, which required EVEP to carry over the historical costs related to our partner’s interests and apply purchase accounting to the remaining interests acquired. This difference is included in “Other long–term liabilities” on our consolidated balance sheet. We are amortizing this difference over the life of our oil and natural gas properties.
Our unaudited condensed consolidated balance sheet included herein has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited condensed consolidated balance sheet reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim period.
All intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Unaudited Condensed Consolidated Balance Sheet, all dollar amounts in tabulations are in thousands of dollars unless otherwise indicated.
NOTE 2. ACQUISITIONS
In May 2008, EVEP acquired oil properties in South Central Texas for $17.5 million, and in August 2008, EVEP acquired oil and natural gas properties in Michigan, Central and East Texas, the Mid-Continent area (Oklahoma, Texas Panhandle and Kansas) and Eastland County, Texas for $58.8 million. These acquisitions were primarily funded with borrowings under EVEP’s credit facility. Our proportionate share of the acquisition cost was $1.5 million.
In September 2008, EVEP issued 236,169 common units to EnerVest to acquire natural gas properties in West Virginia. As EVEP acquired these natural gas properties from EnerVest, EVEP carried over the historical costs related to EnerVest’s interest and assigned a value of $5.8 million to the common units. Our proportionate share of the acquisition cost was $0.1 million.
In September 2008, EVEP also acquired oil and natural gas properties in the San Juan Basin from institutional partnerships managed by EnerVest for $114.7 million in cash and 908,954 of EVEP’s common units. As EVEP acquired these oil and natural gas properties from institutional partnerships managed by EnerVest, EVEP carried over the historical costs related to EnerVest’s interests in the institutional partnerships and assigned a value of $2.1 million to the common units. Our proportionate share of the acquisition cost was $2.3 million
EVEP then applied purchase accounting to the remaining interests acquired. As a result, EVEP recorded a deemed distribution of $13.9 million that represents the difference between the purchase price allocation and the amount paid for the acquisitions. Our portion of this deemed distribution was $1.1 million. In addition, we contributed $0.6 million to EVEP to maintain our 2% interest.
EV Energy GP, L.P.
Notes to Unaudited Condensed Consolidated Balance Sheet (continued)
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, long–term debt and derivatives. Our derivatives are recorded at fair value (see Note 5). The carrying amount of our other financial instruments other than debt approximates fair value because of the short–term nature of the items. The carrying value of our debt approximates fair value because the facility’s interest rate approximates current market rates.
NOTE 4. RISK MANAGEMENT
EVEP’s business activities expose it to risks associated with changes in the market price of oil and natural gas. In addition, EVEP’s floating rate credit facility exposes it to risks associated with changes in interest rates As such, future earnings are subject to fluctuation due to changes in the market price of oil and natural gas and interest rates. EVEP uses derivatives to reduce our risk of changes in the prices of oil and natural gas and interest rates. EVEP’s policies do not permit the use of derivatives for speculative purposes. EVEP has elected not to designate any of its derivatives as hedging instruments as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.
