Form 8-K Energy XXI Ltd For: Sep 02

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): September 2, 2015

 

Energy XXI Ltd

(Exact name of registrant as specified in its charter)

 

BERMUDA		001-33628		98-0499286
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

Canon’s Court, 22 Victoria Street, P.O. Box HM

1179, Hamilton HM EX, Bermuda

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (441) 295-2244

 

(Former name or former address, if changed since last report.)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 4.02(a) – Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

 

On September 2, 2015, in connection with preparing its annual report on Form 10-K for the year ended June 30, 2015 (the “2015 Form 10-K”), management of Energy XXI Ltd (the “Company”) and the Audit Committee of its Board of Directors (the “Audit Committee”) determined that the contemporaneous formal documentation it had historically prepared to support its initial designations of derivative financial instruments as cash flow hedges in connection with the Company’s crude oil and natural gas hedging program did not meet the technical requirements to qualify for cash flow hedge accounting treatment in accordance with ASC Topic 815, Derivatives and Hedging.  The primary reason for this determination was that the formal hedge documentation lacked specificity of the hedged items and, therefore, the designations failed to meet hedge documentation requirements for cash flow hedge accounting treatment.  Consequently, unrealized gains or losses resulting from those derivative financial instruments should have been recorded in the Company’s consolidated statements of operations as a component of earnings.  Under the cash flow accounting treatment previously applied by the Company, unrealized gains or losses resulting from changes in the fair value of its derivative financial instruments were recorded , net of the related tax impact, in accumulated other comprehensive income or loss, until the production month when the associated hedge contracts were settled at which time gains or losses associated with the settled contracts were reclassified to revenues .

 

The Audit Committee has concluded that the Company’s previously issued consolidated financial statements for the years ended June 30, 2014, 2013, 2012 and 2011 and for the quarters ended September 30, 2014 and 2013, December 31, 2014 and 2013, March 31, 2015 and 2014 and June 30, 2014 should no longer be relied upon, and determined that those financial statements will be restated. This restatement primarily reflects the recognition of unrealized gains and losses on derivative financial instruments previously included in accumulated other comprehensive income (loss) to gain (loss) on derivative financial instruments included in earnings and the reclassification of amounts associated with settled contracts previously included in oil and gas sales revenues to gain (loss) on derivative financial instruments as a result of not qualifying as for cash flow hedge accounting treatment described above. The restatement also reflects resulting adjustments to net oil and natural gas properties, impairment of oil and natural gas properties and depreciation, depletion and amortization due to the previous inclusion of the value of the cash flow hedges in our full cost ceiling test, which is only permitted if the derivative instruments qualify for cash flow hedge accounting; and adjustments to deferred income taxes and income tax expense (benefit). While these non-cash adjustments impact revenues, net income (loss) and net income (loss) per common share for each period, as well as total stockholders’ equity, these adjustments do not impact the economics of the hedge transactions or net cash flows from operating, investing or financing activities, nor do they affect the Company’s liquidity or Adjusted earnings before interest, depreciation, taxes and amortization (EBITDA) for each such period. The restatement will not have any impact on any of the Company’s financial covenants under its revolving credit facility, 11.000% senior secured second lien notes or senior note indentures. The primary financial statement items impacted by this restatement for and as of the years ended June 30, 2014 and 2013 and for and as of the quarters ended September 30, 2014 and 2013, December 31, 2014 and 2013, March 31, 2015 and 2014 and June 30, 2014 are as follows:

 

 

ENERGY XXI LTD

Restatement of Historical Statement of Operations Data
(In Thousands, except per share information)

(Unaudited)

 

