0000010048-15-000005.txt : 20150812 0000010048-15-000005.hdr.sgml : 20150812 20150812133723 ACCESSION NUMBER: 0000010048-15-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150812 DATE AS OF CHANGE: 20150812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARNWELL INDUSTRIES INC CENTRAL INDEX KEY: 0000010048 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 720496921 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05103 FILM NUMBER: 151046398 BUSINESS ADDRESS: STREET 1: 1100 ALAKEA ST. STREET 2: SUITE 2900 CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 808-531-8400 MAIL ADDRESS: STREET 1: 1100 ALAKEA ST. STREET 2: SUITE 2900 CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: BMA CORP/TN DATE OF NAME CHANGE: 19770324 FORMER COMPANY: FORMER CONFORMED NAME: BARNWELL OFFSHORE INC DATE OF NAME CHANGE: 19671101 10-Q 1 brn10q063015.htm 10-Q BRN.10Q.06.30.15


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q 
[X]              Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2015
or
[   ]              Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 1-5103 
BARNWELL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter) 
DELAWARE
 
72-0496921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1100 Alakea Street, Suite 2900, Honolulu, Hawaii
96813
(Address of principal executive offices)
(Zip code)
 
 
(808) 531-8400
 
 
(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.                                         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 the 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
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
 
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
 
As of August 10, 2015 there were 8,277,160 shares of common stock, par value $0.50, outstanding.




BARNWELL INDUSTRIES, INC.
AND SUBSIDIARIES
 
INDEX 
 
 
 
 
 
 
 
 
 
 
 
 





PART I - FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2015
 
September 30,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,695,000

 
$
16,104,000

Restricted cash
131,000

 

Accounts and other receivables, net of allowance for doubtful accounts of:
$41,000 at June 30, 2015; $34,000 at September 30, 2014
2,725,000

 
2,910,000

Note receivable
906,000

 

Prepaid expenses
246,000

 
221,000

Investment held for sale

 
1,139,000

Real estate held for sale
5,448,000

 
5,448,000

Other current assets
1,167,000

 
698,000

Total current assets
19,318,000

 
26,520,000

Restricted cash, net of current portion
144,000

 

Investments
7,344,000

 
5,900,000

Property and equipment
203,842,000

 
223,023,000

Accumulated depletion, depreciation, and amortization
(183,429,000
)
 
(200,673,000
)
Property and equipment, net
20,413,000

 
22,350,000

Total assets
$
47,219,000

 
$
54,770,000


 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,897,000

 
$
3,453,000

Accrued operating and other expenses
2,046,000

 
2,464,000

Accrued incentive and other compensation
638,000

 
1,085,000

Current portion of long-term debt
3,654,000

 
4,449,000

Other current liabilities
2,225,000

 
3,072,000

Total current liabilities
10,460,000

 
14,523,000

Long-term debt
4,800,000

 
6,650,000

Liability for retirement benefits
4,238,000

 
4,266,000

Asset retirement obligation
8,222,000

 
8,185,000

Deferred income taxes
1,939,000

 
1,201,000

Total liabilities
29,659,000

 
34,825,000

Commitments and contingencies (Note 14)


 


Equity:
 
 
 
Common stock, par value $0.50 per share; authorized, 20,000,000 shares:
8,445,060 issued at June 30, 2015 and September 30, 2014
4,223,000

 
4,223,000

Additional paid-in capital
1,330,000

 
1,315,000

Retained earnings
14,691,000

 
16,204,000

Accumulated other comprehensive loss, net
(1,226,000
)
 
(258,000
)
Treasury stock, at cost: 167,900 shares at June 30, 2015 and September 30, 2014
(2,286,000
)
 
(2,286,000
)
Total stockholders' equity
16,732,000

 
19,198,000

Non-controlling interests
828,000

 
747,000

Total equity
17,560,000

 
19,945,000

Total liabilities and equity
$
47,219,000

 
$
54,770,000

See Notes to Condensed Consolidated Financial Statements

3



BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 

 
 

 
 
 
 
Oil and natural gas
$
2,196,000

 
$
4,619,000

 
$
7,260,000

 
$
16,343,000

Contract drilling
1,415,000

 
1,548,000

 
3,839,000

 
4,475,000

Sale of interest in leasehold land, net
1,266,000

 
258,000

 
3,115,000

 
378,000

Gas processing and other
326,000

 
385,000

 
513,000

 
696,000

 
5,203,000

 
6,810,000

 
14,727,000

 
21,892,000

Costs and expenses:
 

 
 

 
 
 
 
Oil and natural gas operating
1,535,000

 
2,111,000

 
4,976,000

 
6,774,000

Contract drilling operating
815,000

 
1,268,000

 
2,812,000

 
3,669,000

General and administrative
1,891,000

 
1,844,000

 
6,270,000

 
6,049,000

Depletion, depreciation, and amortization
801,000

 
1,296,000

 
2,648,000

 
5,364,000

Interest expense
76,000

 
165,000

 
248,000

 
520,000

 
5,118,000

 
6,684,000

 
16,954,000

 
22,376,000

Income (loss) before equity in income (loss) of affiliates and income taxes
85,000

 
126,000

 
(2,227,000
)
 
(484,000
)
Equity in income (loss) of affiliates
988,000

 
(113,000
)
 
1,444,000

 
(376,000
)
Income (loss) before income taxes
1,073,000

 
13,000

 
(783,000
)
 
(860,000
)
Income tax (benefit) provision
(140,000
)
 
