10-Q 1 cwei-9302012x10xq.htm 10-Q CWEI - 9.30.2012 - 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarterly period ended September 30, 2012

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                 to                
 
Commission File Number 001-10924
 
CLAYTON WILLIAMS ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
75-2396863
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

Six Desta Drive - Suite 6500
 
 
Midland, Texas
 
79705-5510
(Address of principal executive offices)
 
(Zip code)
 
Registrant’s telephone number, including area code: (432) 682-6324
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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. x Yes o No
 
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). x Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
 
There were 12,163,536 shares of Common Stock, $.10 par value, of the registrant outstanding as of November 6, 2012.
 



CLAYTON WILLIAMS ENERGY, INC.
TABLE OF CONTENTS

 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.  FINANCIAL INFORMATION

Item 1 -
Financial Statements

CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 
ASSETS
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
CURRENT ASSETS
 

 
 

Cash and cash equivalents
$
22,694

 
$
17,525

Accounts receivable:
 

 
 

Oil and gas sales
36,770

 
41,282

Joint interest and other, net
12,357

 
14,517

Affiliates
513

 
990

Inventory
44,272

 
44,868

Deferred income taxes
8,202

 
8,948

Fair value of derivatives
945

 

Prepaids and other
5,730

 
14,813

 
131,483

 
142,943

PROPERTY AND EQUIPMENT
 

 
 

Oil and gas properties, successful efforts method
2,497,466

 
2,103,085

Natural gas gathering and processing systems
45,477

 
26,040

Contract drilling equipment
88,570

 
75,956

Other
20,970

 
19,134

 
2,652,483

 
2,224,215

Less accumulated depreciation, depletion and amortization
(1,271,601
)
 
(1,156,664
)
Property and equipment, net
1,380,882

 
1,067,551

 
 
 
 
OTHER ASSETS
 

 
 

Debt issue costs, net
10,898

 
11,644

Fair value of derivatives
7,745

 

Investments and other
15,531

 
4,133

 
34,174

 
15,777

 
$
1,546,539

 
$
1,226,271

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

3


CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
CURRENT LIABILITIES
 

 
 

Accounts payable:
 

 
 

Trade
$
76,426

 
$
98,645

Oil and gas sales
36,129

 
37,409

Affiliates
123

 
1,501

Fair value of derivatives

 
5,633

Accrued liabilities and other
21,088

 
13,042

 
133,766

 
156,230

NON-CURRENT LIABILITIES
 

 
 

Long-term debt
769,572

 
529,535

Deferred income taxes
152,022

 
134,209

Fair value of derivatives

 
494

Asset retirement obligations
51,547

 
40,794

Deferred revenue from volumetric production payment
39,170

 

Accrued compensation under non-equity award plans
22,675

 
20,757

Other
861

 
751

 
1,035,847

 
726,540

COMMITMENTS AND CONTINGENCIES


 


STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, par value $.10 per share, authorized — 3,000,000 shares; none issued

 

Common stock, par value $.10 per share, authorized — 30,000,000 shares: issued and outstanding — 12,163,536 shares at September 30, 2012 and December 31, 2011
1,216

 
1,216

Additional paid-in capital
152,515

 
152,515

Retained earnings
223,195

 
189,770

 
376,926

 
343,501

 
$
1,546,539

 
$
1,226,271

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

4


CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
REVENUES
 

 
 

 
 

 
 

Oil and gas sales
$
101,638

 
$
99,752

 
$
308,116

 
$
300,488

Natural gas services
671

 
334

 
1,305

 
1,108

Drilling rig services
5,348

 
929

 
11,478

 
3,614

Gain on sales of assets
106

 
49

 
543

 
14,570

Total revenues
107,763

 
101,064

 
321,442

 
319,780

COSTS AND EXPENSES
 

 
 

 
 

 
 

Production
32,564

 
24,284

 
93,937

 
75,237

Exploration:
 

 
 

 
 

 
 

Abandonments and impairments
306

 
1,256

 
2,292

 
2,307

Seismic and other
2,710

 
1,842

 
5,445

 
5,287

Natural gas services
508

 
233

 
956

 
781

Drilling rig services
5,335

 
1,673

 
12,164

 
4,378

Depreciation, depletion and amortization
37,661

 
25,901

 
103,486

 
74,987

Impairment of property and equipment

 
5,035

 
5,711

 
9,459

Accretion of asset retirement obligations
1,069

 
706

 
2,628

 
2,077

General and administrative
5,830

 
7,142

 
25,133

 
22,678

Loss on sales of assets and impairment of inventory
207

 
114

 
485

 
417

Total costs and expenses
86,190

 
68,186

 
252,237

 
197,608

Operating income
21,573

 
32,878

 
69,205

 
122,172

OTHER INCOME (EXPENSE)
 

 
 

 
 

 
 

Interest expense
(9,786
)
 
(8,717
)
 
(27,817
)
 
(24,304
)
Loss on early extinguishment of long-term debt

 
(907
)
 

 
(5,501
)
Gain (loss) on derivatives
(21,901
)
 
92,286

 
9,856

 
74,128

Other
(559
)
 
527

 
739

 
3,514

Total other income (expense)
(32,246
)
 
83,189

 
(17,222
)
 
47,837

Income (loss) before income taxes
(10,673
)
 
116,067

 
51,983

 
170,009

Income tax (expense) benefit
3,497

 
(41,544
)
 
(18,558
)
 
(60,693
)
NET INCOME (LOSS)
$
(7,176
)
 
$
74,523

 
$
33,425

 
$
109,316

Net income (loss) per common share:
 

 
 

 
 

 
 

Basic
$
(0.59
)
 
$
6.13

 
$
2.75

 
$
8.99

Diluted
$
(0.59
)
 
$
6.13

 
$
2.75

 
$
8.99

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
12,164

 
12,163

 
12,164

 
12,160

Diluted
12,164

 
12,163

 
12,164

 
12,161

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

5


CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 
 
 
Total
 
No. of
 
Par
 
Paid-In
 
Retained
 
Stockholders’
 
