EXHIBIT 99.2
Constellation Energy Partners LLC
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
INDEX
Page | ||
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2007 | F-2 | |
Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2006 | F-3 | |
Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended June, 2007 | F-4 | |
Notes to Unaudited Pro Forma Condensed Combined Financial Statements | F-5 |
Constellation Energy Partners LLC
Unaudited Pro Forma Condensed Combined Balance Sheet
At June 30, 2007
(in thousands)
CEP Historical | Amvest Historical | Pro Forma Adjustments | CEP Pro Forma | |||||||||||||||
Assets | ||||||||||||||||||
Current assets | ||||||||||||||||||
Cash and cash equivalents | $ | 7,668 | $ | 3 | $ | 6,655 | a,b,i | $ | 14,326 | |||||||||
Accounts receivable | 9,717 | 4,381 | (775 | ) | a,i | 13,323 | ||||||||||||
Prepaid expenses | 258 | 150 | — | 408 | ||||||||||||||
Risk management assets | 5,922 | — | 5,922 | |||||||||||||||
Drilling fund | — | 8,500 | a | 8,500 | ||||||||||||||
Other | 2,033 | 6,039 | (6,039 | ) | i | 2,033 | ||||||||||||
Total current assets | 25,598 | 10,573 | 8,341 | 44,512 | ||||||||||||||
Natural gas properties (See Note 2) | ||||||||||||||||||
Natural gas properties and related equipment | ||||||||||||||||||
Natural gas properties, equipment and facilities | 306,448 | 130,451 | 96,520 | a,i | 533,419 | |||||||||||||
Material and supplies | 546 | 1,775 | — | 2,321 | ||||||||||||||
Less accumulated depreciation, depletion and amortization | (17,126 | ) | (28,454 | ) | 28,454 | i | (17,126 | ) | ||||||||||
Net natural gas properties | 289,868 | 103,772 | 124,974 | 518,614 | ||||||||||||||
Other assets | ||||||||||||||||||
Loan Costs | 1,229 | — | 350 | a,c,i | 1,579 | |||||||||||||
Intangible contracts | 5,000 | a | 5,000 | |||||||||||||||
Other Non-Current Assets | 4,050 | 12 | (12 | ) | i | 4,050 | ||||||||||||
Risk management assets | 1,839 | — | 1,839 | |||||||||||||||
Total assets | $ | 322,584 | $ | 114,357 | $ | 138,653 | $ | 575,594 | ||||||||||
Liabilities and members’ equity | ||||||||||||||||||
Liabilities | ||||||||||||||||||
Current liabilities | ||||||||||||||||||
Accounts payable | $ | 2,364 | $ | 1,591 | $ | (210 | ) | a,c,i | $ | 3,745 | ||||||||
Payable to affiliate | 1,822 | — | 1,822 | |||||||||||||||
Accrued liabilities | 3,847 | 1,137 | (484 | ) | a,i | 4,500 | ||||||||||||
Royalty payable | 2,999 | 1,669 | (389 | ) | a,i | 4,279 | ||||||||||||
Deferred taxes | — | 92 | (92 | ) | i | — | ||||||||||||
Environmental liability | 717 | — | 717 | |||||||||||||||
Mark to market derivative liabilities | — | — | — | |||||||||||||||
Total current liabilities | 11,749 | 4,489 | (1,175 | ) | 15,063 | |||||||||||||
Other liabilities | ||||||||||||||||||
Asset retirement obligation | 5,933 | 871 | 6,804 | |||||||||||||||
Deferred taxes | — | 29,330 | (29,330 | ) | i | — | ||||||||||||
Mark to market derivative liabilities | 1,873 | — | 1,873 | |||||||||||||||
Debt | 82,500 | — | 42,500 | b | 125,000 | |||||||||||||
Total other liabilities | 90,306 | 30,201 | 13,170 | 133,677 | ||||||||||||||
Total liabilities | 102,055 | 34,690 | 11,995 | 148,740 | ||||||||||||||
Class D Interests | 7,667 | — | — | 7,667 | ||||||||||||||
Members’ equity | ||||||||||||||||||
Members’ equity | 203,354 | 79,667 | 126,658 | b,i | 409,679 | |||||||||||||
Accumulated other comprehensive income | 9,508 | — | 9,508 | |||||||||||||||
Total members’ equity | 212,862 | 79,667 | 126,658 | 419,187 | ||||||||||||||