As of June 30, 2009, EVEP had entered into oil and natural gas commodity contracts with the following terms:
Period Covered | | Index | | Hedged Volume per Day | | Weighted Average Fixed Price | | Weighted Average Floor Price | | Weighted Average Ceiling Price |
| Oil (Bbls): | | | | | | | | | | |
Swaps – 2009 | | WTI | | 1,772 | | $ 93.21 | | $ | | $ |
Collar – 2009 | | WTI | | 125 | | | | 62.00 | | 73.90 |
Swaps – 2010 | | WTI | | 1,725 | | 90.84 | | | | |
Swaps – 2011 | | WTI | | 480 | | 109.38 | | | | |
Collar – 2011 | | WTI | | 1,100 | | | | 110.00 | | 166.45 |
Swaps – 2012 | | WTI | | 460 | | 108.76 | | | | |
Collar – 2012 | | WTI | | 1,000 | | | | 110.00 | | 170.85 |
Swap – 2013 | | WTI | | 500 | | 72.50 | | | | |
| | | | | | | | | | | |
| Natural Gas (MMBtus): | | | | | | | | | | |
Swaps – 2009 | | Dominion Appalachia | | 6,400 | | 9.03 | | | | |
Swaps – 2010 | | Dominion Appalachia | | 5,600 | | 8.65 | | | | |
Swap – 2011 | | Dominion Appalachia | | 2,500 | | 8.69 | | | | |
Collar – 2011 | | Dominion Appalachia | | 3,000 | | | | 9.00 | | 12.15 |
Collar – 2012 | | Dominion Appalachia | | 5,000 | | | | 8.95 | | 11.45 |
Swaps – 2009 | | NYMEX | | 9,000 | | 8.05 | | | | |
Collars – 2009 | | NYMEX | | 7,000 | | | | 7.79 | | 9.50 |
Put – 2009 | | NYMEX | | 5,000 | | | | 4.00 | | |
Swaps – 2010 | | NYMEX | | 15,300 | | 8.10 | | | | |
Collar – 2010 | | NYMEX | | 1,500 | | | | 7.50 | | 10.00 |
Swaps – 2011 | | NYMEX | | 14,300 | | 8.31 | | | | |
Swaps – 2012 | | NYMEX | | 14,300 | | 8.73 | | | | |
Swap – 2013 | | NYMEX | | 4,000 | | 7.50 | | | | |
Swaps – 2009 | | MICHCON_NB | | 5,000 | | 8.27 | | | | |
Swap – 2010 | | MICHCON_NB | | 5,000 | | 8.34 | | | | |
Collar – 2011 | | MICHCON_NB | | 4,500 | | | | 8.70 | | 11.85 |
Collar – 2012 | | MICHCON_NB | | 4,500 | | | | 8.75 | | 11.05 |
Swaps – 2009 | | HOUSTON SC | | 5,478 | | 8.25 | | | | |
Collar – 2010 | | HOUSTON SC | | 3,500 | | | | 7.25 | | 9.55 |
Collar - 2011 | | HOUSTON SC | | 3,500 | | | | 8.25 | | 11.65 |
Collar – 2012 | | HOUSTON SC | | 3,000 | | | | 8.25 | | 11.10 |
Swaps – 2009 | | EL PASO PERMIAN | | 3,500 | | 7.80 | | | | |
Swap – 2010 | | EL PASO PERMIAN | | 2,500 | | 7.68 | | | | |
Swap – 2011 | | EL PASO PERMIAN | | 2,500 | | 9.30 | | | | |
Swap – 2012 | | EL PASO PERMIAN | | 2,000 | | 9.21 | | | | |
Swap – 2013 | | EL PASO PERMIAN | | 3,000 | | 6.77 | | | | |
Swap – 2013 | | SAN JUAN BASIN | | 3,000 | | 6.66 | | | | |
EV Energy GP, L.P.