Shares
 
Value
 
Capital
 
Earnings
 
Equity
BALANCE,
 

 
 

 
 

 
 

 
 

December 31, 2011
12,164

 
$
1,216

 
$
152,515

 
$
189,770

 
$
343,501

Net income

 

 

 
33,425

 
33,425

BALANCE,
 

 
 

 
 

 
 

 
 

September 30, 2012
12,164

 
$
1,216

 
$
152,515

 
$
223,195

 
$
376,926

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

6


CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Nine Months Ended
 
September 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
33,425

 
$
109,316

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
103,486

 
74,987

Impairment of property and equipment
5,711

 
9,459

Exploration costs
2,292

 
2,307

(Gain) loss on sales of assets and impairment of inventory, net
(58
)
 
(14,153
)
Deferred income tax expense
18,558

 
60,693

Non-cash employee compensation
2,200

 
6,104

Unrealized gain on derivatives
(14,817
)
 
(82,029
)
Accretion of asset retirement obligations
2,628

 
2,077

Amortization of debt issue costs and original issue discount
1,587

 
1,623

Loss on early extinguishment of long-term debt

 
5,501

Amortization of deferred revenue from volumetric production payment
(5,862
)
 

Changes in operating working capital:
 

 
 

Accounts receivable
7,150

 
768

Accounts payable
(5,772
)
 
(4,456
)
Other
7,355

 
3,090

Net cash provided by operating activities
157,883

 
175,287

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Additions to property and equipment
(438,482
)
 
(282,474
)
Proceeds from volumetric production payment
45,032

 

Proceeds from sales of assets
867

 
12,466

Increase in equipment inventory
64

 
2,844

Other
(195
)
 
(133
)
Net cash used in investing activities
(392,714
)
 
(267,297
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from long-term debt
240,000

 
445,366

Repayments of long-term debt

 
(323,500
)
Premium on early extinguishment of long-term debt

 
(2,765
)
Proceeds from exercise of stock options

 
213

Net cash provided by financing activities
240,000

 
119,314

NET INCREASE IN CASH AND CASH EQUIVALENTS
5,169

 
27,304

CASH AND CASH EQUIVALENTS
 

 
 

Beginning of period
17,525

 
8,720

End of period
$
22,694

 
$
36,024

SUPPLEMENTAL DISCLOSURES
 

 
 

Cash paid for interest, net of amounts capitalized
$
19,295

 
$
8,064

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

7


CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(Unaudited)
 
1.
Nature of Operations
 
Clayton Williams Energy, Inc. (a Delaware corporation),  is an independent oil and gas company engaged in the exploration for and development and production of oil and natural gas primarily in its core areas in Texas, Louisiana and New Mexico.  Unless the context otherwise requires, references to “CWEI” mean Clayton Williams Energy, Inc., the parent company, and references to the “Company”, “we”, “us” or “our” mean Clayton Williams Energy, Inc. and its consolidated subsidiaries.  Approximately 26% of the Company’s outstanding Common Stock is beneficially owned by Clayton W. Williams, Jr. (“Mr. Williams”), Chairman of the Board, President and Chief Executive Officer of the Company, and approximately 25% is owned by a partnership in which Mr. Williams’ adult children are limited partners.
 
Substantially all of our oil and gas production is sold under short-term contracts, which are market-sensitive.  Accordingly, our results of operations and capital resources are highly dependent upon prevailing market prices of, and demand for, oil and natural gas.  These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control.  These factors include the level of global supply and demand for oil and natural gas, market uncertainties, weather conditions, domestic governmental regulations and taxes, political and economic conditions in oil producing countries, price and availability of alternative fuels, and overall domestic and foreign economic conditions.
 
2.
Presentation
 
The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ materially from those estimates.
 
The consolidated financial statements include the accounts of CWEI and its wholly-owned subsidiaries.  We account for our undivided interest in oil and gas limited partnerships using the proportionate consolidation method.  Under this method, we consolidate our proportionate share of assets, liabilities, revenues and expenses of such limited partnerships.  Less than 5% of our consolidated total assets and total revenues are derived from oil and gas limited partnerships.  All significant intercompany transactions and balances associated with the consolidated operations have been eliminated.  Certain reclassifications of prior year financial statement amounts have been made to conform to current year presentations.
 
In the opinion of management, our unaudited consolidated financial statements as of September 30, 2012 and for the interim periods ended September 30, 2012 and 2011 include all adjustments that are necessary for a fair presentation in accordance with GAAP.  These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2012.
 
Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2011.

3.
Long-Term Debt
 
Long-term debt consists of the following:
 
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
7.75% Senior Notes due 2019, net of unamortized original issue discount of $428 at September 30, 2012 and $465 at December 31, 2011
$
349,572

 
$
349,535

Revolving credit facility, due November 2015
420,000

 
180,000

 
$
769,572

 
$
529,535

 

8

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Senior Notes
 
In July 2005, we issued $225 million of aggregate principal amount of 7¾% Senior Notes due 2013 (“2013 Senior Notes”).  The 2013 Senior Notes were issued at face value and bore interest at 7¾% per year, payable semi-annually on February 1 and August 1 of each year, beginning February 1, 2006.  In March 2011, we redeemed $143.2 million in aggregate principal amount of 2013 Senior Notes in a tender offer and recorded a $4.6 million loss on early extinguishment of long-term debt, consisting of a $2.8 million premium and a $1.8 million write-off of debt issuance costs.  On August 1, 2011, we called at par and redeemed in full the remaining $81.8 million of 2013 Senior Notes and recorded an additional $907,000 loss on early extinguishment of long-term debt related to the write-off of debt issuance costs.
 
