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 September 30, |
or
| TRANSITION 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.
Yes☒xNo☐o
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). Yes☒x No☐o
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”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
| Large accelerated filer | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company Emerging growth company | 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 Securities Exchange Act of 1934. Act.☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)Act). Yes☐oNo☒x
As of November 7, 20179, 2018 there were 207.7026 shares of LLC Membership Interest outstanding.
| PAGE | |||
| PART I - FINANCIAL INFORMATION | |||
| Item 1. | 1 | ||
| 1 | |||
| 2 | |||
| 3 | |||
| 4 | |||
| Item 2. | |||
| Item 3. | |||
| Item 4. | |||
| PART II - OTHER INFORMATION | |||
| Item 1. | |||
| Item 1A. | |||
| Item 2. | |||
| Item 3. | |||
| Item 4. | |||
| Item 5. | |||
| Item 6. | |||
PART I – FINANCIAL INFORMATION
(in thousands, except share data)
| September 30, 2017 | December 31, 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,777 | $ | 3,458 | ||||
| Salvage fund | 942 | 266 | ||||||
| Production receivable | 210 | 324 | ||||||
| Other current assets | 74 | 119 | ||||||
| Total current assets | 4,003 | 4,167 | ||||||
| Salvage fund | 558 | 1,286 | ||||||
| Oil and gas properties: | ||||||||
| Proved properties | 19,962 | 18,056 | ||||||
| Less: accumulated depletion and amortization | (6,493 | ) | (3,804 | ) | ||||
| Total oil and gas properties, net | 13,469 | 14,252 | ||||||
| Total assets | $ | 18,030 | $ | 19,705 | ||||
| Liabilities and Members' Capital | ||||||||
| Current liabilities: | ||||||||
| Due to operators | $ | 552 | $ | 462 | ||||
| Accrued expenses | 240 | 566 | ||||||
| Current portion of long-term borrowings | 1,393 | 690 | ||||||
| Asset retirement obligations | 942 | 266 | ||||||
| Total current liabilities | 3,127 | 1,984 | ||||||
| Long-term borrowings | 5,841 | 6,453 | ||||||
| Asset retirement obligations | 553 | 1,409 | ||||||
| Other liabilities | 40 | 40 | ||||||
| Total liabilities | 9,561 | 9,886 | ||||||
| Commitments and contingencies (Note 4) | ||||||||
| Members' capital: | ||||||||
| Manager: | ||||||||
| Distributions | (5,058 | ) | (5,058 | ) | ||||
| Retained earnings | 5,356 | 5,117 | ||||||
| Manager's total | 298 | 59 | ||||||
| Shareholders: | ||||||||
| Capital contributions (250 shares authorized; | ||||||||
| 207.7026 issued and outstanding) | 41,143 | 41,143 | ||||||
| Syndication costs | (4,804 | ) | (4,804 | ) | ||||
| Distributions | (35,427 | ) | (35,427 | ) | ||||
| Retained earnings | 7,257 | 8,845 | ||||||
| Shareholders' total | 8,169 | 9,757 | ||||||
| Accumulated other comprehensive income | 2 | 3 | ||||||
| Total members' capital | 8,469 | 9,819 | ||||||
| Total liabilities and members' capital | $ | 18,030 | $ | 19,705 | ||||
| September 30, 2018 | December 31, 2017 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,449 | $ | 2,423 | ||||
| Salvage fund | 880 | 1,191 | ||||||
| Production receivable | 223 | 491 | ||||||
| Other current assets | 73 | 52 | ||||||
| Total current assets | 3,625 | 4,157 | ||||||
| Salvage fund | 791 | 355 | ||||||
| Oil and gas properties: | ||||||||
| Proved properties | 20,080 | 20,498 | ||||||
| Less: accumulated depletion and amortization | (8,806 | ) | (7,391 | ) | ||||
| Total oil and gas properties, net | 11,274 | 13,107 | ||||||
| Total assets | $ | 15,690 | $ | 17,619 | ||||
| Liabilities and Members' Capital | ||||||||
| Current liabilities: | ||||||||
| Due to operators | $ | 623 | $ | 609 | ||||
| Accrued expenses | 52 | 54 | ||||||
| Current portion of long-term borrowings | 431 | 1,566 | ||||||
| Asset retirement obligations | 880 | 1,191 | ||||||
| Other current liabilities | 40 | 40 | ||||||
| Total current liabilities | 2,026 | 3,460 | ||||||
| Long-term borrowings | 2,792 | 5,639 | ||||||
| Asset retirement obligations | 485 | 210 | ||||||
| Total liabilities | 5,303 | 9,309 | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Members' capital: | ||||||||
| Manager: | ||||||||
| Distributions | (5,058 | ) | (5,058 | ) | ||||
| Retained earnings | 5,907 | 5,484 | ||||||
| Manager's total | 849 | 426 | ||||||
| Shareholders: | ||||||||
| Capital contributions (250 shares authorized; | ||||||||
| 207.7026 issued and outstanding) | 41,143 | 41,143 | ||||||
| Syndication costs | (4,804 | ) | (4,804 | ) | ||||
| Distributions | (35,427 | ) | (35,427 | ) | ||||
| Retained earnings | 8,625 | 6,970 | ||||||
| Shareholders' total | 9,537 | 7,882 | ||||||
| Accumulated other comprehensive income | 1 | 2 | ||||||
| Total members' capital | 10,387 | 8,310 | ||||||
| Total liabilities and members' capital | $ | 15,690 | $ | 17,619 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 1 |