Total liabilities and members’ equity | $ | 322,584 | $ | 114,357 | $ | 138,653 | $ | 575,594 | ||||||||||
F-2
Constellation Energy Partners LLC
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2006
(in thousands)
CEP Historical | EQR and KPC Historical | Amvest Historical | Pro Forma Adjustments | CEP Pro Forma | |||||||||||||||||
Revenues | |||||||||||||||||||||
Gas sales | $ | 36,917 | $ | 18,772 | $ | 36,632 | $ | (1,625 | ) | i | $ | 90,696 | |||||||||
Total Revenues | 36,917 | 18,772 | 36,632 | (1,625 | ) | 90,696 | |||||||||||||||
Expenses: | |||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||
Lease operating expenses | 7,234 | 8,806 | 6,871 | (1,625 | ) | i | 21,286 | ||||||||||||||
Cost of sales | 1,481 | 1,481 | |||||||||||||||||||
Production taxes | 1,783 | 812 | 2,126 | 4,721 | |||||||||||||||||
General and administrative | 4,573 | 4,809 | — | h | 9,382 | ||||||||||||||||
Depreciation, depletion and amortization | 7,444 | 544 | 8,604 | 10,088 | d | 26,680 | |||||||||||||||
Accretion expense | 141 | 42 | 216 | e | 399 | ||||||||||||||||
Total operating expenses | 21,175 | 10,162 | 23,933 | 8,679 | 63,949 | ||||||||||||||||
Other expense/(income) | |||||||||||||||||||||
Interest expense | 221 | 1,178 | 6,365 | f, g | 7,764 | ||||||||||||||||
Interest (income) | (468 | ) | (468 | ) | |||||||||||||||||
Other (income) | — | (12 | ) | (12 | ) | ||||||||||||||||
Total other expenses/(income) | (247 | ) | — | 1,166 | 6,365 | 7,284 | |||||||||||||||
— | |||||||||||||||||||||
Total expenses | 20,928 | 10,162 | 25,099 | 15,044 | 71,233 | ||||||||||||||||
Income before taxes | $ | 15,989 | $ | 8,610 | $ | 11,533 | $ | (16,669 | ) | $ | 19,463 | ||||||||||
Income tax provision | — | 4,333 | (4,333 | ) | i | — | |||||||||||||||
Net income (loss) | $ | 15,989 | $ | 8,610 | $ | 7,200 | $ | (12,336 | ) | $ | 19,463 | ||||||||||
Other comprehensive income | 13,113 | — | — | — | 13,113 | ||||||||||||||||
Comprehensive income (loss) | $ | 29,102 | $ | 8,610 | $ | 7,200 | $ | (12,336 | ) | $ | 32,576 | ||||||||||
Earnings per unit - Basic | $ | 1.41 | $ | 0.98 | |||||||||||||||||
Units outstanding - Basic | 11,320,300 | 8,504,364 | b | 19,824,664 | |||||||||||||||||
Earnings per unit - Diluted | $ | 1.41 | $ | 0.98 | |||||||||||||||||
Units outstanding - Diluted | 11,320,300 | 8,504,364 | b | 19,824,664 |
F-3
Constellation Energy Partners LLC
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 2007
(in thousands)
CEP Historical | EQR and KPC Historical | Amvest Historical | Pro Forma Adjustments | CEP Pro Forma | |||||||||||||||||
Revenues | |||||||||||||||||||||
Gas sales | $ | 26,497 | $ | 4,702 | $ | 20,073 | $ | (407 | ) | i | $ | 50,865 | |||||||||
Loss from mark-to-market activities | (5,401 | ) | (5,401 | ) | |||||||||||||||||
Total Revenues | 21,096 | 4,702 | 20,073 | (407 | ) | 45,464 | |||||||||||||||
Expenses: | |||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||
Lease operating expenses | 4,745 | 1,966 | 3,992 | (407 | ) | i | 10,296 | ||||||||||||||
Cost of sales | — | 698 | 698 | ||||||||||||||||||
Production taxes | 1,144 | 171 | 1,143 | 2,458 | |||||||||||||||||
General and administrative | 3,390 | 2,166 | — | h | 5,556 | ||||||||||||||||
Loss on sale of asset | 94 | 94 | |||||||||||||||||||
Depreciation, depletion and amortization | 5,543 | 163 | 5,544 | 2,830 | d, i | 14,080 | |||||||||||||||
Accretion expense | 113 | 21 | 54 | e | 188 | ||||||||||||||||
Total operating expenses | 15,029 | 2,300 | 13,564 | 2,477 | 33,370 | ||||||||||||||||