211,000

 
160,000

 
662,000

Net income (loss)
1,213,000

 
(198,000
)
 
(943,000
)
 
(1,522,000
)
Less: Net income (loss) attributable to non-controlling interests
242,000

 
18,000

 
570,000

 
(32,000
)
Net income (loss) attributable to Barnwell Industries, Inc.
$
971,000

 
$
(216,000
)
 
$
(1,513,000
)
 
$
(1,490,000
)
Basic and diluted net income (loss) per common share attributable to Barnwell Industries, Inc. stockholders
$
0.12

 
$
(0.03
)
 
$
(0.18
)
 
$
(0.18
)
Weighted-average number of common shares outstanding:
 

 
 

 
 
 
 
Basic and diluted
8,277,160

 
8,277,160

 
8,277,160

 
8,277,160

 
See Notes to Condensed Consolidated Financial Statements


4



BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
1,213,000

 
$
(198,000
)
 
$
(943,000
)
 
$
(1,522,000
)
Other comprehensive income (loss):
 

 
 

 


 


Foreign currency translation adjustments, net of taxes of $0
132,000

 
356,000

 
(1,047,000
)
 
(1,345,000
)
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
26,000

 
(3,000
)
 
79,000

 
13,000

Total other comprehensive income (loss)
158,000

 
353,000

 
(968,000
)
 
(1,332,000
)
Total comprehensive income (loss)
1,371,000

 
155,000

 
(1,911,000
)
 
(2,854,000
)
Less: Comprehensive income (loss) attributable to non-controlling interests
242,000

 
18,000

 
570,000

 
(32,000
)
Comprehensive income (loss) attributable to Barnwell Industries, Inc.
$
1,129,000

 
$
137,000

 
$
(2,481,000
)
 
$
(2,822,000
)
 
See Notes to Condensed Consolidated Financial Statements


5



BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Nine months ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net loss
$
(943,000
)
 
$
(1,522,000
)
Adjustments to reconcile net loss to net cash


 
 

(used in) provided by operating activities:


 
 

Equity in (income) loss of affiliates
(1,444,000
)
 
376,000

Depletion, depreciation, and amortization
2,648,000

 
5,364,000

Gain on sale of contract drilling assets
(272,000
)
 

Foreign exchange loss (gain)
157,000

 
(271,000
)
Loss on sale of investment
16,000

 

Retirement benefits expense
305,000

 
184,000

Accretion of asset retirement obligation
458,000

 
330,000

Deferred income tax expense (benefit)
796,000

 
(225,000
)
Asset retirement obligation payments
(562,000
)
 
(110,000
)
Share-based compensation benefit
(69,000
)
 
(209,000
)
Retirement plan contributions
(254,000
)
 
(354,000
)
Sale of interest in leasehold land, net
(3,115,000
)
 
(378,000
)
(Decrease) increase from changes in current assets and liabilities
(3,087,000
)
 
1,302,000

Net cash (used in) provided by operating activities
(5,366,000
)
 
4,487,000

Cash flows from investing activities:
 

 
 

Proceeds from sale of interest in leasehold land, net of fees paid
3,115,000

 
378,000

Proceeds from sale of contract drilling assets
368,000

 

Proceeds from sale of investment, net of closing costs
266,000

 

Proceeds from sale of oil and natural gas assets

 
8,448,000

Proceeds from gas over bitumen royalty adjustments

 
12,000

Payment to acquire interest in affiliates

 
(5,140,000
)
Payment to acquire oil and natural gas properties
(526,000
)
 

Capital expenditures - oil and natural gas
(878,000
)
 
(3,382,000
)
Capital expenditures - all other
(197,000
)
 
(42,000
)
Net cash provided by investing activities
2,148,000

 
274,000

Cash flows from financing activities:
 

 
 

Proceeds from long-term debt borrowings

 
5,000,000

Repayments of long-term debt
(2,645,000
)
 
(5,606,000
)
Increase in restricted cash
(275,000
)
 
(1,892,000
)
Contributions from non-controlling interests
120,000

 
170,000

Distributions to non-controlling interests
(609,000
)
 
(13,000
)
Net cash used in financing activities
(3,409,000
)
 
(2,341,000
)
Effect of exchange rate changes on cash and cash equivalents
(782,000
)
 
7,000

Net (decrease) increase in cash and cash equivalents
(7,409,000
)
 
2,427,000

Cash and cash equivalents at beginning of period
16,104,000

 
7,828,000

Cash and cash equivalents at end of period
$
8,695,000

 
$
10,255,000

 
See Notes to Condensed Consolidated Financial Statements

6



BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Three months ended June 30, 2015 and 2014
(Unaudited)
 
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
Equity
Balance at March 31, 2014
8,277,160

 
$
4,223,000

 
$
1,299,000

 
$
14,258,000

 
$
1,306,000

 
$
(2,286,000
)
 
$
601,000

 
$
19,401,000

Distributions to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
(13,000
)
 
(13,000
)
Contributions from non-controlling interests
 

 
 

 
 

 
 

 
 

 
 

 
90,000

 
90,000

Net income (loss)
 

 
 

 
 

 
(216,000
)
 
 

 
 

 
18,000

 
(198,000
)
Share-based compensation
 

 
 

 
8,000

 
 

 
 

 
 

 
 

 
8,000

Foreign currency translation adjustments, net of taxes of $0
 

 
 

 
 

 
 

 
356,000

 
 

 
 

 
356,000

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
 

 
 

 
 

 
 

 
(3,000
)
 
 

 
 