In March 2011, we issued $300 million of aggregate principal amount of 7.75% Senior Notes due 2019 (“2019 Senior Notes”).  The 2019 Senior Notes were issued at face value and bear interest at 7.75% per year, payable semi-annually on April 1 and October 1 of each year, beginning October 1, 2011.  In April 2011, we issued an additional $50 million aggregate principal amount of 2019 Senior Notes with an original issue discount of 1% or $500,000.  We may redeem some or all of the 2019 Senior Notes at redemption prices (expressed as percentages of principal amount) equal to 103.875% beginning on April 1, 2015, 101.938% beginning on April 1, 2016, and 100% beginning on April 1, 2017 or for any period thereafter, in each case plus accrued and unpaid interest.
 
The Indenture governing the 2019 Senior Notes contains covenants that restrict our ability to:  (1) borrow money; (2) issue redeemable or preferred stock; (3) pay distributions or dividends; (4) make investments; (5) create liens without securing the 2019 Senior Notes; (6) enter into agreements that restrict dividends from subsidiaries; (7) sell certain assets or merge with or into other companies; (8) enter into transactions with affiliates; (9) guarantee indebtedness; and (10) enter into new lines of business.  One such covenant provides that we may only incur indebtedness if the ratio of consolidated EBITDAX to consolidated interest expense (as these terms are defined in the Indenture) does not exceed certain ratios specified in the Indenture.  These covenants are subject to a number of important exceptions and qualifications as described in the Indenture.  We were in compliance with these covenants at September 30, 2012.
 
Revolving Credit Facility
 
We have a credit facility with a syndicate of banks that provides for a revolving line of credit of up to $565 million, limited to the amount of a borrowing base as determined by the banks.  The borrowing base, which is based on the discounted present value of future net cash flows from oil and gas production, is redetermined by the banks semi-annually in May and November.  We or the banks may also request an unscheduled borrowing base redetermination at other times during the year.  If, at any time, the borrowing base is less than the amount of outstanding credit exposure under the revolving credit facility, we will be required to (1) provide additional security, (2) prepay the principal amount of the loans in an amount sufficient to eliminate the deficiency (or by a combination of such additional security and such prepayment eliminate such deficiency), or (3) prepay the deficiency in not more than five equal monthly installments plus accrued interest.
 
In May 2012, the banks increased the borrowing base from $475 million to $565 million and increased the maximum credit facility from $500 million to $565 million.  The banks also increased the aggregate commitment from $350 million to $475 million in April 2012 and to $555 million in August 2012. At September 30, 2012, after allowing for outstanding letters of credit totaling $4.1 million, we had $131 million available under the revolving credit facility based on then-existing commitments.  During the first nine months of 2012, we increased indebtedness outstanding under the revolving credit facility by $240 million.
 
The revolving credit facility is collateralized primarily by 80% or more of the adjusted engineered value (as defined in the revolving credit facility) of our oil and gas interests evaluated in determining the borrowing base.  The obligations under the revolving credit facility are guaranteed by each of CWEI’s material domestic subsidiaries.
 
At our election, annual interest rates under the revolving credit facility are determined by reference to (1) LIBOR plus an applicable margin between 1.75% and 2.75% per year or (2) if an alternate base rate loan, the greatest of (A) the prime rate, (B) the federal funds rate plus 0.50%, or (C) one-month LIBOR plus 1% plus, if any of (A), (B) or (C), an applicable margin between 0.75% and 1.75% per year.  We also pay a commitment fee on the unused portion of the revolving credit facility at a rate between 0.375% and 0.50%.  The applicable margins are based on actual borrowings outstanding as a percentage of the borrowing base.  Interest and fees are payable no less often than quarterly.  The effective annual interest rate on borrowings under the revolving credit facility, excluding bank fees and amortization of debt issue costs, for the nine months ended September 30, 2012 was 2.6%.
 

9

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The revolving credit facility also contains various covenants and restrictive provisions that may, among other things, limit our ability to sell assets, incur additional indebtedness, make investments or loans and create liens.  One such covenant requires that we maintain a ratio of consolidated current assets to consolidated current liabilities of at least 1 to 1.  Another financial covenant prohibits the ratio of our consolidated funded indebtedness to consolidated EBITDAX (determined as of the end of each fiscal quarter for the then most-recently ended four fiscal quarters) from being greater than 4 to 1.  The computations of consolidated current assets, current liabilities, EBITDAX and indebtedness are defined in the revolving credit facility.  We were in compliance with all financial and non-financial covenants at September 30, 2012.
 
4.
Acquisition of Southwest Royalties, Inc. Limited Partnerships
 
On March 14, 2012, Southwest Royalties, Inc. (“SWR”), a wholly owned subsidiary of CWEI, completed the mergers of each of the 24 limited partnerships of which SWR was the general partner (“SWR Partnerships”), into SWR, with SWR continuing as the surviving entity in the mergers. At the effective time of the mergers, all of the units representing limited partnership interests in the SWR Partnerships, other than those held by SWR, were converted into the right to receive cash. SWR did not receive any cash payment for its partnership interests in the SWR Partnerships. However, as a result of the mergers, SWR acquired 100% of the assets and liabilities of the SWR Partnerships. SWR paid aggregate merger consideration of $38.6 million in the mergers. Pro forma financial information is not presented as it would not be materially different from the information presented in the consolidated statements of operations and comprehensive income (loss) of CWEI.
 
To obtain the funds to finance the aggregate merger consideration, SWR entered into a volumetric production payment (“VPP”) with a third party for upfront cash proceeds of $44.4 million and deferred future advances aggregating $4.7 million.  Under the terms of the VPP, SWR conveyed to the third party a term overriding royalty interest covering approximately 725,000 barrels of oil equivalents (“BOE”) of estimated future oil and gas production from certain properties derived from the mergers.  The scheduled volumes under the VPP relate to production months from March 2012 through December 2019 and are to be delivered to, or sold on behalf of, the third party free of all costs associated with the production and development of the underlying properties.  Once the scheduled volumes have been delivered to the third party, the term overriding royalty interest will terminate.  SWR retained the obligation to prudently operate and produce the properties during the term of the VPP, and the third party assumed all risks related to the adequacy of the associated reserves to fully recoup the scheduled volumes and also assumed all risks associated with product prices.  As a result, the VPP has been accounted for as a sale of reserves, with the sales proceeds being deferred and amortized into oil and gas sales as the scheduled volumes are produced (see Note 6).
 