		For the Year Ended								For the Quarter Ended
		June 30,								September 30,								December 31,								March 31,								June 30,
		2013				2014				2013				2014				2013				2014				2014				2015				2014
Revenues – Crude oil sales:
As previously reported		$	1,080,982			$	1,091,223			$	289,229			$	368,501			$	262,230			$	324,655			$	249,955			$	232,520			$	289,809
Adjustments to revenues – crude oil sales			(13,295	)			12,985				1,737				1,654				1,397				(44,947	)			4,686				(54,915	)			5,166
As restated			1,067,687				1,104,208				290,966				370,155				263,627				279,708				254,641				177,605				294,975
Revenues – natural gas sales:
As previously reported			127,863				139,502				35,363				34,730				34,586				33,100				35,228				27,672				34,325
Adjustments to revenues – natural gas sales			(15,110	)			(3,619	)			(2,779	)			(169	)			(3,448	)			(1,299	)			2,334				(660	)			274
As restated			112,753				135,883				32,584				34,561				31,138				31,801				37,562				27,012				34,599
(Loss) gain on derivative financial instruments:
As previously reported			(1,756	)			(5,704	)			(1,441	)			3,283				(5,722	)			886				205				(1,932	)			1,254
Adjustments to (loss) gain on derivative financial instruments			(19,752	)			(81,264	)			(28,962	)			53,442				(15,229	)			190,576				(7,554	)			18,895				(29,519	)
As restated			(21,508	)			(86,968	)			(30,403	)			56,725				(20,951	)			191,462				(7,349	)			16,963				(28,265	)
Total Revenues:
As previously reported			1,208,845				1,230,725				324,592				403,231				296,816				357,755				285,183				260,192				324,134
Adjustments to total revenues			(49,913	)			(77,602	)			(31,445	)			58,210				(23,002	)			145,216				(329	)			(38,612	)			(22,826	)
As restated			1,158,932				1,153,123				293,147				461,441				273,814				502,971				284,854				221,580				301,308
Net Income (Loss):
As previously reported			162,081				59,111				43,139				(6,403	)			10,495				(373,879	)			7,292				(584,317	)			(1,815	)
Adjustments to net income (loss)			18,702				(40,987	)			(17,857	)			33,593				(8,567	)			97,916				(974	)			89,256				(13,589	)
As restated			180,783				18,124				25,282				27,190				1,928				(275,963	)			6,318				(495,061	)			(15,404	)
Earnings (Loss) per Share (Basic):
As previously reported			1.90				0.64				0.53				(0.10	)			0.10				(4.01	)			0.06				(6.22	)			(0.06	)
Adjustments to earnings (loss) per share (basic)			0.24				(0.55	)			(0.23	)			0.36				(0.11	)			1.04				(0.01	)			0.95				(0.18	)
As restated			2.14				0.09				0.30				0.26				(0.01	)			(2.97	)			0.05				(5.27	)			(0.24	)
Earnings (Loss) per Share (Diluted):
As previously reported			1.86				0.64				0.51				(0.10	)			0.10				(4.01	)			0.06				(6.22	)			(0.06	)
Adjustments to earnings (loss) per share (diluted)			0.08				(0.55	)			(0.24	)			0.34				(0.11	)			1.04				(0.01	)			0.95				(0.18	)
As restated			1.94				0.09				0.27				0.24				(0.01	)			(2.97	)			0.05				(5.27	)			(0.24	)

 

 

ENERGY XXI LTD

Restatement of Historical Balance Sheet Data

(In Thousands)

(Unaudited)

 

		As Of
		June 30,								September 30,								December 31,								March 31,
		2013				2014				2013				2014				2013				2014				2014				2015
Oil and natural gas properties:
As previously reported		$	3,289,505			$	6,524,602			$	3,399,831			$	6,637,292			$	3,523,881			$	6,642,565			$	3,625,788			$	5,772,316
Adjustments to oil and natural gas properties			(106,631	)			(97,339	)			(104,075	)			(95,213	)			(101,717	)			(93,035	)			(99,526	)			79,517
As restated			3,182,874				6,427,263				3,295,756				6,542,079				3,422,164				6,549,530				3,526,262				5,851,833
Total Assets:
As previously reported			3,611,711				7,436,778				3,743,584				7,496,583				4,161,708				7,224,043				4,181,116				6,755,826
Adjustments to total assets			(106,631	)			(95,281	)			(104,075	)			(95,213	)			(101,717	)			(93,035	)			(99,526	)			79,517
As restated			3,505,080				7,341,497				3,639,509				7,401,370				4,059,991				7,131,008				4,081,590				6,835,343
Accumulated earnings (deficit):
As previously reported			(29,352	)			(19,626	)			1,818				(40,165	)			739				(428,200	)			(3,281	)			(1,016,322	)
Adjustments to accumulated earnings (deficit)			(42,759	)			(83,745	)			(60,615	)			(50,152	)			(69,182	)			47,764				(70,156	)			137,021
As restated			(72,111	)			(103,371	)			(58,797	)			(90,317	)			(68,443	)			(380,436	)			(73,437	)			(879,301	)
Accumulated other comprehensive (loss) income:
As previously reported			26,552				(20,475	)			6,844				15,278				(4,456	)			109,126				(4,794	)			85,361
Adjustments to accumulated other comprehensive (loss) income			(26,552	)			20,475				(6,844	)			(15,278	)			4,456				(109,126	)			4,794				(85,361	)
As restated			–				–				–				–				–				–				–				–
Total Stockholders’ Equity:
As previously reported			1,437,246				1,797,830				1,434,295				1,817,040				1,366,188				1,523,550				1,332,765				912,430
Adjustments to total stockholders’ equity			(69,311	)			(63,270	)			(67,459	)			(65,430	)			(64,726	)			(61,362	)			(65,362	)			51,660
As restated			1,367,935				1,734,560				1,366,836				1,751,610				1,301,462				1,462,188				1,267,403				964,090