Notes to Unaudited Condensed Consolidated Balance Sheet (continued)
As of June 30, 2009, EVEP had also entered into interest rate swaps with the following terms:
Period Covered | | Notional Amount | | Floating Rate | | Fixed Rate |
| July 2009 – September 2012 | | $ 40,000 | | 1 Month LIBOR | | 2.145% |
| July 2009 – July 2012 | | 35,000 | | 1 Month LIBOR | | 4.043% |
| July 2009 – July 2012 | | 40,000 | | 1 Month LIBOR | | 4.050% |
| July 2009 – July 2012 | | 70,000 | | 1 Month LIBOR | | 4.220% |
| July 2009 – July 2012 | | 20,000 | | 1 Month LIBOR | | 4.248% |
| July 2009 – July 2012 | | 35,000 | | 1 Month LIBOR | | 4.250% |
At June 30, 2009, our proportionate share of the fair value of these derivatives was as follows:
| | | Asset Derivatives | | | Liability Derivatives | |
| Oil and natural gas commodity contracts | | $ | 2,770 | | | $ | – | |
| Interest rate swaps | | | – | | | | 232 | |
| Total fair value | | | 2,770 | | | | 232 | |
| Netting arrangements | | | (222 | ) | | | (222 | ) |
| Net recorded fair value | | $ | 2,548 | | | $ | 10 | |
| | | | | | | | | |
| Location of derivatives on our condensed consolidated balance sheet: | | | | | | | | |
Derivative asset | | $ | 903 | | | $ | – | |
Long–term derivative asset | | | 1,645 | | | | – | |
Derivative liability | | | – | | | | 10 | |
| | | $ | 2,548 | | | $ | 10 | |
NOTE 5. FAIR VALUE MEASUREMENTS
We adopted SFAS No. 157, Fair Value Measurements, on January 1, 2008 for our financial assets and financial liabilities, and we adopted SFAS No. 157 on January 1, 2009 for our nonfinancial assets and nonfinancial liabilities. The adoption did not have a material impact on our condensed consolidated balance sheet.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values determined based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 refers to fair values determined based on our own assumptions used to measure assets and liabilities at fair value.
The following table presents the fair value hierarchy table for our assets and liabilities that are required to be measured at fair value on a recurring basis:
| | | | | Fair Value Measurements at June 30, 2009 Using: |
| | | Total Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Derivatives | | $ 2,538 | | $ – | | $ 2,538 | | $ – |
Our estimates of fair value have been determined at discreet points in time based on relevant market data. These estimates involve uncertainty and cannot be determined with precision. There were no changes in valuation techniques or related inputs in the six months ended June 30. 2009.
EV Energy GP, L.P.
Notes to Unaudited Condensed Consolidated Balance Sheet (continued)
NOTE 6. ASSET RETIREMENT OBLIGATIONS
If a reasonable estimate of the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells can be made, EVEP records an asset retirement obligation (“ARO”) and capitalize the asset retirement cost in oil and natural gas properties in the period in which the retirement obligation is incurred. After recording these amounts, the ARO is accreted to its future estimated value using an assumed cost of funds and the additional capitalized costs are depreciated on a unit–of–production basis. The changes in our proportionate share of the aggregate ARO are as follows:
| Balance as of December 31, 2008 | | $ | 692 | |
| Accretion expense | | | 20 | |
| Revisions in estimated cash flows | | | 5 | |
| Payments to settle obligation | | | (1 | ) |
| Balance as of June 30, 2009 | | $ | 716 | |
As of June 30, 2009, $0.01 million of the ARO is classified as current and is included in “Accounts payable and accrued liabilities” on our condensed consolidated balance sheet.
NOTE 7. LONG–TERM DEBT AND SUBSEQUENT EVENT
As of June 30, 2009, EVEP’s credit facility consists of a $700.0 million senior secured revolving credit facility that expires in October 2012. Borrowings under the facility are secured by a first priority lien on substantially all of EVEP’s assets and the assets of its subsidiaries. EVEP may use borrowings under the facility for acquiring and developing oil and natural gas properties, for working capital purposes, for general corporate purposes and for funding distributions to partners. EVEP also may use up to $50.0 million of available borrowing capacity for letters of credit. The facility contains certain covenants which, among other things, require the maintenance of a current ratio (as defined in the facility) of greater than 1.00 and a ratio of total debt to earnings plus interest expense, taxes, depreciation, depletion and amortization expense and exploration expense of no greater than 4.0 to 1.0. As of June 30, 2009, EVEP was in compliance with all of the facility’s financial covenants.
Borrowings under the facility bear interest at a floating rate based on, at EVEP’s election, a base rate or the London Inter–Bank Offered Rate plus applicable premiums based on the percent of the borrowing base that EVEP has outstanding (weighted average effective interest rate of 3.11% at June 30, 2009).