RIDGEWOOD ENERGY A-1 FUND, LLC
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 777 | $ | 220 | $ | 2,692 | $ | 376 | ||||||||
| Expenses | ||||||||||||||||
| Depletion and amortization | 395 | 167 | 2,563 | 198 | ||||||||||||
| Management fees to affiliate (Note 2) | 93 | 64 | 280 | 254 | ||||||||||||
| Operating expenses | 164 | 91 | 515 | 134 | ||||||||||||
| General and administrative expenses | 38 | 41 | 126 | 114 | ||||||||||||
| Total expenses | 690 | 363 | 3,484 | 700 | ||||||||||||
| Income (loss) from operations | 87 | (143 | ) | (792 | ) | (324 | ) | |||||||||
| Interest expense, net | (187 | ) | (103 | ) | (557 | ) | (100 | ) | ||||||||
| Net loss | (100 | ) | (246 | ) | (1,349 | ) | (424 | ) | ||||||||
| Other comprehensive (loss) income | ||||||||||||||||
| Unrealized (loss) gain on marketable securities | - | - | (1 | ) | 1 | |||||||||||
| Total comprehensive loss | $ | (100 | ) | $ | (246 | ) | $ | (1,350 | ) | $ | (423 | ) | ||||
| Manager Interest | ||||||||||||||||
| Net income (loss) | $ | 68 | $ | 2 | $ | 239 | $ | (20 | ) | |||||||
| Shareholder Interest | ||||||||||||||||
| Net loss | $ | (168 | ) | $ | (248 | ) | $ | (1,588 | ) | $ | (404 | ) | ||||
| Net loss per share | $ | (813 | ) | $ | (1,194 | ) | $ | (7,649 | ) | $ | (1,944 | ) | ||||
| Three months ended September 30, | Nine months ended Sepember 30, | |||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||||||
| Revenue | ||||||||||||||||||||
| Oil and gas revenue | $ | 1,092 | $ | 777 | $ | 3,719 | $ | 2,692 | ||||||||||||
| Expenses | ||||||||||||||||||||
| Depletion and amortization | 636 | 395 | 2,598 | 2,563 | ||||||||||||||||
| Management fees to affiliate (Note 4) | 93 | 93 | 280 | 280 | ||||||||||||||||
| Operating expenses | 156 | 164 | 443 | 515 | ||||||||||||||||
| General and administrative expenses | 50 | 38 | 143 | 126 | ||||||||||||||||
| Total expenses | 935 | 690 | 3,464 | 3,484 | ||||||||||||||||
| Gain on sale of oil and gas properties | 899 | - | 899 | - | ||||||||||||||||
| Income (loss) from operations | 1,056 | 87 | 1,154 | (792 | ) | |||||||||||||||
| Other income (loss) | ||||||||||||||||||||
| Gain on debt extinguishment | 1,313 | - | 1,313 | - | ||||||||||||||||
| Interest expense, net | (103 | ) | (187 | ) | (389 | ) | (557 | ) | ||||||||||||
| Total other income (loss) | 1,210 | (187 | ) | 924 | (557 | ) | ||||||||||||||
| Net income (loss) | 2,266 | (100 | ) | 2,078 | (1,349 | ) | ||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||
| Unrealized loss on marketable securities | - | - | (1 | ) | (1 | ) | ||||||||||||||
| Total comprehensive income (loss) | $ | 2,266 | $ | (100 | ) | $ | 2,077 | $ | (1,350 | ) | ||||||||||
| Manager Interest | ||||||||||||||||||||
| Net income | $ | 134 | $ | 68 | $ | 423 | $ | 239 | ||||||||||||
| Shareholder Interest | ||||||||||||||||||||
| Net income (loss) | $ | 2,132 | $ | (168 | ) | $ | 1,655 | $ | (1,588 | ) | ||||||||||
| Net income (loss) per share | $ | 10,262 | $ | (813 | ) | $ | 7,968 | $ | (7,649 | ) | ||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 2 |
(in thousands)
| Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (1,349 | ) | $ | (424 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| provided by (used in) operating activities: | ||||||||
| Depletion and amortization | 2,563 | 198 | ||||||
| Accretion expense | 22 | - | ||||||
| Amortization of debt discounts and deferred financing costs | 91 | 31 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in production receivable | 114 | (137 | ) | |||||
| Decrease (increase) in other current assets | 45 | (70 | ) | |||||
| Increase (decrease) in due to operators | 38 | (6 | ) | |||||
| (Decrease) increase in accrued expenses | (14 | ) | 107 | |||||
| Settlement of asset retirement obligation | (82 | ) | - | |||||
| Net cash provided by (used in) operating activities | 1,428 | (301 | ) | |||||
| Cash flows from investing activities | ||||||||
| Capital expenditures for oil and gas properties | (2,160 | ) | (1,517 | ) | ||||
| Decrease (increase) in salvage fund | 51 | (3 | ) | |||||
| Net cash used in investing activities | (2,109 | ) | (1,520 | ) | ||||
| Cash flows from financing activities | ||||||||
| Long-term borrowings | - | 1,120 | ||||||
| Net cash provided by financing activities | - | 1,120 | ||||||
| Net decrease in cash and cash equivalents | (681 | ) | (701 | ) | ||||
| Cash and cash equivalents, beginning of period | 3,458 | 1,444 | ||||||
| Cash and cash equivalents, end of period | $ | 2,777 | $ | 743 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest, net of amounts capitalized | $ | 485 | $ | - | ||||
| Supplemental disclosure of non-cash investing activities | ||||||||
Due to operators for accrued capital expenditures for oil and gas properties | $ | 467 | $ | 254 | ||||
| Nine months ended Sepember 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | 2,078 | $ | (1,349 | ) | |||