 

The matters disclosed in this Current Report on Form 8-K have been discussed by the Audit Committee and management with representatives of BDO USA, LLP, the registered independent public accounting firm that reviewed the financial statements for the three months ended December 31, 2014 and March 31, 2015 to be restated and UHY LLP, the registered independent public accounting firm that audited or reviewed the remainder of the financial statements to be restated. In addition, the Company has discontinued the use of cash flow hedge accounting on all of its outstanding derivative contracts. The Company is assessing the impact of these errors on the effectiveness of their internal controls over financial reporting.

 

 

The Company intends to file with its 2015 Form 10-K (1) a restated balance sheet as of June 30, 2014, (2) restated audited consolidated statements of operations, consolidated statements of cash flows, and consolidated statements of stockholders’ equity (deficit) for the years ended June 30, 2014 and 2013, (3) restated quarterly financial information for the quarters ended September 30, 2014 and 2013, December 31, 2014 and 2013, March 31, 2015 and 2014, and June 30, 2014, and (4) restated selected financial data for the years ended June 30, 2014, 2013, 2012, and 2011,and does not plan to amend previously filed reports in connection with the restatement.  The Company intends to file a Notification of Late Filing on Form 12b-25 in order to obtain an additional fifteen calendar days to file the 2015 Form 10-K, but there can be no assurance that the 2015 Form 10-K will be filed within the fifteen calendar-day period.

 

Cautionary Note to Investors Regarding Forward-Looking Statements

 

This Current Report on Form 8-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include, among other things, the statement that the Company expects to file its 2015 Form 10-K within fifteen calendar days following its 12b-25 filing and the Company’s estimates of the impact the loss of hedge accounting treatment on certain of its derivatives will have on the financial statements described above. There can be no assurance that the Company will be able to file its 2015 Form 10-K within that time period or that such estimates will not change. Forward-looking statements are subject to a number of uncertainties and risks, and actual results may differ materially from those projected. Factors that could affect the Company's actual results include unanticipated delays in the conclusion of the Company’s 2015 integrated audit and the effects of other various risk factors and uncertainties disclosed in the Company’s filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. Such forward-looking statements are made only as of the date of this Form 8-K, and the Company does not undertake any obligation to update any forward-looking statement to reflect subsequent events or circumstances except to the extent required by applicable law.

 

Item 8.01 – Other Events.

 

On September 8, 2015, the Company will issue a press release regarding the matters in this Current Report on Form 8-K. A copy of the Company’s press release is filed as Exhibit 99.1 to this Current Report and is incorporated herein by reference.

 

Item 9.01.  Financial Statements and Exhibits.

 

(d) Exhibits.

 

Exhibit Number		Description
99.1		Press release, dated September 8, 2015.

 

 

SIGNATURES

 

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

 

	Energy XXI Ltd
	By:	/s/ Bruce W. Busmire
		Bruce W. Busmire
September 8, 2015		Chief Financial Officer

 

 

Exhibit Index

 

Exhibit Number		Description
99.1		Press release, dated September 8, 2015.

 

 

 

Exhibit 99.1

 

 

 

Energy XXI Reports Restatement of Prior Period Financials Due to Change in Derivative Accounting Method

 

Non-Cash Restatement with no Impact to Cash/Liquidity

 

HOUSTON – September 8, 2015 – Energy XXI Ltd (NASDAQ: EXXI) (the “Company”) today announced that it will restate its financial statements to correct its method of accounting for crude oil and natural gas hedging to reflect unrealized hedging gains and losses in the Company’s consolidated statements of operations as a component of earnings rather than on its consolidated balance sheets.