Other expense/(income) | |||||||||||||||||||||
Interest expense | 1,825 | 683 | 1,946 | f,g,i | 4,454 | ||||||||||||||||
Interest (income) | (135 | ) | (135 | ) | |||||||||||||||||
Other (income) | (70 | ) | (37 | ) | (107 | ) | |||||||||||||||
Total other expenses/(income) | 1,620 | — | 646 | 1,946 | 4,212 | ||||||||||||||||
Total expenses | 16,649 | 2,300 | 14,210 | 4,423 | 37,582 | ||||||||||||||||
Income before taxes | $ | 4,447 | $ | 2,402 | $ | 5,863 | $ | (4,830 | ) | $ | 7,882 | ||||||||||
Income tax provision | — | 1,857 | (1,857 | ) | i | — | |||||||||||||||
Net income (loss) | $ | 4,447 | $ | 2,402 | $ | 4,006 | $ | (2,973 | ) | $ | 7,882 | ||||||||||
Other comprehensive income | (3,605 | ) | — | — | — | (3,605 | ) | ||||||||||||||
Comprehensive income (loss) | $ | 842 | $ | 2,402 | $ | 4,006 | $ | (2,973 | ) | $ | 4,277 | ||||||||||
Earnings per unit - Basic | $ | 0.36 | $ | 0.40 | |||||||||||||||||
Units outstanding - Basic | 12,201,279 | 7,623,385 | b | 19,824,664 | |||||||||||||||||
Earnings per unit - Diluted | $ | 0.36 | $ | 0.40 | |||||||||||||||||
Units outstanding - Diluted | 12,201,279 | 7,623,385 | b | 19,824,664 | |||||||||||||||||
Distributions declared and paid per unit | 0.6736 | 0.6736 |
F-4
Constellation Energy Partners LLC
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet as of June 30, 2007, is derived from:
• | the historical consolidated financial statements of Constellation Energy Partners LLC (“CEP,” or the “Company”); and |
• | the preliminary purchase price allocation of certain oil and natural gas properties and other related assets acquired in the purchase of Amvest Osage, Inc. (referred to as “Amvest”). |
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2006, and the six months ended June 30, 2007, are derived from:
• | the historical consolidated financial statements of CEP; |
• | the historical consolidated financial statements of Amvest; |
• | the historical statements of direct revenues and direct operating expenses of EnergyQuest Resources, L.P. (“EQR”); and |
• | the historical financial statements of Kansas Processing EQR, LLC (“KPC”). |
The unaudited pro forma condensed combined balance sheet gives effect to the acquisition of Amvest and the related financing activities as if the transactions had occurred on June 30, 2007. The unaudited pro forma condensed combined statements of operation give effect to the acquisition of Amvest and of the EnergyQuest assets and the related financing activities as if the transactions had occurred on January 1, 2006.
The unaudited pro forma condensed combined financial statements reflect the following transactions:
• | the acquisition of Amvest, EQR, and KPC; |
• | the equity issuance of additional Class B and the Class F units on July 25, 2007, used to finance the acquisition of Amvest; and |
• | an increase in debt in July 2007, used to finance the acquisition of Amvest and to fund certain investment capital expenditures in the Black Warrior Basin and Cherokee Basin. |
The consolidated financial statements of Amvest included elsewhere in this Form 8-K/A have a fiscal year-end of July 31. The pro forma condensed combined financial statement information included in this Form 8-K/A is presented as of December 31, 2006 and June 30, 2007. In order to present a comparable fiscal period, we have utilized the financial statements of Amvest for the year ended July 31, 2006 and unaudited interim financial statement data.