 
(3,000
)
Balance at June 30, 2014
8,277,160

 
$
4,223,000

 
$
1,307,000

 
$
14,042,000

 
$
1,659,000

 
$
(2,286,000
)
 
$
696,000

 
$
19,641,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2015
8,277,160

 
$
4,223,000

 
$
1,326,000

 
$
13,720,000

 
$
(1,384,000
)
 
$
(2,286,000
)
 
$
831,000

 
$
16,430,000

Contributions from non-controlling interests
 

 
 

 
 

 
 

 
 

 
 

 
30,000

 
30,000

Distributions to non-controlling interests
 

 
 

 
 

 
 

 
 

 
 

 
(275,000
)
 
(275,000
)
Net income (loss)
 

 
 

 
 

 
971,000

 
 

 
 

 
242,000

 
1,213,000

Share-based compensation
 

 
 

 
4,000

 
 

 
 

 
 

 
 

 
4,000

Foreign currency translation adjustments, net of taxes of $0
 

 
 

 
 

 
 

 
132,000

 
 

 
 

 
132,000

Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
 

 
 

 
 

 
 

 
26,000

 
 

 
 

 
26,000

Balance at June 30, 2015
8,277,160

 
$
4,223,000

 
$
1,330,000

 
$
14,691,000

 
$
(1,226,000
)
 
$
(2,286,000
)
 
$
828,000

 
$
17,560,000


See Notes to Condensed Consolidated Financial Statements


7



BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Nine months ended June 30, 2015 and 2014
(Unaudited)
 
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
Equity
Balance at September 30, 2013
8,277,160

 
$
4,223,000

 
$
1,289,000

 
$
15,532,000

 
$
2,991,000

 
$
(2,286,000
)
 
$
571,000

 
$
22,320,000

Distributions to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
(13,000
)
 
(13,000
)
Contributions from non-controlling interests
 

 
 

 
 

 
 

 
 

 
 

 
170,000

 
170,000

Net income (loss)
 

 
 

 
 

 
(1,490,000
)
 
 

 
 

 
(32,000
)
 
(1,522,000
)
Share-based compensation
 

 
 

 
18,000

 
 

 
 

 
 

 
 

 
18,000

Foreign currency translation adjustments, net of taxes of $0
 

 
 

 
 

 
 

 
(1,345,000
)
 
 

 
 

 
(1,345,000
)
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
 

 
 

 
 

 
 

 
13,000

 
 

 
 

 
13,000

Balance at June 30, 2014
8,277,160

 
$
4,223,000

 
$
1,307,000

 
$
14,042,000

 
$
1,659,000

 
$
(2,286,000
)
 
$
696,000

 
$
19,641,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
8,277,160

 
$
4,223,000

 
$
1,315,000

 
$
16,204,000

 
$
(258,000
)
 
$
(2,286,000
)
 
$
747,000

 
$
19,945,000

Contributions from non-controlling interests
 

 
 

 
 

 
 

 
 

 
 

 
120,000

 
120,000

Distributions to non-controlling interests
 

 
 

 
 

 
 

 
 

 
 

 
(609,000
)
 
(609,000
)
Net income (loss)
 

 
 

 
 

 
(1,513,000
)
 


 


 
570,000

 
(943,000
)
Share-based compensation
 

 
 

 
15,000

 
 

 
 

 
 

 
 

 
15,000

Foreign currency translation adjustments, net of taxes of $0
 

 
 

 
 

 
 

 
(1,047,000
)
 
 

 
 

 
(1,047,000
)
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0
 

 
 

 
 

 
 

 
79,000

 
 

 
 

 
79,000

Balance at June 30, 2015
8,277,160

 
$
4,223,000

 
$
1,330,000

 
$
14,691,000

 
$
(1,226,000
)
 
$
(2,286,000
)
 
$
828,000

 
$
17,560,000


See Notes to Condensed Consolidated Financial Statements


8



BARNWELL INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”), including a 77.6%-owned land investment general partnership (Kaupulehu Developments), a 75%-owned land investment partnership (KD Kona 2013 LLLP) and two 80%-owned joint ventures (Kaupulehu 2007, LLLP and Kaupulehu Investors, LLC). All significant intercompany accounts and transactions have been eliminated.
 
Barnwell’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in variable interest entities (“VIE”) in which the Company is not deemed to be the primary beneficiary are accounted for by the equity method.
 
Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.
 
Unaudited Interim Financial Information
 
The accompanying unaudited condensed consolidated financial statements and notes have been prepared by Barnwell in accordance with the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 2014 Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2014 has been derived from audited consolidated financial statements.
 
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at June 30, 2015, results of operations, comprehensive income (loss), and equity for the three and nine months ended June 30, 2015 and 2014, and cash flows for the nine months ended June 30, 2015 and 2014, have been made. The results of operations for the period ended June 30, 2015 are not necessarily indicative of the operating results for the full year.

Use of Estimates
 
The preparation of the financial statements in conformity with U.S. GAAP requires management of Barnwell to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.


9



Significant Accounting Policies
 
Other than as set forth below, there have been no changes to Barnwell’s significant accounting policies as described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s most recently filed Annual Report on Form 10-K.
 
Acquisitions
 
Acquisitions of businesses are accounted for using the acquisition method of accounting. Purchase prices are allocated to acquired assets and assumed liabilities based on their estimated fair value at the time of the acquisition. A business combination may result in the recognition of a gain or goodwill based on the fair value of the assets acquired and liabilities assumed at the acquisition date as compared to the fair value of consideration transferred.