| Adjustments to reconcile net income (loss) to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depletion and amortization | 2,598 | 2,563 | ||||||
| Gain on sale of oil and gas properties | (899 | ) | - | |||||
| Accretion expense | 16 | 22 | ||||||
| Gain on debt extinguishment | (1,313 | ) | - | |||||
| Amortization of debt discounts and deferred financing costs | - | 91 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease in production receivable | 268 | 114 | ||||||
| (Increase) decrease in other current assets | (21 | ) | 45 | |||||
| (Decrease) increase in due to operators | (20 | ) | 38 | |||||
| Decrease in accrued expenses | (2 | ) | (14 | ) | ||||
| Settlement of asset retirement obligations | (13 | ) | (82 | ) | ||||
| Net cash provided by operating activities | 2,692 | 1,428 | ||||||
| Cash flows from investing activities | ||||||||
| Capital expenditures for oil and gas properties | (1,673 | ) | (2,160 | ) | ||||
| Proceeds from sale of oil and gas properties | 3,099 | - | ||||||
| (Increase) decrease in salvage fund | (126 | ) | 51 | |||||
| Net cash provided by (used in) investing activities | 1,300 | (2,109 | ) | |||||
| Cash flows from financing activities | ||||||||
| Repayments of long-term borrowings | (3,966 | ) | - | |||||
| Net cash used in financing activities | (3,966 | ) | - | |||||
| Net increase (decrease) in cash and cash equivalents | 26 | (681 | ) | |||||
| Cash and cash equivalents, beginning of period | 2,423 | 3,458 | ||||||
| Cash and cash equivalents, end of period | $ | 2,449 | $ | 2,777 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest, net of amounts capitalized | $ | 396 | $ | 485 | ||||
| Supplemental disclosure of non-cash investing activities | ||||||||
| Due to operators for accrued capital expenditures for oil and gas properties | $ | 534 | $ | 467 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 3 |
RIDGEWOOD ENERGY A-1 FUND, LLC
| 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 Fundthe 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 Fundthe 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, 34, 5 and 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, 20162017 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K (“20162017 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, 2016,2017, 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 20162017 Annual Report. There have been no significant changes to the Fund’s significant accounting policies during the three and nine months ended September 30, 2017.2018, except as noted below for revenue recognition. See Note 2. “Revenue Recognition” for discussion of the Fund’s updated accounting policies related to revenue recognition for revenue from contracts with customers.
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, salvage fund, production receivable, other current assets, due to operators, accrued expenses, other current liabilities and long-term debt. Except for long-term debt, the carrying amounts of these instruments approximate fair value due to their short-term nature. The Fund’s salvage fund is a separate interest-bearing account that has no restrictions on withdrawals, therefore its carrying amount approximates fair value. The portion of the Fund’s investments in federal agency mortgage-backed securities are carried in the financial statements at fair value as noted below. The Fund’s long-term debt is valued using an income approach and classified as Level 3 in the fair value hierarchy. The Fund applies the provisions of the fair value measurement accounting guidance to its non-financial assets and liabilities, such as oil and gas properties and asset retirement obligations, on a non-recurring basis.
| 4 |
Salvage Fund
The Fund deposits cash in a separate interest-bearing account, or salvage fund, cash to provide for the fundingdismantling and removal of asset retirement obligations.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 September 30, 20172018 and December 31, 2016,2017, 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.
| Gross | ||||||||||||
| Amortized | Unrealized | Fair | ||||||||||
| Cost | Gains | Value | ||||||||||
| (in thousands) | ||||||||||||
| Government National Mortgage Association security (GNMA July 2041) | ||||||||||||
| September 30, 2017 | $ | 46 | $ | 2 | $ | 48 | ||||||
| December 31, 2016 | $ | 64 | $ | 3 | $ | 67 | ||||||
| Gross | ||||||||||||
| Amortized | Unrealized | Fair | ||||||||||
| Cost | Gains | Value | ||||||||||
| (in thousands) | ||||||||||||
| Government National Mortgage Association security (GNMA July 2041) | ||||||||||||
| September 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. At least bi-annually,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. The following table presents changes in asset retirement obligations duringfor the nine months ended September 30, 2017 and 2016.