 

Historically, under the cash flow hedge accounting, the Company recorded the unrealized gains and losses on its derivative contracts, net of the related tax impact, in accumulated other comprehensive income or loss as part of the consolidated balance sheet, until the production month when the associated hedge contracts were settled at which time gains or losses associated with the settled contracts were reclassified to revenues.

 

During the preparation of its annual report on Form 10-K for the year ended June 30, 2015 (the “2015 Form 10-K”), the Company recently determined that certain oil and gas hedges did not qualify for cash flow hedge accounting treatment at their date of designation. The primary reason for this derivative accounting change was that the formal hedge documentation lacked specificity of the hedged items and, therefore, the designations failed to meet the very complex technical documentation requirements for cash flow hedge accounting treatment. 

 

The Company will restate its previously issued consolidated financial statements for the years ended June 30, 2014, 2013, 2012 and 2011 and for the quarters ended September 30, 2014 and 2013, December 31, 2014 and 2013, March 31, 2015 and 2014 and June 30, 2014. The Company filed a report on Form 8-K providing further details regarding the expected impact of these non-cash adjustments on its financial statements for each restated period. This restatement primarily reflects the unrealized recognition of gains and losses on derivative financial instruments described above. However, the restatement also reflects resulting adjustments to net oil and natural gas properties, impairment of oil and natural gas properties and depreciation, depletion and amortization due to the previous inclusion of the value of the cash flow hedges in the Company’s full cost ceiling test, which is only permitted if the derivative instruments qualify for cash flow hedge accounting; and adjustments to deferred income taxes and income tax expense (benefit). While these non-cash adjustments impact revenues, net income (loss) and net income (loss) per common share for each period, as well as total stockholders’ equity, these adjustments do not impact the economics of the hedge transactions or net cash flows from operating, investing or financing activities, nor do they affect the Company’s liquidity or adjusted earnings before interest, depreciation, taxes and amortization (“EBIDTA”) for each such period.

  

 

 

 

 

2015 Form 10-K, Earnings Release for Fiscal 2015 Fourth-Quarter and Year-End 2015 and Related Conference Call

 

In order to complete the restatements and related review by the Company’s independent registered public accounting firms, the Company will file a Notification of Late Filing on Form 12b-25 in order to obtain an additional fifteen calendar days to file the 2015 Form 10-K. The Company also announced that it plans to postpone the distribution of its 2015 fourth quarter and 2015 fiscal year earnings release and related conference call, previously scheduled for Monday, September 14, 2015. The Company will provide a public update on the timing of the call as soon as practicable.

 

About the Company

 

Energy XXI is an independent oil and natural gas company whose growth strategy emphasizes acquisitions, enhanced by its value-added organic drilling program. The company’s properties are located in the U.S. Gulf of Mexico waters and the Gulf Coast onshore.  To learn more, visit the Energy XXI website at www.EnergyXXI.com.

 

Forward-Looking Statements

 

All statements included in this release relating to future plans, projects, events or conditions and all other statements other than statements of historical fact included in this release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this press release are largely based on our expectations, which reflect estimates and assumptions made by our management. Forward-looking statements include, among other things, the statement that the Company expects to file its 2015 Form 10-K within fifteen calendar days following its 12b-25 filing and the Company’s estimates of the impact the loss of hedge accounting treatment on certain of its derivatives will have on the financial statements described above. There can be no assurance that the Company will be able to file its 2015 Form 10-K within that time period or that such estimates will not change. Forward-looking statements are subject to a number of uncertainties and risks, and actual results may differ materially from those projected. Factors that could affect the Company's actual results include unanticipated delays in the conclusion of the Company’s 2015 integrated audit and the effects of other various risk factors and uncertainties disclosed in the Company’s filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K. Energy XXI does not assume any obligation and expressly disclaims any duty to update the information contained herein except as required by law.

 

Use of Non-GAAP Financial Measure

 

In addition to the financial measures prepared in accordance with accounting principles generally accepted in the United States ("GAAP"), we use the non-GAAP financial measure “EBITDA.” EBITDA is defined as net earnings before interest, taxes, depreciation and amortization expense. EBITDA is not a measure of operating performance under GAAP. The company uses this non-GAAP measure as a key metric for the management of the company and to demonstrate the company’s ability to internally fund capital expenditures and service debt. When analyzing our operating performance, investors should not consider this non-GAAP measure as a substitute for net income prepared in accordance with GAAP.

 

 

 

 

 

Enquiries of the Company

 

 

Energy XXI

Greg Smith

Vice President, Investor Relations

713-351-3149

[email protected]

 

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