Note Receivable
 
The note receivable consists of a purchase money mortgage related to the sale of one residential parcel. Barnwell estimates an allowance for this financing receivable based on an evaluation of the credit worthiness of the counterparty and has determined that no allowance was needed at June 30, 2015. This financing receivable is considered in default if not paid in full on the maturity date at which time the amount in default will accrue interest. Amounts deemed uncollectible will be written off against an established allowance.
 
Recent Accounting Pronouncements
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within this guidance are debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.
 
In March 2013, the FASB issued ASU No. 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This update provides guidance on releasing cumulative translation adjustments when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, these amendments provide guidance on the release of cumulative translation adjustments in partial sales of equity method investments and in step acquisitions. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.
 
In April 2013, the FASB issued ASU No. 2013-07, “Liquidation Basis of Accounting,” which provides guidance on when and how to apply the liquidation basis of accounting and on what to disclose. The update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent, as defined in the update. The Company adopted the provisions of this ASU

10



effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The Company adopted the provisions of this ASU effective October 1, 2014. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements.
 
In November 2014, the FASB issued ASU 2014-17, “Pushdown Accounting,” which provides companies with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.  The election to apply pushdown accounting can be made either in the period in which the change of control occurred or in a subsequent period.  If the election is made in a subsequent period, it would be considered a change in accounting principle and treated in accordance with Topic 250, “Accounting Changes and Error Corrections.” The Company adopted the provisions of this ASU on November 18, 2014, as the amendments in the update were effective upon issuance. The adoption of this update did not have a material impact on Barnwell’s consolidated financial statements. 

2.    LIQUIDITY

As of June 30, 2015, Barnwell had $8,695,000 in cash and cash equivalents and working capital totaled $8,858,000. Upon the April 2015 renewal of our secured Canadian credit facility, the borrowing capacity thereunder was reduced from $11,800,000 Canadian dollars to $6,500,000 Canadian dollars, or US$5,211,000 at the June 30, 2015 exchange rate. This reduction in the borrowing capacity is largely due to a tightening credit market for oil and natural gas companies due to the uncertainty of future oil and natural gas prices and significant declines in Royal Bank of Canada’s forecast of oil and natural gas prices and leaves Barnwell with minimal available credit under the facility.

In August 2015, Barnwell entered into a purchase and sale agreement with an independent third party to sell the interest in its principal oil and natural gas properties located in the Dunvegan and Belloy areas of Alberta, Canada, for approximately $15,000,000, which will be adjusted at closing for customary purchase price adjustments in order to, among other things, reflect an economic effective date of April 1, 2015. On closing the buyer will withhold 50 percent of the proceeds in trust for the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes related to the sale and the precise timing for the release of these funds cannot be determined. The sale of these interests is expected to close in the fourth quarter of fiscal 2015, subject to customary closing conditions. However, there can be no assurance that all of the conditions to closing the sale will be satisfied. Barnwell will be required to use a portion of the proceeds received upon closing for Canadian income tax payments and repayment of most or all of the $4,800,000 of the Canadian credit facility currently outstanding as there will be a significant reduction of the borrowing capacity as a result of the sale. See Note 17 for additional details.

Because of the combined impact on our oil and natural gas segment of declines in oil and natural gas prices and declines in production due to oil and natural gas property sales, which will further be reduced after the sale of Dunvegan and Belloy, Barnwell estimates that it will be heavily reliant upon land investment segment proceeds from percentage of sales payments and any future distributions from investee partnerships

11



in order to provide sufficient liquidity to fund our operations in the near term. Although there has been a recent increase in land investment segment proceeds, there can be no assurance that this trend will continue or that the amount of future land investment segment proceeds will provide the liquidity needed.

If the sale of Dunvegan and Belloy does not close as expected and if oil and natural gas, land investment and residential real estate segment proceeds are not sufficient and Barnwell’s Canadian revolving credit facility is further reduced below the level of borrowings under the facility upon the April 2016 review there will be a material adverse effect on our operations, liquidity, cash flows and financial condition, and the Company will need to obtain alternative terms or sources of financing or liquidate investments and/or operating assets to make any required cash outflows. Our liquidity issues may force us to curtail existing operations, reduce or delay capital expenditures, or sell assets on less favorable terms. There can be no assurance the Company will be able to secure the sale of any of its oil and natural gas properties or realize enough proceeds from such sales to fund its operations, or to otherwise resolve its liquidity issues.

3.    EARNINGS (LOSS) PER COMMON SHARE
 
Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities, which consist of outstanding stock options. Potentially dilutive shares are excluded from the computation of diluted earnings (loss) per share if their effect is anti-dilutive.
 
Options to purchase 621,250 and 837,250 shares of common stock were excluded from the computation of diluted shares for the three and nine months ended June 30, 2015 and 2014, respectively, as their inclusion would have been antidilutive.
 