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | 1,675 | $ | 2,119 | ||||
| Liabilities incurred | 2 | - | ||||||
| Liabilities settled | (82 | ) | - | |||||
| Accretion expense | 22 | - | ||||||
| Revision of estimates | (122 | ) | - | |||||
| Balance, end of period | $ | 1,495 | $ | 2,119 | ||||
| Nine months ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| (in thousands) | ||||||||
| Balance, beginning of period | $ | 1,401 | $ | 1,675 | ||||
| Liabilities incurred | 2 | 2 | ||||||
| Liabilities settled/relieved | (54 | ) | (82 | ) | ||||
| Accretion expense | 16 | 22 | ||||||
| Revision of estimates | - | (122 | ) | |||||
| Balance, end of period | $ | 1,365 | $ | 1,495 | ||||
During the nine months ended September 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. The Fund maintains a salvage fund to provide for the funding of asset retirement obligations.
| 5 |
Impairment of Long-Lived Assets
The Fund reviews the carrying value of its oil and gas properties annually and when management determines thatfor impairment whenever events and circumstances indicate that the recorded carrying value of propertiesthe 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 estimated future net discounted cash flows from the asset.a valuation technique that considers both market and income approaches and uses 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. Given the volatility
There were no impairments of oil and natural gas prices, it is reasonably possible thatproperties during each of the Fund’s estimate of future net discounted cash flows from proved oilthree and natural gas reserves could change in the near term.
Recent Accounting Pronouncements
In May 2014,August 2018, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on fair value measurement, which adds, among other things, disclosure requirements for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This accounting guidance is effective for the Fund in the first quarter 2020 with early adoption permitted. The Fund does not expect this accounting guidance will have a material impact on its financial statements upon adoption.
In May 2014, the FASB issued accounting guidance on revenue recognition (“New Revenue Standard”), which provides for a single five-step model to be applied to all revenue contracts with customers. In July 2015, the FASB issued a deferral of the effective date of the guidanceNew Revenue Standard to 2018, with early adoption permitted in 2017. In March 2016, the FASB issued accounting guidance, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard.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 guidance.New Revenue Standard. The accounting guidanceNew Revenue Standard may be applied either retrospectively or through the use of a modified-retrospective method. The Fund has substantially completed the evaluation of the accounting guidance and currently expects the adoption of the accounting guidance will not have a material impact on the Fund’s financial statements. Under the new accounting guidance,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 its currentthe Fund’s previous revenue recognition model. The Fund will adoptadopted the new accounting guidanceNew Revenue Standard using the modified retrospective method at the date of adoption, which ison 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 all existing contracts for which revenues have not been recognized under the previous revenue guidance as of December 31, 2017. Although the Fund hasdid not identifiedidentify changes to its revenue recognition that would resultresulted in a material cumulative effect adjustment to retained earnings on January 1, 2018, the Fund expects the adoption of the accounting guidance will resultresulted in enhanced disclosures related to revenue recognition policies, the Fund’s performance obligations and significant judgments used in applying the newNew Revenue Standard.
Revenue from Contracts with Customers
Oil and gas revenues are recognized at the point when control of oil and natural gas is transferred to the customers. Natural gas liquid (“NGL”) sales are included within gas sales. The Fund’s oil and natural gas generally is sold to its customers at prevailing market prices based on an index in which the prices are published, adjusted for pricing differentials, quality of the oil and pipeline allowances.
Oil and Gas Revenue
Generally, the Fund sells oil 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 recognition accounting guidance.
| 6 |
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 Fund for the sale of NGLs. In this type of arrangement, the Fund evaluates whether it is the principal or agent in the transaction. The Fund concluded that it is the principal and the ultimate third-party purchaser is the customer, therefore, 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.
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. | Oil and Gas Properties |
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 had 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, 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.
| 7 |
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 was recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale were utilized to repay a portion of the long-term debt outstanding under the credit agreement. The sale did not qualify as discontinued operations because it did not represent a strategic shift that has, or will have, a major effect on the Fund’s operations and financial results.
| 4. | 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. In addition, pursuant to the terms of the LLC Agreement,Fund, however, the Manager is also permitted to waive the management fee at its own discretion. SuchTherefore, the management fee may be temporarily waived to accommodate the Fund’s short-term capital commitments. Management fees during each of the three and nine months ended September 30, 20172018 and 20162017 were $0.1 million and $0.3 million, respectively.
The Manager is also entitled to receive a 15% interest inof the cash distributions from operations made by the Fund. The Fund did not pay distributions during the three and nine months ended September 30, 20172018 and 2016.
The Fund entered into a master agreement withutilizes Beta Sales and Transport, LLC, a wholly ownedwholly-owned subsidiary of the Manager, to facilitate the transportation and sale of oil and natural gas produced from the Beta Project. The Fund has provided discussion of this agreement in Note 2 of “Notes to Financial Statements” – “Related Parties” contained in Item 8. “Financial Statements and Supplementary Data” within its 2016 Annual Report.
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 projects to acquire and develop oil and natural gas projects, which are also owned by other entities that are likewise managed by the Manager.
| 5. | Credit Agreement – Beta Project Financing |
On June 1, 2018, the Fund and other participating funds managed by the Manager, and Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendment (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the 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 and as amended by the Third Amendment, the “Credit Agreement”). In conjunction with the sale of a portion of the Beta Project working interest and the repayment of a portion of amounts outstanding on the Credit Agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager and the Lenders entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement effective as of September 1, 2018 (“Fourth Amendment Effective Date”).