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
 
Cash and cash equivalents
$
4,118

Oil and gas properties
41,098

Other non-current assets
210

Total assets acquired
45,426

 
 

Asset retirement obligations
(6,864
)
Total liabilities assumed
(6,864
)
 
 

Net assets acquired
$
38,562

 

10

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5.
Asset Retirement Obligations
 
Changes in asset retirement obligations (“ARO”) are as follows:
 
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Beginning of period
$
40,794

 
$
40,444

Additional ARO from new properties
7,687

 
1,526

Sales or abandonments of properties
(967
)
 
(4,425
)
Accretion expense
2,628

 
2,757

Revisions of previous estimates
1,405

 
492

End of period
$
51,547

 
$
40,794

 
Our ARO is measured using primarily Level 3 inputs.  The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, inflation rate and well life.  The inputs are calculated based on historical data as well as current estimated costs.
 
6.
Deferred Revenue from Volumetric Production Payment
 
The net proceeds from the VPP discussed in Note 4 are recorded as a non-current liability in the consolidated balance sheets.  Deferred revenue from VPP will be amortized over the life of the VPP and will be recognized in oil and gas sales in the consolidated statements of operations and comprehensive income (loss).
 
Changes in deferred revenue from the VPP are as follows:
 
 
September 30, 2012
 
December 31,
2011
 
(In thousands)
Beginning of period
$

 
$

Deferred revenue from VPP
45,032

 

Amortization of deferred revenue from VPP
(5,862
)
 

End of period
$
39,170

 
$


Under the terms of the VPP, SWR conveyed to a third party a term overriding royalty interest covering approximately 725,000 BOE of estimated future oil and gas production. As of September 30, 2012, we have a remaining obligation to deliver approximately 642,000 BOE.

7.
Compensation Plans
 
Stock-Based Compensation
 
We presently have options outstanding under a stock option plan for independent directors covering 6,000 shares of Common Stock.  As of September 30, 2012, the options had a weighted average exercise price of $28.86 per share (ranging from $12.14 per share to $41.74 per share), a weighted average remaining contractual term of 2.8 years, and an aggregate intrinsic value of $138,160 (based on a market price at September 30, 2012 of $51.89 per share).  No options were granted during the nine months ended September 30, 2012 or 2011.
 
Non-Equity Award Plans
 
The Compensation Committee of the Board has adopted an after-payout (“APO”) incentive plan (the “APO Incentive Plan”) for officers, key employees and consultants who promote our drilling and acquisition programs.  The Compensation Committee’s objective in adopting this plan is to further align the interests of the participants with ours by granting the participants an APO

11

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

interest in the production developed, directly or indirectly, by the participants.  The plan generally provides for the creation of a series of partnerships or participation arrangements, which are treated as partnerships for tax purposes (“APO Partnerships”), between us and the participants, to which we contribute a portion of our economic interest in wells drilled or acquired within certain areas.  Generally, we pay all costs to acquire, drill and produce applicable wells and receive all revenues until we have recovered all of our costs, plus interest (“payout”).  At payout, the participants receive 99% to 100% of all subsequent revenues and pay 99% to 100% of all subsequent expenses attributable to the economic interests that are subject to the APO Partnerships.  Between 5% and 7.5% of our economic interests in specified wells drilled or acquired by us subsequent to October 2002 are subject to the APO Incentive Plan.  We record our allocable share of the assets, liabilities, revenues, expenses and oil and gas reserves of these APO Partnerships in our consolidated financial statements.  Participants in the APO Incentive Plan are immediately vested in all future amounts payable under the plan.
 
The Compensation Committee has also adopted an APO reward plan (the “APO Reward Plan”) which offers eligible officers, key employees and consultants the opportunity to receive bonus payments that are based on certain profits derived from a portion of our working interest in specified areas where we are conducting drilling and production enhancement operations.  The wells subject to an APO Reward Plan are not included in the APO Incentive Plan.  Likewise, wells included in the APO Incentive Plan are not included in the APO Reward Plan.  Although conceptually similar to the APO Incentive Plan, the APO Reward Plan is a compensatory bonus plan through which we pay participants a bonus equal to a portion of the APO cash flows received by us from our working interest in wells in a specified area.  Unlike the APO Incentive Plan, however, participants in the APO Reward Plan are not immediately vested in all future amounts payable under the plan.  To date, we have granted awards under the APO Reward Plan in 13 specified areas, each of which established a quarterly bonus amount equal to 7% or 10% of the APO cash flow from wells drilled or recompleted in the respective areas after the effective date set forth in each plan, which dates range from January 1, 2007 to April 1, 2011.  Of these 13 awards, one award fully vested November 4, 2011, three awards fully vested August 9, 2012, three awards will fully vest on May 5, 2013 and six awards will fully vest on June 1, 2013.
 
In January 2007, we granted awards under the Southwest Royalties Reward Plan (the “SWR Reward Plan”), a one-time incentive plan which established a quarterly bonus amount for participants equal to the after-payout cash flow from a 22.5% working interest in one well. As of October 25, 2011, the plan was fully vested and 100% of subsequent quarterly bonus amounts are payable to participants.
 
To continue as a participant in the APO Reward Plan or the SWR Reward Plan, participants must remain in the employment or service of the Company through the full vesting date established for each award.  The full vesting date may be accelerated in the event of a change of control or sale transaction, as defined in the plan documents.
 