Reconciliations between net earnings (loss) attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net earnings (loss) per share computations are detailed in the following tables:
 
 
Three months ended June 30, 2015
 
Net Earnings
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic net earnings per share
$
971,000

 
8,277,160

 
$
0.12

Effect of dilutive securities -
 

 
 

 
 

common stock options

 

 
 

Diluted net earnings per share
$
971,000

 
8,277,160

 
$
0.12

 
Nine months ended June 30, 2015
 
Net Loss
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic net loss per share
$
(1,513,000
)
 
8,277,160

 
$
(0.18
)
Effect of dilutive securities -
 

 
 

 
 

common stock options

 

 
 

Diluted net loss per share
$
(1,513,000
)
 
8,277,160

 
$
(0.18
)

12



 
Three months ended June 30, 2014
 
Net Loss
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic net loss per share
$
(216,000
)
 
8,277,160

 
$
(0.03
)
Effect of dilutive securities -
 

 
 

 
 

common stock options

 

 
 

Diluted net loss per share
$
(216,000
)
 
8,277,160

 
$
(0.03
)
 
Nine months ended June 30, 2014
 
Net Loss
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic net loss per share
$
(1,490,000
)
 
8,277,160

 
$
(0.18
)
Effect of dilutive securities -
 

 
 

 
 

common stock options

 

 
 

Diluted net loss per share
$
(1,490,000
)
 
8,277,160

 
$
(0.18
)

4.    NOTE RECEIVABLE
 
In October 2014, Barnwell sold one residential parcel for $1,250,000 and received a down payment of $343,000 and a purchase money mortgage from the buyer for the remainder of the sales price. The note was due 270 days from the closing date and Barnwell collected the balance in July 2015. The note was non-interest bearing and was accordingly recorded at a discount using an interest rate based on market rates for similar instruments. See Note 6 for additional information regarding the sale of the residential parcel. 

5.    REAL ESTATE HELD FOR SALE
 
Kaupulehu 2007, LLLP (“Kaupulehu 2007”) currently owns one luxury residence that is available for sale in the Lot 4A Increment I area located in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka`upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.

6.    INVESTMENTS
 
A summary of Barnwell’s investments is as follows:
 
 
June 30,
2015
 
September 30,
2014
Investment in residential parcel
$
1,192,000

 
$
1,192,000

Investment in Kukio Resort land development partnerships
6,102,000

 
4,658,000

Investment in leasehold land interest – Lot 4C
50,000

 
50,000

Total investments
$
7,344,000

 
$
5,900,000

 

13



Investment in residential parcels
 
At June 30, 2015, Kaupulehu 2007 owned one residential parcel in the Lot 4A Increment I area located in the North Kona District of the island of Hawaii, north of Hualalai Resort at Historic Ka`upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean.
 
A second residential parcel, which was included in investment held for sale at September 30, 2014, was sold in October 2014 for $1,250,000 for a nominal loss which is included in general and administrative expenses in the Condensed Consolidated Statements of Operations.

Investment in Kukio Resort land development partnerships
 
On November 27, 2013, Barnwell, through a wholly-owned subsidiary, entered into two limited liability limited partnerships, KD Kona 2013 LLLP and KKM Makai, LLLP, and indirectly acquired a 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP for $5,140,000. These entities own certain real estate and development rights interests in the Kukio, Maniniowali and Kaupulehu portions of Kukio Resort, a private residential community on the Kona coast of the island of Hawaii, as well as Kukio Resort’s real estate sales office operations. KD Kaupulehu, LLLP, which is comprised of KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LLLP (“KD II”), is the developer of Kaupulehu Lot 4A Increments I and II, the area in which Barnwell has interests in percentage of sales payments. Barnwell’s investment in these entities is accounted for using the equity method of accounting.
 
The limited liability limited partnership agreements provide for a priority return of Barnwell’s investment prior to profit distributions. Net profits, losses and cash flows of the partnerships are allocated to Barnwell and the other partners at varying percentages based on whether the initial and any additional capital contributions plus any preferred returns due to contributing partners have been repaid to the investors.
 
Barnwell’s share of the income of its equity affiliates was $988,000 and $1,444,000 for the three and nine months ended June 30, 2015, respectively, and the share of the loss of its equity affiliates was $113,000 and $376,000 for the three and nine months ended June 30, 2014, respectively. The equity in the underlying net assets of the Kukio Resort land development partnerships exceeds the carrying value of the investment in affiliates by approximately $398,000 as of June 30, 2015, which is attributable to differences in the value of capitalized development costs and a note receivable. The basis difference for the capitalized development costs will be recognized as the partnerships sell lots and recognize the associated costs. The basis difference for the note receivable will be recognized as the partnerships sell memberships for the Kukio Golf and Beach Club for which the receivable relates. The basis difference adjustment for both the three and nine months ended June 30, 2015 was a $74,000 increase in equity in income of affiliates, and the basis difference adjustment for the three and nine months ended June 30, 2014 was not material.
 
Barnwell, as well as KD I, KD II and certain other owners of the partnerships, have jointly and severally executed a surety indemnification agreement. Bonds issued by the surety at June 30, 2015 totaled approximately $4,144,000 and relate to certain construction contracts of KD I. If any such performance bonds are called, we may be obligated to reimburse the issuer of the performance bond as Barnwell, KD I and certain other partners are jointly and severally liable, however we believe that it is remote that a material amount of any currently outstanding performance bonds will be called. Performance bonds do not have stated expiration dates. Rather, the performance bonds are released as the underlying performance is completed.
 

14



As of June 30, 2015, Barnwell’s maximum loss exposure as a result of its investment in the Kukio Resort land development partnerships was approximately $10,246,000, consisting of the carrying value of the investment of $6,102,000 and $4,144,000 from the surety indemnification agreement of which we are jointly and severally liable.