The unaudited pro forma condensed combined balance sheet and statements of operations are presented for illustrative purposes only, and do not purport to be indicative of the financial position or results of operations that would actually have occurred if the transactions described had occurred as presented in such statements or that may be obtained in the future. In addition, future results may vary significantly from the results reflected in such statements due to factors described in “Risk Factors” included in our Quarterly Report on Form 10-Q for the six months ended June 30, 2007, in our Annual Report on Form 10-K for the year ended December 31, 2006 or elsewhere in the Company’s reports and filings with the Securities and Exchange Commission (“SEC”). The unaudited pro forma condensed combined balance sheet and statements of operations should be read in conjunction with our historical consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the six months ended June 30, 2007.
The pro forma statements should also be read in conjunction with the consolidated financial statements for Amvest included elsewhere in this Form 8-K/A and with the statements of direct revenues and direct operating expenses for EQR and the notes thereto and the consolidated financial statements of KPC and the notes thereto included in a Form 8-K/A filing with the SEC dated July 5, 2007.
F-5
2. ACQUISITION AND PRELIMINARY PURCHASE PRICE ALLOCATION
The acquisition of Amvest was completed on July 25, 2007. The Company acquired certain oil and natural gas properties from Amvest for approximately $240.0 million, subject to purchase price adjustments.
The acquisition included a 13 year exclusive concession from the Osage Nation for coalbed methane and shale rights on approximately 560,000 net acres in Osage County, Oklahoma, with potential for up to 100,000 additional acres, and approximately 370 producing wells with current net production of 16 MMcfe per day. Also included were support equipment and facilities, including certain pipeline gathering systems.
The total consideration was $241.9 million which consisted of cash of $241.0 million and estimated transaction costs of $0.9 million. An amount of $8.5 million was included in a drilling escrow fund that was returned to the Company for use for drilling programs on proved undeveloped locations after the close of transaction. The purchase price allocation of the total consideration (after the return of the drilling fund) of $233.4 million is as follows:
Natural Gas and Oil Properties | $ | 181.3 million | |
Unproved Properties | 38.4 million | ||
Pipelines | 5.0 million | ||
Other PP&E | 1.4 million | ||
Intangible Third Party Gas Contracts | 5.0 million | ||
Net Working Capital | 2.3 million | ||
Total | $ | 233.4 million | |
The preliminary purchase price allocation used for the purpose of this pro forma financial information is based on preliminary appraisals, evaluations of proved oil and natural gas reserves, discounted cash flows, quoted market prices, other estimates by management, and a preliminary third party valuation report. The purchase price allocation related to the acquisition of Amvest is preliminary and subject to change, pending finalization of the valuation of the assets and liabilities acquired.
3. PRO FORMA ADJUSTMENTS
The unaudited pro forma condensed combined financial statements have been adjusted to reflect the following:
a. | the purchase of Amvest as detailed in Note 2 |
b. | the issuance and sale of 3,371,219 Class F Units and 2,664,998 Common Units for approximately $206.3 million ($210.0 million less $3.675 million in estimated expenses) and borrowings of $42.5 million under the reserve-based credit facility to fund the remaining balance of the purchase price and certain investment capital expenditures in the Black Warrior Basin and the Cherokee Basin |
c. | the debt issuance costs of approximately $0.35 million related to the borrowings under the reserve-based credit facility to fund the remaining purchase price of Amvest |
d. | recording incremental depreciation, depletion and amortization expense related to the acquired Amvest, EQR, and KPC assets based on the relative fair value allocation of the purchase price to the acquired assets |
e. | recording incremental accretion expense related to the assumed asset retirement obligations of EQR |
f. | recording incremental interest expense at 7.11% associated with the increase in long-term debt of approximately $42.5 million incurred to fund the balance of the purchase price of Amvest, as well as to fund planned capital expenditures on these properties and recording incremental interest expense at 7.235% associated with the increase in long-term debt of approximately $60.5 million incurred to fund the balance of the purchase price of EQR, the escrow deposit and certain investment capital expenditures in the Black Warrior Basin |
F-6
A 0.125% increase or decrease in this rate results in a $0.13 million change in interest expense associated with these increases in outstanding debt. |