The Third Amendment extended the loan maturity from December 31, 2016,2020 to December 31, 2022, revised the Fund had borrowingsinterest rate and required a monthly payment amount based on a fixed percentage of $7.3 millionthe Fund’s Net Revenue (as defined in the Credit Agreement) derived from the Beta Project, changed the overriding royalty interest (“ORRI”) in its working interest in the Beta Project conveyed to the Lenders to a fixed percentage of 10.81% from a tiered structure, and deferred the payment of such ORRI, which will not become payable to the Lenders until January 1, 2023. The proceeds from the sale of a portion of the working interest in the Beta Project were used to reduce the outstanding debt under the credit agreement. The loan bears interest at 8% compounded annually. Principal and interest are repaid atCredit Agreement. As a result, the lesserFourth Amendment principally reduced the fixed percentage for the calculation of the Monthlymonthly payments and amended the interest calculation. Beginning on September 1, 2018 up to and including March 31, 2019, the Fund’s fixed percentage is 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project determined on September 1, 2018, as scheduled in the Credit Agreement. Beginning on April 1, 2019 and each April 1st thereafter, the Fund’s fixed percentage will be the greater of (i) 30% or (ii) the Fixed Amount or the Debt Service Cap amount,Reassessment Percentage, as defined in the credit agreement,Credit Agreement. The Fixed Reassessment Percentage is determined annually 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’ proved plus probable future undiscounted cash flows attributable to the Beta Project through the maturity of the loan. Beginning on September 1, 2018 and thereafter until the loan is repaid in full, in no event later than December 31, 2020.2022, the loan will bear interest at a rate equal to 8.75% compounded monthly.
| 8 |
The Fund reviewed the terms of the Third Amendment and determined that the conditions were 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. The Fund then reviewed the terms of the Fourth Amendment and determined that the Fourth Amendment met the conditions of debt extinguishment pursuant to ASC 470-50 guidance in a non-troubled debt restructuring. Pursuant to ASC 470-50 guidance, the new debt instrument shall be initially recorded at fair value and the difference between the fair value of the new debt instrument and the carrying amount of the debt being extinguished is recognized as a gain or loss on extinguishment of debt. Additionally, the difference in the fair value of the ORRI before and after the Fourth Amendment is included in the gain or loss recognized upon extinguishment of the debt.
The Fund recognized a gain on debt extinguishment of $1.3 million during third quarter 2018, which is recorded within “Other income (loss)” in its condensed statements of operations. The gain on debt extinguishment primarily represents non-cash gains associated with the change in the fair value of ORRI conveyed to the Lenders totaling $1.3 million and the difference between the fair value of the new debt and the carrying amount of the old debt totaling $16 thousand. The Fund estimated the fair value of the ORRI before and after the Fourth Amendment using a discounted cash flow method based on Level 3 inputs, which included future revenue from proved and probable oil and natural gas reserves from the Beta Project, future commodity pricing curves to derive future cash flows and risk-adjusted discount rate of 9%. The change in the fair value of the ORRI of $1.3 million is recorded within “Total oil and gas properties, net” on the Fund’s balance sheet, which will be amortized to depletion expense using the units-of-production method over the life of the Beta Project. The Fund estimated the fair value of the amended debt by discounting future cash payments of principal and interest to a present value amount using a market yield for debt instruments with similar terms, maturities and credit ratings. The Fund used a market yield of 9.25% to estimate the fair value of the amended debt, which was determined to be $3.3 million. The discounted loan is being accreted to its face value using the effective interest method over the remaining term of the amended debt.
As of September 30, 2018 and December 31, 2017, the Fund had borrowings of $3.2 million and $7.2 million, respectively, under the Credit Agreement. The loan may be prepaid by the Fund without premium or penalty. As of December 31, 2016, in accordance withSeptember 30, 2018, the termsestimated fair value of the credit agreement, there aredebt approximates its carrying value.
There were no additional borrowings available to the Fund. On September 15, 2017, the Fund and other participating funds managed by the Manager, entered into the second amendment to the credit agreement (“Second Amendment”). The Second Amendment principally amended the definition of net revenues, which is the basis for the calculation of the Debt Service Cap amount.
As of September 30, 2018 and December 31, 2017, there were no accrued interest costs outstanding. Interest costs incurred during the three and nine months ended September 30, 2018 of $0.1 million was capitalizedand $0.4 million, respectively, were expensed and included on the balance sheetstatements of operations within “Oil and gas properties”.
The credit agreementCredit Agreement contains customary covenants, with which the Fund was in compliance as of September 30, 20172018 and December 31, 2016.
| 6. | Commitments and Contingencies |
Capital Commitments
As of September 30, 2017,2018, the Fund’s estimated capital commitments related to its oil and gas properties were $3.7$3.5 million (which include asset retirement obligations for the Fund’s projects of $2.3$1.9 million), of which $2.1$2.0 million is expected to be spent during the next twelve months primarily related to the additional development costs for the Beta Project. As a result of continued development of the Beta Project, the Fund has experienced negative cash flows for the nine months ended September 30, 2017.months. 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.
| 9 |
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 September 30, 20172018 and December 31, 2016,2017, 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 with the BOEM, its operators and working interest partners to determine and agree upon the correct level of decommissioning obligations to which they may be liable and the manner in which such obligations will be secured. 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 fundsentities managed by the Manager. Depending on the extent, nature and payment of claims made by the Fund or other fundsentities managed by the Manager, yearly insurance coverage may be exhausted and become insufficient to cover a claim by the Fund in a given year.
| 10 |
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, 2016.
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.