Summarized financial information for the Kukio Resort land development partnerships is as follows:
 
Three months ended June 30, 2015
 
Three months ended June 30, 2014
Revenue
$
12,078,000

 
$
2,228,000

Gross profit
$
5,285,000

 
$
778,000

Net earnings (loss)
$
4,215,000

 
$
(298,000
)
 
Nine months ended June 30, 2015
 
November 27, 2013 -
June 30, 2014
Revenue
$
22,785,000

 
$
3,850,000

Gross profit
$
9,694,000

 
$
1,541,000

Net earnings (loss)
$
6,779,000

 
$
(1,107,000
)

Percentage of sales payments
 
Kaupulehu Developments has the right to receive payments from KD I and KD II resulting from the sale of lots and/or residential units within approximately 870 acres of the Kaupulehu Lot 4A area by KD I and KD II in two increments (“Increment I” and “Increment II”) (see Note 16).
 
The following table summarizes the Increment I percentage of sales payment revenues received from KD I.
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Sale of interest in leasehold land:
 
 
 

 
 
 
 
Proceeds
$
1,473,000

 
$
300,000

 
$
3,623,000

 
$
440,000

Fees
(207,000
)
 
(42,000
)
 
(508,000
)
 
(62,000
)
Revenues – sale of interest in leasehold land, net
$
1,266,000

 
$
258,000

 
$
3,115,000

 
$
378,000

 
Investment in leasehold land interest - Lot 4C
 
Kaupulehu Developments holds an interest in an area of approximately 1,000 acres of vacant leasehold land zoned conservation located adjacent to Lot 4A. The lease terminates in December 2025. 



15



7.    OIL AND NATURAL GAS PROPERTIES
 
Acquisition

On November 13, 2014, Barnwell completed the acquisition of additional non-operated working interests in oil and natural gas properties located in the Progress area of Alberta, Canada for cash consideration. The sales price per the agreement was adjusted for customary purchase price adjustments to $526,000 in order to, among other things, reflect an economic effective date of July 1, 2014. The results of operations for the Progress acquisition have been included in the consolidated financial statements from the closing date. Pro forma information is not presented as the pro forma results would not be materially different from the information presented in the Condensed Consolidated Statements of Operations.
 
The Progress acquisition was accounted for under the acquisition method of accounting, and as such, Barnwell estimated the fair value of the acquired property as of the November 13, 2014 acquisition date. The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed in the transaction as of the acquisition date. See Note 13 for further information regarding the fair value measurement inputs.
 
Property and equipment
$
751,000

Asset retirement obligation
(225,000
)
Net identifiable assets acquired
$
526,000


8.    LONG-TERM DEBT
 
A summary of Barnwell’s long-term debt is as follows:
 
 
June 30,
2015
 
September 30,
2014
Canadian revolving credit facility
$
4,800,000

 
$
7,000,000

Real estate loan
3,654,000

 
4,099,000

 
8,454,000

 
11,099,000

Less: current portion
(3,654,000
)
 
(4,449,000
)
Total long-term debt
$
4,800,000

 
$
6,650,000

 
Canadian revolving credit facility
 
On April 10, 2015, Barnwell’s credit facility at Royal Bank of Canada was amended and renewed. The amendment, among other things, provides for a decrease in the aggregate principal amount of the revolving credit facility to $6,500,000 Canadian dollars, or US$5,211,000 at the June 30, 2015 exchange rate, from $11,800,000 Canadian dollars. This reduction in the borrowing capacity is largely due to a tightening credit market for oil and natural gas companies due to the uncertainty of future oil and natural gas prices and significant declines in Royal Bank of Canada’s forecast of oil and natural gas prices and leaves Barnwell with minimal available credit under the facility. The other material terms of the credit facility remain unchanged. Borrowings under this facility were US$4,800,000 and issued letters of credit were $36,000 at June 30, 2015. The interest rate on the facility at June 30, 2015 was 2.69%.


16



The obligations under the credit facility are secured by substantially all of the assets of Barnwell of Canada, Limited. The credit facility subjects Barnwell to certain customary affirmative covenants, including the delivery of financial statements and annual appraisals of certain oil and gas properties. In addition, the credit facility contains customary negative covenants, including, but not limited to, restrictions on the ability of Barnwell to, among other things, merge with or acquire other entities, incur new liens, incur additional indebtedness, or sell certain oil and gas properties or petroleum and natural gas reserves (other than the sale of production from such oil and gas properties in the ordinary course of business). The credit facility also contains provisions concerning customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, and certain events of bankruptcy and insolvency. If an event of default occurs and is continuing, amounts due under the credit facility may be accelerated, and the rights and remedies of Royal Bank of Canada under the credit facility may be exercised, including rights with respect to the collateral securing Barnwell’s obligations thereunder.

Barnwell repaid $200,000 and $2,200,000 of the credit facility during the three and nine months ended June 30, 2015, respectively. During the three and nine months ended June 30, 2015, Barnwell realized foreign currency transaction losses of $11,000 and $157,000, respectively, as a result of the repayment of U.S. dollar denominated debt using Canadian dollars.
The renewed facility is available in U.S. dollars at the London Interbank Offer Rate plus 2.50%, at Royal Bank of Canada’s U.S. base rate plus 1.50%, or in Canadian dollars at Royal Bank of Canada’s prime rate plus 1.50%. A standby fee of 0.625% per annum is charged on the unused facility balance. Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually, with the next review planned for April 2016. Subject to that review, the facility may be renewed for one year with no required debt repayments or converted to a two-year term loan by the bank. If the facility is converted to a two-year term loan, Barnwell has agreed to the following repayment schedule of the then outstanding loan balance: first year of the term period - 20% (5% per quarter), and in the second year of the term period - 80% (5% per quarter for the first three quarters and 65% in the final quarter). Based on the terms of this agreement, if Royal Bank of Canada were to convert the facility to a two-year term loan upon its next review in April 2016, Barnwell would be obligated to make quarterly principal and interest repayments beginning in July 2016. As no debt repayments will be required on or before June 30, 2016, the entire outstanding loan balance at June 30, 2015 is classified as long-term debt.
Real estate loan
 
Barnwell, together with its real estate joint venture, Kaupulehu 2007, has a non-revolving real estate loan with a Hawaii bank. In January 2015, the loan was amended from monthly principal and interest payments to monthly interest-only payments effective February 1, 2015. All other terms of the loan remained unchanged. The principal balance and any accrued interest will be due and payable on April 1, 2018. The interest rate adjusts each April for the remaining term of the loan to the lender’s then prevailing interest rate for similarly priced commercial mortgage loans or a floating rate equal to the lender’s base rate. The interest rate at June 30, 2015 was 3.59%.
 