g. | recording incremental amortization of additional debt issuance costs associated with the increase in the reserve-based credit facility |
h. | no incremental pro forma adjustments for general and administrative expenses have been reflected for any costs associated with the Transition Services Agreement, pursuant to which EQR will operate the EnergyQuest assets and conduct a specified drilling program on CEP’s behalf. The Transition Services Agreement provides for a reimbursement of EQR’s actual costs plus a 10% premium for any general and administrative services that CEP specifically requests. This amount may not be indicative of any actual future general and administrative costs incurred by CEP. Under this agreement, CEP estimates that the monthly requested general and administrative services will be approximately $140,000 per month. |
i. | To eliminate intercompany activities between EQR and KPC, to eliminate historical balances from Amvest not acquired in the transaction, to eliminate historical interest expense on historical affiliate balances, and to eliminate historical income tax-related balances as CEP is not a taxpayer. |
4. DEBT
In July 2007, the Company borrowed $42.5 million under the reserve-based credit facility to fund the purchase price of the acquisition of Amvest, as well as to fund a portion of planned capital expenditures on these properties. On July 6, 2007, the borrowing base of the reserve-based credit facility was increased to $135.0 million, and then to $180.0 million on July 26, 2007.
In July 2007, the amount guaranteed under a credit support fee agreement with Constellation Energy (“CEG”), under which CEG will guarantee credit support for the Company’s financial derivatives, was increased to $15.0 million. This guarantee and another guarantee for $25.0 million were released effective July 6, 2007, when the borrowing base under the Company’s reserve-based credit facility was increased to $135.0 million. On July 13, 2007, the Company entered into a credit support fee agreement with CEG under which CEG will guarantee credit support up to $15.0 million for financial derivatives that the Company entered into in relation to the Amvest Acquisition. This guarantee was released on July 26, 2007, when the borrowing base under the Company’s reserve-based credit facility was increased to $180.0 million. Debt issuance costs related to these transactions were approximately $0.5 million which are being amortized over the life of the facility. The reserve-based credit facility will mature in October 2010.
5. EQUITY ISSUANCE
On July 16, 2007, the Company entered into a Class F Unit and Common Unit Purchase Agreement (the “Unit Purchase Agreement”) with certain unaffiliated third-party investors (the “Purchasers”) to sell 3,371,219 Class F Units representing limited liability company interests (the “Class F Units”) and 2,664,998 common units representing Class B limited liability company interests (the “New Common Units”) in a private placement (the “Private Placement”) for an aggregate purchase price of approximately $210 million. The Company issued and sold 3,371,219 Class F Units and 2,664,998 New Common Units to the Purchasers pursuant to the Unit Purchase Agreement on July 25, 2007. The Company used the proceeds from the Private Placement, together with funds available under the Company’s revolving credit facility, to fund the purchase price of the acquisition of Amvest. At the issuance of the Class F and New Common Units, additional Class A units were issued such that the total outstanding amount remained at 2% of all outstanding units. Estimated offering expenses were $3.675 million.
In connection with the Unit Purchase Agreement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers dated July 25, 2007. Pursuant to the Registration Rights Agreement, the Company is required to prepare and file a registration statement within 90 days of the closing of the Private Placement (the “Closing Date”), and use its commercially reasonable efforts to cause the registration statement to become effective no later than 135 days following the Closing Date. In addition, the Registration Rights Agreement gives the Purchasers piggyback registration rights under certain circumstances. These registration rights are transferable to affiliates and, in certain circumstances, to third parties.
F-7
If the registration statement is not declared effective within 165 days after the Closing Date, then the Company must pay each Purchaser, as liquidated damages, 0.25% of the sum of the product of $34.43 times the number of Class F Units purchased by such Purchaser plus the product of $35.25 times the number of New Common Units purchased by such Purchaser (the “Liquidated Damages Multiplier”) per 30-day period for the first 90 days following the 165th day after the Closing Date, increasing by an additional 0.25% of the Liquidated Damages Multiplier per 30-day period for each subsequent 30 days, up to a maximum of 1.00% of the Liquidated Damages Multiplier per 30-day period. There is no limitation on the aggregate amount of the liquidated damages the Company must pay each Purchaser.
6. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (Unaudited)
The following table sets forth certain unaudited pro forma information concerning the Company’s proved oil and natural gas reserves for the year ended December 31, 2006, giving effect to the transaction relating to the acquisition of Amvest and of the EnergyQuest assets as if they had occurred on January 1, 2006. The information excludes reserves related to royalty and net profit interests. The Company’s estimate of proved reserves is based on the quantities of natural gas that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact.
Natural Gas Reserves—MMCF
Year-Ended December 31, 2006
CEP | EQR | Amvest | CEP | |||||||||
Historical | Historical | Historical | Pro Forma | |||||||||
Beginning Balance | 112,025 | 39,822 | 76,733 | 228,580 | ||||||||
Extensions and discoveries | — | 5,334 | 25,678 | 31,012 | ||||||||
Purchases of reserves in place | — | — | 3,665 | 3,665 | ||||||||
Sales of reserves in place | — | — | — | — | ||||||||
Revisions of previous estimates | 12,952 | (1,668 | ) | (30,651 | ) | (19,367 | ) | |||||
Production | (4,641 | ) | (2,279 | ) | (5,367 | ) | (12,287 | ) | ||||
End of year | 120,336 | 41,209 | 70,058 | 231,603 | ||||||||
Total developed reserves | 97,387 | 23,479 | 44,170 | 165,036 | ||||||||
F-8
Oil, Condensate, and Liquids—MBBLS
Year-Ended December 31, 2006
CEP | EQR | Amvest | CEP | ||||||||
Historical | Historical | Historical | Pro Forma | ||||||||
Beginning Balance | — | 8 | 209 | 217 | |||||||
Extensions and discoveries | — | — | — | — | |||||||
Purchases of reserves in place | — | — | — | — | |||||||
Sales of reserves in place | — | — | — | — | |||||||
Revisions of previous estimates | — | 8 | 31 | 39 | |||||||
Production | — | (2 | ) | (26 | ) | (28 | ) | ||||
End of year | — | 14 | 214 | 228 | |||||||
Total developed reserves | — | 14 | 214 | 228 | |||||||
Natural Gas Reserves—MMCFE
Year-Ended December 31, 2006
CEP | EQR | Amvest | CEP | |||||||||
Historical | Historical | Historical | Pro Forma | |||||||||
Beginning Balance | 112,025 | 39,873 | 77,990 | 229,888 | ||||||||
Extensions and discoveries | — | 5,334 | 25,678 | 31,012 | ||||||||
Purchases of reserves in place | — | — | 3,665 | 3,665 | ||||||||
Sales of reserves in place | — | — | — | — | ||||||||
Revisions of previous estimates | 12,952 | (1,621 | ) | (30,467 | ) | (19,136 | ) | |||||
Production | (4,641 | ) | (2,293 | ) | (5,526 | ) | (12,460 | ) | ||||
End of year | 120,336 | 41,293 | 71,340 | 232,969 | ||||||||
Total developed reserves | 97,387 | 23,563 | 45,452 | 166,402 | ||||||||
F-9
The following table sets forth certain unaudited pro forma information for the Company’s standardized measure of discounted cash flows relating to proved oil and natural gas reserves as of December 31, 2006, giving effect to the transaction relating to the acquisition of Amvest and of the EnergyQuest assets as if they had occurred on January 1, 2006. Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below.
Future cash inflows are calculated by applying year-end prices of natural gas, relating to the proved reserves, to the year-end quantities of those reserves. Future cash inflows exclude the impact of the Company’s hedging program and mark-to-market derivatives. Future development and production costs represent the estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions. In addition, asset retirement obligations are included within future production and development costs. There are no future income tax expenses because the Company is a non-taxable entity.