We recognize compensation expense related to the APO Partnerships based on the estimated value of economic interests conveyed to the participants. Estimated compensation expense applicable to the APO Reward Plan and SWR Reward Plan is recognized over the vesting periods, which range from two years to five years. We recorded a $2.2 million credit to compensation expense for the three months ended September 30, 2012 and a $1.1 million charge to compensation expense for the three months ended September 30, 2011 in connection with all non-equity award plans. We recorded compensation expense of $2.2 million for the nine months ended September 30, 2012 and $6.1 million for the nine months ended September 30, 2011 in connection with all non-equity award plans. Aggregate compensation under non-equity award plans is reflected on the balance sheet as detailed in the following schedule:
 
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Current liabilities:
 

 
 

Accrued liabilities and other
$
2,207

 
$
1,994

Non-current liabilities:
 

 
 

Accrued compensation under non-equity award plans
22,675

 
20,757

Total accrued compensation under non-equity award plans
$
24,882

 
$
22,751

 

12

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8.
Derivatives
 
Commodity Derivatives
 
From time to time, we utilize commodity derivatives in the form of swap contracts to attempt to optimize the price received for our oil and gas production.  Under swap contracts, we receive a fixed price for the respective commodity and pay a floating market price as defined in each contract (generally NYMEX futures prices), resulting in a net amount due to or from the counterparty.  Commodity derivatives are settled monthly as the contract production periods mature.
 
The following summarizes information concerning our net positions in open commodity derivatives applicable to periods subsequent to September 30, 2012.  The settlement prices of commodity derivatives are based on NYMEX futures prices.
 
Swaps:
 
 
Oil
 
Gas
 
Bbls
 
Price
 
MMBtu (a)
 
Price
Production Period:
 

 
 

 
 

 
 

4th Quarter 2012
702,000

 
$
90.40

 

 
$

2013
1,913,000

 
$
97.20

 
1,480,000

 
$
3.34

2014
600,000

 
$
99.30

 

 
$

 
3,215,000

 
 

 
1,480,000

 
 

    
(a)
One MMBtu equals one Mcf at a Btu factor of 1,000.

Accounting For Derivatives
 
We did not designate any of our currently open commodity derivatives as cash flow hedges; therefore, all changes in the fair value of these contracts prior to maturity, plus any realized gains or losses at maturity, are recorded as other income (expense) in our statements of operations and comprehensive income (loss).

 
Effect of Derivative Instruments on the Consolidated Balance Sheets
 
Fair Value of Derivative Instruments as of September 30, 2012
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
 
 
 
(In thousands)
 
 
 
(In thousands)
Derivatives not designated as hedging instruments:
 
 
 

 
 
 
 

Commodity derivatives
Fair value of derivatives:
 
 

 
Fair value of derivatives:
 
 

 
Current
 
$
945

 
Current
 
$

 
Non-current
 
7,745

 
Non-current
 

Total
 
 
$
8,690

 
 
 
$

 

13

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
Fair Value of Derivative Instruments as of December 31, 2011
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
 
 
Balance Sheet
 
 

 
Location
 
Fair Value
 
Location
 
Fair Value
 
 
 
(In thousands)
 
 
 
(In thousands)
Derivatives not designated as hedging instruments:
 
 
 

 
 
 
 

Commodity derivatives
Fair value of derivatives:
 
 

 
Fair value of derivatives:
 
 

 
Current
 
$

 
Current
 
$
5,633

 
Non-current
 

 
Non-current
 
494

Total
 
 
$

 
 
 
$
6,127


Gross to Net Presentation Reconciliation of Derivative Assets and Liabilities
 
 
September 30, 2012
 
Assets
 
Liabilities
 
(In thousands)
Fair value of derivatives — gross presentation
$
18,655

 
$
9,965

Effects of netting arrangements
(9,965
)
 
(9,965
)
Fair value of derivatives — net presentation
$
8,690

 
$

 
 
December 31, 2011
 
Assets
 
Liabilities
 
(In thousands)
Fair value of derivatives — gross presentation
$
26

 
$
6,153

Effects of netting arrangements
(26
)
 
(26
)
Fair value of derivatives — net presentation
$

 
$
6,127

 
All of our derivative contracts are with JPMorgan Chase Bank, N.A.  We have elected to net the outstanding positions with this counterparty between current and noncurrent assets or liabilities since we have the right to settle these positions on a net basis.
 
Effect of Derivative Instruments Recognized in Earnings on the Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 
 
Amount of Gain or (Loss) Recognized in Earnings
 
 
Three Months Ended
 
Nine Months Ended
Location of Gain or (Loss)
 
September 30, 2012
 
September 30, 2012
Recognized in Earnings
 
Realized
 
Unrealized
 
Total
 
Realized
 
Unrealized
 
Total
 
 
 
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 

 
 

 
 

 
 

Commodity derivatives:
 
 

 
 

 
 

 
 

 
 

 
 

Other income (expense) -
 
 

 
 

 
 

 
 

 
 

 
 

Gain (loss) on derivatives
 
$
(1,390
)
 
$
(20,511
)
 
$
(21,901
)
 
$
(4,961
)
 
$
14,817

 
$
9,856

Total
 
$
(1,390
)
 
$
(20,511
)
 
$
(21,901
)
 
$
(4,961
)
 
$
14,817

 
$
9,856

 

14

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Amount of Gain or (Loss) Recognized in Earnings
 
 
Three Months Ended
 
Nine Months Ended
Location of Gain or (Loss)
 
September 30, 2011
 
September 30, 2011
Recognized in Earnings
 
Realized
 
Unrealized
 
Total
 
Realized
 
Unrealized
 
Total
 
 
 
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 

 
 

 
 

 
 

Commodity derivatives:
 
 

 
 

 
 

 
 

 
 

 
 

Other income (expense) -
 
 

 
 

 
 

 
 

 
 

 
 

Gain (loss) on derivatives
 
$
1,188

 
$
91,098

 
$
92,286

 
$
(7,901
)
 
$
82,029

 
$
74,128

Total
 
$
1,188

 
$
91,098

 
$
92,286

 
$
(7,901
)
 
$
82,029

 
$
74,128

 

9.
Financial Instruments
 
Cash and cash equivalents, receivables, accounts payable and accrued liabilities were each estimated to have a fair value approximating the carrying amount due to the short maturity of those instruments.  Indebtedness under our revolving credit facility was estimated to have a fair value approximating the carrying amount since the interest rate is generally market sensitive.
 