The loan is collateralized by, among other things, a first mortgage on Kaupulehu 2007’s lots together with all improvements thereon. Kaupulehu 2007 will be required to make a principal payment upon the sale of the house or the residential parcel in the amount of the net sales proceeds of the house or residential parcel; the loan agreement defines net sales proceeds as the gross sales proceeds for the house or residential parcel, less reasonable commissions and normal closing costs.
 

17



As a result of the sale of one of the residential parcels in October 2014, Kaupulehu 2007 repaid $266,000 of the real estate loan, as required from the net proceeds of the sale. The remaining $907,000 due from the buyer was recorded as a purchase money mortgage, which was collected by Barnwell in July 2015. This amount is currently being held in an agency account by the real estate loan lender until negotiations regarding the required repayment amount are complete.
 
The loan agreement contains provisions requiring us to maintain compliance with certain covenants including a consolidated debt service coverage ratio and a consolidated total liabilities to tangible net worth ratio. However, in June 2015, the bank suspended these financial covenants in exchange for an interest reserve account of $275,000, which is included in restricted cash on the Condensed Consolidated Balance Sheets at June 30, 2015. These financial covenants will remain suspended as long as there are sufficient funds in the interest reserve account.
 
The home collateralizing the loan is currently available for sale; therefore, the entire balance outstanding at June 30, 2015 under the term loan has been classified as a current liability.

9.    RETIREMENT PLANS
 
Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees. Additionally, Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”), a noncontributory supplemental retirement benefit plan which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the Pension Plan, and a postretirement medical insurance benefits plan (“Postretirement Medical”) covering eligible U.S. employees.
 
The following table details the components of net periodic benefit cost for Barnwell’s retirement plans:
 
 
Pension Plan
 
SERP
 
Postretirement Medical
 
Three months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
64,000

 
$

 
$
15,000

 
$
12,000

 
$

 
$
3,000

Interest cost
89,000

 
73,000

 
19,000

 
17,000

 
13,000

 
13,000

Expected return on plan assets
(125,000
)
 
(113,000
)
 

 

 

 

Amortization of prior service cost (credit)
1,000

 
1,000

 
(1,000
)
 
(1,000
)
 

 
3,000

Amortization of net actuarial loss (gain)
21,000

 
(3,000
)
 
6,000

 
2,000

 
(1,000
)
 
(5,000
)
Net periodic benefit cost
$
50,000

 
$
(42,000
)
 
$
39,000

 
$
30,000

 
$
12,000

 
$
14,000


18



 
Pension Plan
 
SERP
 
Postretirement Medical
 
Nine months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
192,000

 
$
118,000

 
$
46,000

 
$
35,000

 
$

 
$
9,000

Interest cost
267,000

 
242,000

 
57,000

 
50,000

 
39,000

 
40,000

Expected return on plan assets
(375,000
)
 
(323,000
)
 

 

 

 

Amortization of prior service cost (credit)
4,000

 
4,000

 
(3,000
)
 
(4,000
)
 

 
9,000

Amortization of net actuarial loss (gain)
64,000

 
15,000

 
18,000

 
4,000

 
(4,000
)
 
(15,000
)
Net periodic benefit cost
$
152,000

 
$
56,000

 
$
118,000

 
$
85,000

 
$
35,000

 
$
43,000


Barnwell contributed $250,000 to the Pension Plan during the nine months ended June 30, 2015 and does not expect to make any further contributions during the remainder of fiscal 2015. The SERP and Postretirement Medical plans are unfunded, and Barnwell funds benefits when payments are made. Barnwell does not expect to make any benefit payments under the Postretirement Medical plan during fiscal 2015 and expected payments under the SERP for fiscal 2015 are not material. Fluctuations in actual equity market returns as well as changes in general interest rates will result in changes in the market value of plan assets and may result in increased or decreased retirement benefits costs and contributions in future periods.

10.    INCOME TAXES
 
The components of income (loss) before income taxes, after adjusting the income (loss) for non-controlling interests, are as follows:
 
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
United States
$
1,684,000

 
$
(710,000
)
 
$
1,269,000

 
$
(2,949,000
)
Canada
(853,000
)
 
705,000

 
(2,622,000
)
 
2,121,000

 
$
831,000

 
$
(5,000
)
 
$
(1,353,000
)
 
$
(828,000
)
 
The components of the income tax provision (benefit) are as follows:
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Current
$
(289,000
)
 
$
344,000

 
$
(636,000
)
 
$
887,000

Deferred
149,000

 
(133,000
)
 
796,000

 
(225,000
)
 
$
(140,000
)
 
$
211,000

 
$
160,000

 
$
662,000

 
As a result of significant declines in prices, funds available for oil and natural gas capital expenditures are projected to be minimal in the near term and thus Barnwell's ability to replace production and abate declining reserves has been significantly restricted as compared to the recent past. Accordingly, Barnwell has determined that it is not more likely than not that all of our oil and natural gas deferred tax assets under

19



Canadian tax law are realizable. Included in the deferred income tax expense for the three and nine months ended June 30, 2015 was $78,000 and $863,000, respectively, for the valuation allowance necessary for the portion of Canadian tax law deferred tax assets that may not be realizable. There was no such valuation allowance recorded in the same periods of the prior year.