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. Significant declines in prices couldrecoverable 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 sustained lowervolatile oil and natural gas commodity price environment, the Fund continued to advance the development of the Beta Project, which commenced production during the second half ofin 2016. The Fund has suspended distributions and continues to conserve cash to provide for the continued development of the Beta Project.
| 11 |
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. |
Business Update
Information regarding the Fund’s current projects, all of which are located in the United States offshore waters ofin the Gulf of Mexico, is provided in the following table. See “Liquidity Needs” under this Item 2. “Management’s“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.
| 12 |
| Total Spent | Total | |||||||||||
| Working | through | Fund | ||||||||||
| Project | Interest | September 30, 2018 | Budget | Status | ||||||||
| (in thousands) | ||||||||||||
| Producing Properties | ||||||||||||
| Beta Project | 1.64% | $ | 15,591 | $ | 17,947 | 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 second quarter 2017 and third quarter 2017, respectively. Wells #5 and #6 commenced production in first quarter 2018 and third quarter 2018, respectively. Well #7, which began drilling in third quarter 2018, is expected to commence production in first quarter 2019. The Fund expects to spend $1.6 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. | ||||||
Beta Project – Partial Sale of Working Interest
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 had 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, 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 was recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale were utilized to repay a portion of the long-term debt outstanding under the credit agreement.
| 13 |
| Total Spent | Total | |||||||||||||
| Working | through | Fund | ||||||||||||
| Project | Interest | September 30, 2017 | Budget | Status | ||||||||||
| (in thousands) | ||||||||||||||
| Producing Properties | ||||||||||||||
| Beta Project | 2.0% | $ | 16,689 | $ | 19,069 | The Beta Project is expected to include the development of five wells. Wells #1 and #2 commenced production during third quarter 2016 and fourth quarter 2016, respectively. Wells #3 and #4 commenced production during second quarter 2017 and third quarter 2017, respectively. Well #5 began drilling in third quarter 2017 and is expected to commence production in first quarter 2018. The Fund expects to spend $1.5 million for additional development costs and $0.9 million for asset retirement obligations. | ||||||||
| Liberty Project | 2.0% | $ | 3,004 | $ | 3,445 | The Liberty Project, a single-well project, commenced production in 2010. After various shut-ins in late-2015 and early-2016, due to third-party facilities' repair and maintenance activities, the well resumed production in early-May 2016. The well was shut-in again in late-June 2017 due to gas dehydration unit work, resuming production in late-September 2017. The operator is currently flowing the well's current zone together with the behind-pipe zone at no cost to the Fund. The Fund expects to spend $0.4 million for asset retirement obligations. | ||||||||
Results of Operations
The following table summarizes the Fund’s results of operations during the three and nine months ended September 30, 20172018 and 2016,2017, 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 September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 777 | $ | 220 | $ | 2,692 | $ | 376 | ||||||||
| Expenses | ||||||||||||||||
| Depletion and amortization | 395 | 167 | 2,563 | 198 | ||||||||||||
| Management fees to affiliate | 93 | 64 | 280 | 254 | ||||||||||||
| Operating expenses | 164 | 91 | 515 | 134 | ||||||||||||
| General and administrative expenses | 38 | 41 | 126 | 114 | ||||||||||||
| Total expenses | 690 | 363 | 3,484 | 700 | ||||||||||||
| Income (loss) from operations | 87 | (143 | ) | (792 | ) | (324 | ) | |||||||||
| Interest expense, net | (187 | ) | (103 | ) | (557 | ) | (100 | ) | ||||||||
| Net loss | (100 | ) | (246 | ) | (1,349 | ) | (424 | ) | ||||||||
| Other comprehensive (loss) income | ||||||||||||||||
| Unrealized (loss) gain on marketable securities | - | - | (1 | ) | 1 | |||||||||||
| Total comprehensive loss | $ | (100 | ) | $ | (246 | ) | $ | (1,350 | ) | $ | (423 | ) | ||||
| Three months ended September 30, | Nine months ended Sepember 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 1,092 | $ | 777 | $ | 3,719 | $ | 2,692 | ||||||||
| Expenses | ||||||||||||||||
| Depletion and amortization | 636 | 395 | 2,598 | 2,563 | ||||||||||||
| Management fees to affiliate | 93 | 93 | 280 | 280 | ||||||||||||
| Operating expenses | 156 | 164 | 443 | 515 | ||||||||||||
| General and administrative expenses | 50 | 38 | 143 | 126 | ||||||||||||
| Total expenses | 935 | 690 | 3,464 | 3,484 | ||||||||||||
| Gain on sale of oil and gas properties | 899 | - | 899 | - | ||||||||||||
| Income (loss) from operations | 1,056 | 87 | 1,154 | (792 | ) | |||||||||||
| Other income (loss) | ||||||||||||||||
| Gain on debt extinguishment | 1,313 | - | 1,313 | - | ||||||||||||
| Interest expense, net | (103 | ) | (187 | ) | (389 | ) | (557 | ) | ||||||||
| Total other income (loss) | 1,210 | (187 | ) | 924 | (557 | ) | ||||||||||
| Net income (loss) | 2,266 | (100 | ) | 2,078 | (1,349 | ) | ||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Unrealized loss on marketable securities | - | - | (1 | ) | (1 | ) | ||||||||||
| Total comprehensive income (loss) | $ | 2,266 | $ | (100 | ) | $ | 2,077 | $ | (1,350 | ) | ||||||
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 nine months ended September 30,| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Number of wells producing | 5 | 2 | 5 | 2 | ||||||||||||