Borrowings under the facility may not exceed a “borrowing base” determined by the lenders under the facility based on EVEP’s oil and natural gas reserves. The borrowing base is subject to scheduled redeterminations as of April 1 and October 1 of each year with an additional redetermination once per calendar year at EVEP’s request or at the request of the lenders and with one calculation that may be made at EVEP’s request during each calendar year in connection with material acquisitions or divestitures of properties. In April 2009, the borrowing base was redetermined from $525.0 million to $465.0 million. In connection with the redetermination, EVEP wrote off $0.2 million of deferred loan costs.
At June 30, 2009, EVEP had $352.0 million outstanding under the facility, and our proportionate share of the amount outstanding under the facility was $7.0 million.
NOTE 8. COMMITMENTS AND CONTINGENCIES
We are involved in disputes or legal actions arising in the ordinary course of business. We do not believe the outcome of such disputes or legal actions will have a material adverse effect on our consolidated financial statements.
NOTE 9. NEW ACCOUNTING STANDARDS
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”) to replace SFAS No. 141, Business Combinations. SFAS No. 141(R) retains the acquisition method of accounting used in business combinations but replaces SFAS 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction and restructuring costs related to the acquisition be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. We adopted SFAS No. 141(R) on January 1, 2009. The adoption of SFAS No. 141(R) has not yet impacted our condensed consolidated financial statements; however, our condensed consolidated financial statements will be impacted to the extent we acquire oil and natural gas properties in a purchase business combination in the future.
EV Energy GP, L.P.
Notes to Unaudited Condensed Consolidated Balance Sheet (continued)
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and how they affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We adopted the disclosure requirements of SFAS No. 161 on January 1, 2009 (see Note 4).
In April 2009, the FASB issued FSP FAS 107–1 and APB 28–1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107–1 and APB –1”), to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107–1 and APB 28–1 is effective for interim or financial periods ending after June 15, 2009. We adopted FSP FAS 107–1 and APB 28–1 in our interim period ending June 30, 2009 (see Notes 3 and 5).
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, to establish standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for interim or financial periods ending after June 15, 2009. We adopted SFAS No. 165 in our interim period ending June 30, 2009 (see Note 10).
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140, to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is effective for financial years beginning after November 15, 2009. We will adopt SFAS No. 166 on January 1, 2010, and we do not expect the adoption to have an impact on our condensed consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No 46(R), to amend the consolidation guidance applicable to variable interest entities. SFAS No. 167 is effective for financial years beginning after November 15, 2009. We will adopt SFAS No. 167 on January 1, 2010, and we do not expect the adoption to have an impact on our condensed consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS No. 168, the Codification will supersede all then existing non–SEC accounting and reporting standards. All other non grandfathered non–SEC accounting literature not included in the Codification will become non authoritative. SFAS No. 168 is effective for interim or financial periods ending September 15, 2009. We will adopt SFAS No. 168 on October 1, 2009, and we do not expect the adoption to have an impact on our condensed consolidated financial statements.
NOTE 10. SUBSEQUENT EVENTS
In July 2009, EVEP, along with certain institutional partnerships managed by EnerVest, acquired additional oil and natural gas properties in the Austin Chalk area in Central and East Texas. EVEP acquired a 15.15% interest in these properties for $11.9 million. The closing of the acquisition is subject to customary post–closing adjustments. The acquisition was funded with cash on hand. Our proportionate share of the acquisition cost was $0.2 million.
In July 2009, EVEP, along with certain institutional partnerships managed by EnerVest, acquired additional oil and natural gas properties in the Austin Chalk area in Central and East Texas. EVEP acquired a 15.15% interest in these properties for $5.0 million. The closing of the acquisition is subject to customary post–closing adjustments. The acquisition was funded with cash on hand. Our proportionate share of the acquisition cost was $0.1 million.
We evaluated subsequent events through September 24, 2009, the date our condensed consolidated financial statements were issued.