Fair Value Measurements
 
We follow a framework for measuring fair value, which outlines a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.  We categorize our assets and liabilities recorded at fair value in the accompanying consolidated balance sheets based upon the level of judgment associated with the inputs used to measure their fair value.

Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 -
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 -
Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 -
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 

15

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The financial assets and liabilities measured on a recurring basis at September 30, 2012 and December 31, 2011 were commodity derivatives.  The fair value of all derivative contracts is reflected on the balance sheet as detailed in the following schedule:
 
 
 
September 30,
2012
 
December 31,
2011
 
 
Significant Other
 
Significant Other
 
 
Observable Inputs
 
Observable Inputs
Description
 
(Level 2)
 
(Level 2)
 
 
(In thousands)
Assets:
 
 

 
 

Fair value of commodity derivatives
 
$
8,690

 
$

Total assets
 
$
8,690

 
$

Liabilities:
 
 

 
 

Fair value of commodity derivatives
 
$

 
$
6,127

Total liabilities
 
$

 
$
6,127

 
Fair Value of Other Financial Instruments
 
We estimate the fair value of our 2019 Senior Notes using quoted market prices (Level 1 inputs). Fair value is compared to the carrying value in the table below:
 
 
 
September 30, 2012
 
December 31, 2011
 
 
Carrying
 
Estimated
 
Carrying
 
Estimated
Description
 
Amount
 
Fair Value
 
Amount
 
Fair Value
 
 
(In thousands)
7.75% Senior Notes due 2019
 
$
349,572

 
$
350,900

 
$
349,535

 
$
334,300

 
10.
Income Taxes
 
Our effective federal and state income tax expense rate for the nine months ended September 30, 2012 of 35.7% differed from the statutory federal rate of 35% due primarily to increases related to the effects of the Texas Margin Tax and certain non-deductible expenses, offset in part by tax benefits derived from excess statutory depletion deductions.
 
We file federal income tax returns with the United States Internal Revenue Service (“IRS”) and state income tax returns in various state tax jurisdictions.  Our tax returns for fiscal years after 2009 currently remain subject to examination by appropriate taxing authorities.  None of our income tax returns are under examination at this time.

16

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


11.
Sales of Assets and Impairments of Inventory
 
Net gain (loss) on sales of assets and impairment of inventory for the three months and nine months ended September 30, 2012 and September 30, 2011 are as follows:
 
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(In thousands)
 
(In thousands)
Gain on sales of assets
 
$
106

 
$
49

 
$
543

 
$
14,570

 
 
 
 
 
 
 
 
 
Loss on sales of assets and impairment of inventory:
 
 

 
 

 
 

 
 

Loss on sales of assets
 
(38
)
 
(20
)
 
(38
)
 
(138
)
Impairment of inventory
 
(169
)
 
(94
)
 
(447
)
 
(279
)
 
 
(207
)
 
(114
)
 
(485
)
 
(417
)
 
 
 
 
 
 
 
 
 
Net gain (loss)
 
$
(101
)
 
$
(65
)
 
$
58

 
$
14,153

 
In February 2011, we sold two 2,000 horsepower drilling rigs and related equipment for $22 million of total consideration.  In connection with the sale, we recorded a gain of $13.2 million during the first quarter of 2011.  Proceeds from the sale consisted of $11 million cash and an $11 million promissory note that was subsequently exchanged for a membership interest in Dalea Investment Group, LLC in June 2012 (see Note 12).
 
We maintain an inventory of tubular goods and other well equipment for use in our exploration and development drilling activities.  Inventory is carried at the lower of average cost or estimated fair market value.  We categorize the measurement of fair value of inventory as Level 2 under applicable accounting standards.  To determine estimated fair value of inventory, we subscribe to market surveys and obtain quotes from equipment dealers for similar equipment.  We then correlate the data as needed to estimate the fair value of the specific items (or groups of similar items) in our inventory.  If the estimated fair values for those specific items (or groups of similar items) in our inventory are less than the related average cost, a provision for impairment is made.


12.
Investment in Dalea Investment Group, LLC
 
In June 2012, we cancelled an $11 million note receivable (see Note 11) in exchange for a 7.66% non-controlling membership interest in Dalea Investment Group, LLC (“Dalea”), an international oilfield services company formed in March 2012.  Since the membership interests in Dalea are privately-held and are not traded in an active market, our investment in Dalea is carried at cost of $11 million.   We have not estimated the fair value of our investment in Dalea because there have been no identified events or changes in circumstances that may have had a significant effect on its carrying value and because it is not practicable to estimate its fair value at this time.

17

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



13.
Costs of Oil and Gas Properties
 
The following sets forth the net capitalized costs for oil and gas properties as of September 30, 2012 and December 31, 2011.
 
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Proved properties
$
2,410,409

 
$
2,021,181

Unproved properties
87,057

 
81,904

Total capitalized costs
2,497,466

 
2,103,085

Accumulated depletion
(1,198,605
)
 
(1,095,197
)
Net capitalized costs
$
1,298,861

 
$
1,007,888

 
14.
Impairment of Property and Equipment
 
We impair our long-lived assets, including oil and gas properties and contract drilling equipment, when estimated undiscounted future net cash flows of an asset are less than its carrying value.  The amount of any such impairment is recognized based on the difference between the carrying value and the estimated fair value of the asset.  We categorize the measurement of fair value of these assets as Level 3 inputs.  We estimate the fair value of the impaired property by applying weighting factors to fair values determined under three different methods: discounted cash flow method, flowing daily production method and proved reserves per BOE method. We then assign applicable weighting factors based on the relevant facts and circumstances.  There were no provisions for impairment of proved properties for the three months ended September 30, 2012, and we recorded provisions for impairment of proved properties of $5.7 million for the nine months ended September 30, 2012, $5 million for the three months ended September 30, 2011, and $9.5 million for the nine months ended September 30, 2011.  These impairments were related to non-core areas in the Permian Basin to reduce the carrying values of those properties to their estimated fair value for the three months and nine months ended September 30, 2012 and 2011, respectively.
 