| Total number of production days | 280 | 117 | 859 | 190 | ||||||||||||
| Oil sales (in thousands of barrels) | 17 | 5 | 56 | 7 | ||||||||||||
| Average oil price per barrel | $ | 43 | $ | 40 | $ | 44 | $ | 39 | ||||||||
| Gas sales (in thousands of mcfs) | 21 | 8 | 73 | 14 | ||||||||||||
| Average gas price per mcf | $ | 3.61 | $ | 2.36 | $ | 3.35 | $ | 1.97 | ||||||||
| Three months ended September 30, | Nine months ended Sepember 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Number of wells producing | 7 | 5 | 7 | 5 | ||||||||||||
| Total number of production days | 415 | 280 | 1,266 | 859 | ||||||||||||
| Oil sales (in thousands of barrels) | 15 | 17 | 56 | 56 | ||||||||||||
| Average oil price per barrel | $ | 67 | $ | 43 | $ | 63 | $ | 44 | ||||||||
| Gas sales (in thousands of mcfs) | 22 | 21 | 79 | 73 | ||||||||||||
| Average gas price per mcf | $ | 3.63 | $ | 3.61 | $ | 3.50 | $ | 3.35 | ||||||||
The increases in the above table werenumber of wells producing and production days primarily related to the commencement of production of fourthree wells in the Beta Project, two wells during the second half of 2016one well in third quarter 2017 and two wells during 2018. The increases in gas sales volume were primarily related to the Liberty Project, which experienced increased production as a result of recompletion work in third quarter 2017, partially offset by the LibertyBeta Project, which was shut-inexperienced shut-ins during the majority of third quarter 2017.2018 due to facility downtime. See additional discussion in “Business Update” section above.
Oil and Gas Revenue.
Oil and gas revenue during the nine months ended September 30, 20172018 was $2.7$3.7 million, an increase of $2.3$1.0 million from the nine months ended September 30, 2016.2017. The increase was attributable to increased sales volume totaling $2.0 million coupled with increased oil and gas prices totaling $0.4$1.1 million, partially offset by decreased sales volume totaling $0.1 million.
See “Overview” above for factors that impact the oil and gas revenue volume and rate variances.
| 14 |
Depletion and Amortization
. Depletion and amortization during the three months ended September 30,Depletion and amortization during the nine months ended September 30, 2018 was $2.6 million, an increase of $35 thousand from the nine months ended September 30, 2017. The increase was attributable to an adjustment to the asset retirement obligation related to a fully depleted property totaling $0.1 million, which was recorded in first quarter 2017.
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-termOperating Expenses.
Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells, as detailed in the following table.| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Lease operating expense | $ | 98 | $ | 31 | $ | 333 | $ | 56 | ||||||||
| Insurance expense | 42 | 50 | 103 | 65 | ||||||||||||
| Transportation and processing expense | 12 | - | 28 | - | ||||||||||||
| Accretion expense | 7 | - | 22 | - | ||||||||||||
| Workover expense and other | 5 | 10 | 29 | 13 | ||||||||||||
| $ | 164 | $ | 91 | $ | 515 | $ | 134 | |||||||||
| Three months ended September 30, | Nine months ended Sepember 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Lease operating expense | $ | 102 | $ | 98 | $ | 304 | $ | 333 | ||||||||
| Insurance expense | 33 | 42 | 85 | 103 | ||||||||||||
| Transportation and processing expense | 6 | 12 | 24 | 28 | ||||||||||||
| Accretion expense | 8 | 7 | 16 | 22 | ||||||||||||
| Workover expense and other | 7 | 5 | 14 | 29 | ||||||||||||
| $ | 156 | $ | 164 | $ | 443 | $ | 515 | |||||||||
Lease operating expense and transportation and processing expense, relatesrelate to the Fund’s producing properties. Insurance expense represents premiums related to the Fund’s properties, which vary depending upon the number of wells producing or drilling. Accretion expense relates to the asset retirement obligations established for the Fund’s provedoil and gas properties. Workover expense represents costs to restore or stimulate production of existing reserves.
The average production cost, which includes lease operating expense, transportation and processing expense and insurance expense, was $7.32$7.59 per barrel of oil equivalent (“BOE”) and $6.00 per BOE during the three and nine months ended September 30, 2018, respectively, compared to $7.32 per BOE and $6.79 per BOE during the three and nine months ended September 30, 2017, respectively, compared to $12.69 per BOE and $12.75respectively. The decrease in the average production cost per BOE during the three and nine months ended September 30, 2016, respectively. The decreases were2018 compared to the nine months ended September 30, 2017 was primarily attributable to the Beta Project, which commenced production in third quarter 2016, and 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-in to the facility.
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.Gain on Sale of Oil and Gas Properties.During the three and nine months ended September 30, 2018, the Fund recorded a gain on sale of oil and gas properties of $0.9 million related to the sale of a portion of the Fund’s working interest in the Beta Project. There was no such amount recorded during the three and nine months ended September 30, 2017. See “Beta Project – Partial Sale of Working Interest” section above for more information.
Gain on Debt Extinguishment. During the three and nine months ended September 30, 2018, the Fund recorded a gain on debt extinguishment of $1.3 million related to accounting for the fourth amendment to the credit agreement. See Note 5 of “Notes to Unaudited Condensed Financial Statements” - “Credit Agreement - Beta Project Financing” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for more information regarding the gain on debt extinguishment. There was no such amount recorded during the three and nine months ended September 30, 2017.