The assumptions used to compute estimated future cash inflows do not necessarily reflect expectations of actual revenues or costs or their present value. In addition, variations from expected production rates could result directly or indirectly from factors outside of the Company’s control, such as unexpected delays in development, changes in prices or regulatory or environmental policies. The reserve valuation further assumes that all reserves will be disposed of by production; however, if reserves are sold in place, additional economic considerations could also affect the amount of cash eventually realized.
Standardized Measure
Year-Ended December 31, 2006
CEP | EQ | Amvest | CEP | |||||||||
Historical | Historical | Historical | Pro Forma | |||||||||
Future cash inflows | 677,866 | 216,410 | 412,325 | 1,306,601 | ||||||||
Future production costs | (257,502 | ) | (79,642 | ) | (178,655 | ) | (515,799 | ) | ||||
Future estimated development costs | (64,673 | ) | (24,629 | ) | (40,742 | ) | (130,044 | ) | ||||
Future net cash inflows | 355,691 | 112,139 | 192,928 | 660,758 | ||||||||
10% annual discount for estimated timing of cash flows | (235,504 | ) | (52,037 | ) | (76,205 | ) | (363,746 | ) | ||||
Standardized measure of discounted estimated future net cash flows | 120,187 | 60,102 | 116,723 | 297,012 | ||||||||
The following table sets forth certain unaudited pro forma information for the principal sources of changes in discounted future net cash flows from the Company’s proved oil and natural gas reserves for the year ended December 31, 2006, giving effect to the transaction relating to the acquisition of Amvest and of the EnergyQuest assets as if they had occurred on January 1, 2006.
F-10
Changes in Standardized Measure
Year-Ended December 31, 2006
CEP | EQ | Amvest | CEP | |||||||||
Historical | Historical | Historical | Pro Forma | |||||||||
Beginning of the period | 295,435 | 109,627 | 297,930 | 702,992 | ||||||||
Sales and transfer of natural gas and oil, net of production costs | (40,064 | ) | (11,996 | ) | (46,925 | ) | (98,985 | ) | ||||
Net changes in prices and production costs related to future production | (193,499 | ) | (52,950 | ) | (174,114 | ) | (420,563 | ) | ||||
Development costs incurred during the period | 12,292 | 1,457 | 14,469 | 28,218 | ||||||||
Changes in extensions and discoveries | — | 9,239 | 27,838 | 37,077 | ||||||||
Revisions of previous quantity estimates | 18,435 | (3,013 | ) | (45,702 | ) | (30,280 | ) | |||||
Purchases of reserves in place | — | — | 13,435 | 13,435 | ||||||||
Accretion discount | 29,624 | 10,963 | 29,792 | 70,379 | ||||||||
Other | (2,036 | ) | (3,225 | ) | — | (5,261 | ) | |||||
Standardized measure of discounted estimated future net cash flows | 120,187 | 60,102 | 116,723 | 297,012 | ||||||||
7. SUBSEQUENT EVENT
Newfield Acquisition Announcement
In August 2007, the Company announced that it had entered into a definitive purchase agreement to acquire additional coalbed methane properties in the Cherokee Basin of Oklahoma (the “Newfield Assets”) for approximately $128 million, subject to purchase price adjustments. The Company executed a unit purchase agreement with third party investors to sell 2,470,592 common units at a price of $42.50 per unit in a private placement for an aggregate purchase price of approximately $105 million. The Company has agreed to file a registration statement with the SEC registering for resale the common units within 90 days after the closing of the private placement. The Company believes that the proceeds from this equity private placement, together with funds available under its existing credit facility, will fully fund the purchase price of the acquisition. The Company anticipates that the private placement will close simultaneously with the acquisition of the assets in September 2007. The Company borrowed $13.0 million under its reserve-based credit facility to fund an acquisition deposit escrow account. The Company also entered into derivative transactions to hedge the future expected production associated with this acquisition.
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Debt
In August 2007, the Company borrowed an additional $13.0 million to fund an acquisition deposit escrow account for the purchase of the Newfield Assets.
In August 2007, the amount guaranteed under the credit support fee agreement with CEG, under which CEG will guarantee credit support for the Company’s financial derivatives, was increased to $10.0 million. The guarantee is for financial derivatives that the Company entered into in anticipation of the acquisition of the Newfield Assets.
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