Unproved properties are nonproducing and do not have estimable cash flow streams. Therefore, we estimate the fair value of individually significant prospects by obtaining, when available, information about recent market transactions in the vicinity of the prospects and adjust the market data as needed to give consideration to the proximity of the prospects to known fields and reservoirs, the extent of geological and geophysical data on the prospects, the remaining terms of leases holding the acreage in the prospects, recent drilling results in the vicinity of the prospects, and other risk-related factors such as drilling and completion costs, estimated product prices and other economic factors. Individually insignificant prospects are grouped and impaired based on remaining lease terms and our historical experience with similar prospects. Based on the assessments previously discussed, we will impair our unproved oil and gas properties when we determine that a prospect’s carrying value exceeds its estimated fair value. We categorize the measurement of fair value of unproved properties as Level 3 inputs. We recorded provisions for impairment of unproved properties aggregating $187,000 for the three months ended September 30, 2012, $711,000 for the nine months ended September 30, 2012, $832,000 for the three months ended September 30, 2011 and $1.1 million for the nine months ended September 30, 2011, and charged these impairments to exploration costs in the accompanying statements of operations and comprehensive income (loss).

18

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




15.
Segment Information
 
We have two reportable operating segments, which are oil and gas exploration and production and contract drilling services.
 
The following tables present selected financial information regarding our operating segments for the three-month and nine-month periods ended September 30, 2012 and 2011.

For the Three Months Ended
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
Contract
 
Intercompany
 
Consolidated
(In thousands)
 
Oil and Gas
 
Drilling
 
Eliminations
 
Total
Revenues
 
$
102,415

 
$
14,869

 
$
(9,521
)
 
$
107,763

Depreciation, depletion and amortization (a)
 
35,580

 
3,666

 
(1,585
)
 
37,661

Other operating expenses (b)
 
43,117

 
13,169

 
(7,757
)
 
48,529

Interest expense
 
9,786

 

 

 
9,786

Other (income) expense
 
22,463

 
(3
)
 

 
22,460

Income (loss) before income taxes
 
(8,531
)
 
(1,963
)
 
(179
)
 
(10,673
)
 
 
 
 
 
 
 
 
 
Income tax (expense) benefit
 
2,810

 
687

 

 
3,497

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(5,721
)
 
$
(1,276
)
 
$
(179
)
 
$
(7,176
)
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,504,338

 
$
63,731

 
$
(21,530
)
 
$
1,546,539

Additions to property and equipment
 
$
107,178

 
$
3,023

 
$
(179
)
 
$
110,022


For the Nine Months Ended
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
Contract
 
Intercompany
 
Consolidated
(In thousands)
 
Oil and Gas
 
Drilling
 
Eliminations
 
Total
Revenues
 
$
309,964

 
$
46,134

 
$
(34,656
)
 
$
321,442

Depreciation, depletion and amortization (a)
 
104,416

 
10,703

 
(5,922
)
 
109,197

Other operating expenses (b)
 
130,668

 
40,963

 
(28,591
)
 
143,040

Interest expense
 
27,817

 

 

 
27,817

Other (income) expense
 
(10,592
)
 
(3
)
 

 
(10,595
)
Income (loss) before income taxes
 
57,655

 
(5,529
)
 
(143
)
 
51,983

 
 
 
 
 
 
 
 
 
Income tax (expense) benefit
 
(20,493
)
 
1,935

 

 
(18,558
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
37,162

 
$
(3,594
)
 
$
(143
)
 
$
33,425

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,504,338

 
$
63,731

 
$
(21,530
)
 
$
1,546,539

Additions to property and equipment
 
$
419,094

 
$
12,614

 
$
(143
)
 
$
431,565



19

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Three Months Ended
 
 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
Contract
 
Intercompany
 
Consolidated
(In thousands)
 
Oil and Gas
 
Drilling
 
Eliminations
 
Total
Revenues
 
$
100,135

 
$
13,979

 
$
(13,050
)
 
$
101,064

Depreciation, depletion and amortization (a)
 
30,267

 
3,285

 
(2,616
)
 
30,936

Other operating expenses (b)
 
35,513

 
11,639

 
(9,902
)
 
37,250

Interest expense
 
8,717

 

 

 
8,717

Other (income) expense
 
(91,579
)
 
(327
)
 

 
(91,906
)
Income (loss) before income taxes
 
117,217

 
(618
)
 
(532
)
 
116,067

 
 
 
 
 
 
 
 
 
Income tax (expense) benefit
 
(41,760
)
 
216

 

 
(41,544
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
75,457

 
$
(402
)
 
$
(532
)
 
$
74,523

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,166,492

 
$
59,997

 
$
(11,167
)
 
$
1,215,322

Additions to property and equipment
 
$
127,252

 
$
6,999

 
$
(532
)
 
$
133,719


For the Nine Months Ended
 
 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
Contract
 
Intercompany
 
Consolidated
(In thousands)
 
Oil and Gas
 
Drilling
 
Eliminations
 
Total
Revenues
 
$
316,166

 
$
38,772

 
$
(35,158
)
 
$
319,780

Depreciation, depletion and amortization (a)
 
82,832

 
9,107

 
(7,493
)
 
84,446

Other operating expenses (b)
 
108,577

 
31,823

 
(27,238
)
 
113,162

Interest expense
 
24,304

 

 

 
24,304

Other (income) expense
 
(58,592
)
 
(13,549
)
 

 
(72,141
)
Income (loss) before income taxes
 
159,045

 
11,391

 
(427
)
 
170,009

 
 
 
 
 
 
 
 
 
Income tax (expense) benefit
 
(56,706
)
 
(3,987
)
 

 
(60,693
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
102,339

 
$
7,404

 
$
(427
)
 
$
109,316

 
 
 
 
 
 
 
 
 
Total assets
 
$
1,166,492

 
$
59,997

 
$
(11,167
)
 
$
1,215,322

Additions to property and equipment
 
$
303,537

 
$
13,563

 
$
(427
)
 
$
316,673

 
    
(a)
Includes impairment of property and equipment.
(b)
Includes the following expenses: production, exploration, natural gas services, drilling rig services, accretion of asset retirement obligations, general and administrative and loss on sales of assets and impairment of inventory.