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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 “LiquidityUnrealized (Loss) GainLoss on Marketable Securities.
Capital Resources and Liquidity
Operating Cash Flows
Cash flows provided by operating activities during the nine months ended September 30, 2018 were $2.7 million, primarily related to revenue received of $4.0 million, partially offset by operating expenses of $0.4 million, interest payments of $0.4 million, management fees of $0.3 million and general and administrative expenses of $0.1 million.
Cash flows provided by operating activities during the nine months ended September 30, 2017 were $1.4 million, related to revenue received of $2.8 million, partially offset by interest payments of $0.5 million, operating expenses of $0.9$0.4 million, management fees of $0.3 million, general and administrative expenses of $0.1 million and the settlement of an asset retirement obligationobligations of $0.1 million.
Investing Cash Flows
Cash flows used in operatingprovided by investing activities during the nine months ended September 30, 20162018 were $0.3$1.3 million, related to management feesproceeds from sale of $0.3 million, operating expensesoil and gas properties of $0.2 million and general and administrative expenses of $0.1$3.1 million, partially offset by revenue receivedcapital expenditures for oil and gas properties of $0.2$1.7 million and investments in salvage fund of $0.1 million.
Cash flows used in investing activities during the nine months ended September 30, 2017 were $2.1 million, primarily related to capital expenditures for oil and gas properties.
Financing Cash Flows
Cash flows used in investingfinancing activities during the nine months ended September 30, 20162018 were $1.5$4.0 million, primarily related to capital expenditures for oil and gas properties.
There were no cash flows from financing activities during the nine months ended September 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 in certain circumstances, through debt financing. The Fund’s remaining capital has been fully allocated to complete 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.
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 September 30, 2017,2018, the Fund’s estimated capital commitments related to its oil and gas properties were $3.7$3.5 million (which include asset retirement obligations for the Fund’s projects of $2.3$1.9 million), of which $2.1$2.0 million is expected to be spent during the next twelve months primarily related to the additional development costs for the Beta Project. As a result of continued development of the Beta Project, the Fund has experienced negative cash flows for the nine months ended September 30, 2017.months. 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 as well asand 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.
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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, debt service costs,borrowing repayments and funding its estimated asset retirement obligations.
Credit Agreement
On June 1, 2018, the Fund and other participating funds managed by the Manager, and Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendment (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the credit agreement, dated as of November 27, 2012 (as amended onby 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, and as amended by the Third Amendment, the “Credit Agreement”) to provide capital toward. In conjunction with the fundingsale of a portion of the Fund’s shareBeta Project working interest and the repayment of development costsa portion of amounts outstanding on the Beta Project.Credit Agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager and the Lenders entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement effective as of September 1, 2018 (“Fourth Amendment Effective Date”). As of September 30, 20172018 and December 31, 2016,2017, the Fund had borrowed $7.3borrowings of $3.2 million and $7.2 million, respectively, under the Credit Agreement.
The Third Amendment extended the loan maturity from December 31, 2020 to December 31, 2022, revised the interest rate and required a monthly payment amount based on a fixed percentage of the Fund’s Net Revenue (as defined in the Credit Agreement) derived from the Beta Project, changed the overriding royalty interest (“ORRI”) in its working interest in the Beta Project conveyed to the Lenders to a fixed percentage of 10.81% from a tiered structure, and deferred the payment of such ORRI, which will not become payable to the Lenders until January 1, 2023. The proceeds from the sale of a portion of the working interest in the Beta Project were used to reduce the outstanding debt under the Credit Agreement. As of December 31, 2016, in accordance witha result, the termsFourth Amendment principally reduced the fixed percentage for the calculation of the monthly payments and amended the interest calculation. Beginning on September 1, 2018 up to and including March 31, 2019, the Fund’s fixed percentage is 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project determined on September 1, 2018, as scheduled in the Credit Agreement, there are no additional borrowings available toAgreement. Beginning on April 1, 2019 and each April 1st thereafter, the Fund.
The 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 Credit Agreement may accelerate the maturity of the loan and require full and immediate repayment of all borrowings under the Credit Agreement. The Fund believes it is in compliance with all covenants under the Credit Agreement as of September 30, 20172018 and December 31, 2016.
Off-Balance Sheet Arrangements
The Fund had no off-balance sheet arrangements as of September 30, 20172018 and December 31, 20162017 and does not anticipate the use of such arrangements in the future.
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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 September 30, 20172018 and December 31, 2016,2017, other than those discussed in “Estimated Capital Expenditures” and “Liquidity Needs – Credit 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.
Not required.
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 September 30, 2017.
There has been no change in the Fund’s internal control over financial reporting that occurred during the three months ended September 30, 20172018 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
PART II – OTHER INFORMATION
None.
Not required.
None.
None.
None.
| ITEM 5. | OTHER INFORMATION |
None.
| 18 |
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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: | November | By: | /s/ | ROBERT E. SWANSON | ||
| Name: | Robert E. Swanson | |||||
| Title: | Chief Executive Officer | |||||
| (Principal Executive Officer) | ||||||
| Dated: | November | By: | /s/ | KATHLEEN P. MCSHERRY | ||
| Name: | Kathleen P. McSherry | |||||
| Title: | Executive Vice President and Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) |
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