20

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




16.
Guarantor Financial Information

In March and April 2011, we issued $350 million of aggregate principal amount of 2019 Senior Notes (see Note 3).  Presented below is condensed consolidated financial information of CWEI (“Issuer”) and the Issuer’s material wholly owned subsidiaries, all of which have jointly and severally, irrevocably and unconditionally guaranteed the performance and payment when due of all obligations under the 2019 Senior Notes and are referred to as “Guarantor Subsidiaries” in the following condensed consolidating financial statements.  We have reclassified amounts in the previously reported condensed consolidating financial statements in this Note 16 between the Issuer and the Guarantor Subsidiaries to conform to the current year presentation, which includes applying equity-method accounting for the investment in subsidiaries at the Issuer, and allocating appropriate income taxes to the Guarantor Subsidiaries.

The financial information which follows sets forth our condensed consolidating financial statements as of and for the periods indicated.
 
Condensed Consolidating Balance Sheet
September 30, 2012
(Unaudited)
(Dollars in thousands)
 
Issuer
 
Guarantor
Subsidiaries
 
Adjustments/
Eliminations
 
Consolidated
Current assets
$
139,981

 
$
216,612

 
$
(225,110
)
 
$
131,483

Property and equipment, net
1,011,179

 
369,703

 

 
1,380,882

Investments in subsidiaries
298,527

 

 
(298,527
)
 

Fair value of derivatives
7,745

 

 

 
7,745

Other assets
12,877

 
13,552

 

 
26,429

Total assets
$
1,470,309

 
$
599,867

 
$
(523,637
)
 
$
1,546,539

 
 
 
 
 
 
 
 
Current liabilities
$
245,366

 
$
113,510

 
$
(225,110
)
 
$
133,766

Non-current liabilities:
 

 
 

 
 

 
 

Long-term debt
769,572

 

 

 
769,572

Deferred income taxes
144,074

 
117,139

 
(109,191
)
 
152,022

Other
43,562

 
70,691

 

 
114,253

 
957,208

 
187,830

 
(109,191
)
 
1,035,847

 
 
 
 
 
 
 
 
Equity
267,735

 
298,527

 
(189,336
)
 
376,926

Total liabilities and equity
$
1,470,309

 
$
599,867

 
$
(523,637
)
 
$
1,546,539



21

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet
December 31, 2011
(Dollars in thousands)
 
Issuer
 
Guarantor
Subsidiaries
 
Adjustments/
Eliminations
 
Consolidated
Current assets
$
142,102

 
$
164,515

 
$
(163,674
)
 
$
142,943

Property and equipment, net
737,562

 
329,989

 

 
1,067,551

Investments in subsidiaries
271,342

 

 
(271,342
)
 

Other assets
13,538

 
2,239

 

 
15,777

Total assets
$
1,164,544

 
$
496,743

 
$
(435,016
)
 
$
1,226,271

 
 
 
 
 
 
 
 
Current liabilities
$
233,729

 
$
86,175

 
$
(163,674
)
 
$
156,230

Non-current liabilities:
 

 
 

 
 

 
 

Long-term debt
529,535

 

 

 
529,535

Fair value of derivatives
494

 

 

 
494

Deferred income taxes
141,923

 
111,662

 
(119,376
)
 
134,209

Other
34,738

 
27,564

 

 
62,302

 
706,690

 
139,226

 
(119,376
)
 
726,540

 
 
 
 
 
 
 
 
Equity
224,125

 
271,342

 
(151,966
)
 
343,501

Total liabilities and equity
$
1,164,544

 
$
496,743

 
$
(435,016
)
 
$
1,226,271


Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended September 30, 2012
(Unaudited)
(Dollars in thousands)
 
Issuer
 
Guarantor
Subsidiaries
 
Adjustments/
Eliminations
 
Consolidated
Total revenue
$
74,129

 
$
34,065

 
$
(431
)
 
$
107,763

Costs and expenses
57,952

 
28,669

 
(431
)
 
86,190

Operating income (loss)
16,177

 
5,396

 

 
21,573

Other income (expense)
(32,431
)
 
185

 

 
(32,246
)
Equity in earnings of subsidiaries
3,628

 

 
(3,628
)
 

Income tax (expense) benefit
5,450

 
(1,953
)
 

 
3,497

Net income (loss)
$
(7,176
)
 
$
3,628

 
$
(3,628
)
 
$
(7,176
)


22

CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Nine Months Ended September 30, 2012
(Unaudited)
(Dollars in thousands)
 
Issuer
 
Guarantor
Subsidiaries
 
Adjustments/
Eliminations
 
Consolidated
Total revenue
$
222,570

 
$
99,896

 
$
(1,024
)
 
$
321,442

Costs and expenses
166,584

 
86,677

 
(1,024
)
 
252,237

Operating income (loss)
55,986

 
13,219

 

 
69,205

Other income (expense)
(19,672
)
 
2,450

 

 
(17,222
)
Equity in earnings of subsidiaries
10,185

 

 
(10,185
)
 

Income tax (expense) benefit
(13,074
)
 
(5,484
)
 

 
(18,558
)
Net income (loss)
$
33,425

 
$
10,185

 
$
(10,185
)
 
$
33,425


Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended September 30, 2011
(Unaudited)
(Dollars in thousands)
 
Issuer
 
Guarantor
Subsidiaries
 
Adjustments/
Eliminations
 
Consolidated
Total revenue
$
68,727

 
$
32,561

 
$
(224
)
 
$
101,064

Costs and expenses
44,290

 
24,120

 
(224
)
 
68,186

Operating income (loss)
24,437

 
8,441

 

 
32,878

Other income (expense)
81,512

 
1,677

 

 
83,189

Equity in earnings of subsidiaries
6,576

 
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