On June 29, 2015, the Canadian province of Alberta enacted legislation that increased the provincial corporate tax rate from 10% to 12% effective July 1, 2015, bringing the total Canadian statutory tax rate applicable to our business from 28.75% to 30.65%. The impact of the enactment of $92,000 was recorded as a charge to income taxes during the quarter ended June 30, 2015.

Consolidated taxes do not bear a customary relationship to pretax results due primarily to the fact that the Company is taxed separately in Canada based on Canadian source operations and in the U.S. based on consolidated operations, Canadian income taxes are not estimated to have a future benefit as foreign tax credits or deductions for U.S. tax purposes, and U.S. consolidated net operating losses and other deferred tax assets under U.S. tax law are not estimated to have any future U.S. tax benefit. In addition, consolidated taxes in the current year periods include the aforementioned valuation allowance for a portion of deferred tax assets under Canadian tax law.


20



11.    SEGMENT INFORMATION
 
Barnwell operates the following segments: 1) exploring for, developing, acquiring, producing and selling oil and natural gas in Canada (oil and natural gas); 2) investing in land interests in Hawaii (land investment); 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling); and 4) developing homes for sale in Hawaii (residential real estate).
 
The following table presents certain financial information related to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegment sales or transfers.
 
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:


 


 
 
 
 
Oil and natural gas
$
2,196,000

 
$
4,619,000

 
$
7,260,000

 
$
16,343,000

Land investment
1,266,000

 
258,000

 
3,115,000

 
378,000

Contract drilling
1,415,000

 
1,548,000

 
3,839,000

 
4,475,000

Other
307,000

 
377,000

 
461,000

 
678,000

Total before interest income
5,184,000

 
6,802,000

 
14,675,000

 
21,874,000

Interest income
19,000

 
8,000

 
52,000

 
18,000

Total revenues
$
5,203,000

 
$
6,810,000

 
$
14,727,000

 
$
21,892,000

Depletion, depreciation, and amortization:
 

 
 

 
 
 
 
Oil and natural gas
$
707,000

 
$
1,187,000

 
$
2,362,000

 
$
5,043,000

Contract drilling
66,000

 
79,000

 
207,000

 
235,000

Other
28,000

 
30,000

 
79,000

 
86,000

Total depletion, depreciation, and amortization
$
801,000

 
$
1,296,000

 
$
2,648,000

 
$
5,364,000

Operating profit (before general and administrative expenses):
 

 
 

 
 
 
 
Oil and natural gas
$
(46,000
)
 
$
1,321,000

 
$
(78,000
)
 
$
4,526,000

Land investment
1,266,000

 
258,000

 
3,115,000

 
378,000

Contract drilling
534,000

 
201,000

 
820,000

 
571,000

Other
279,000

 
347,000

 
382,000

 
592,000

Total operating profit
2,033,000

 
2,127,000

 
4,239,000

 
6,067,000

Equity in income (loss) of affiliates:
 

 
 

 


 


Land investment
988,000

 
(113,000
)
 
1,444,000

 
(376,000
)
General and administrative expenses
(1,891,000
)
 
(1,844,000
)
 
(6,270,000
)
 
(6,049,000
)
Interest expense
(76,000
)
 
(165,000
)
 
(248,000
)
 
(520,000
)
Interest income
19,000

 
8,000

 
52,000

 
18,000

Income (loss) before income taxes
$
1,073,000

 
$
13,000

 
$
(783,000
)
 
$
(860,000
)


21



12.    ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
 
The changes in each component of accumulated other comprehensive (loss) income were as follows:
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Foreign currency translation:
 

 
 

 
 
 
 
Beginning accumulated foreign currency translation
$
513,000

 
$
2,000,000

 
$
1,692,000

 
$
3,701,000

Change in cumulative translation adjustment before reclassifications
121,000

 
579,000

 
(1,204,000
)
 
(1,074,000
)
Amounts reclassified from accumulated other comprehensive income
11,000

 
(223,000
)
 
157,000

 
(271,000
)
Income taxes

 

 

 

Net current period other comprehensive income (loss)
132,000

 
356,000

 
(1,047,000
)
 
(1,345,000
)
Ending accumulated foreign currency translation
645,000

 
2,356,000

 
645,000

 
2,356,000

Retirement plans:


 
 

 


 
 

Beginning accumulated retirement plans benefit cost
(1,897,000
)
 
(694,000
)
 
(1,950,000
)
 
(710,000
)
Amortization of net actuarial loss and prior service cost
26,000

 
(3,000
)
 
79,000

 
13,000

Income taxes

 

 

 

Net current period other comprehensive income (loss)
26,000

 
(3,000
)
 
79,000

 
13,000

Ending accumulated retirement plans benefit cost
(1,871,000
)
 
(697,000
)
 
(1,871,000
)
 
(697,000
)
Accumulated other comprehensive (loss) income, net of taxes
$
(1,226,000
)
 
$
1,659,000

 
$
(1,226,000
)
 
$
1,659,000

 
The realized foreign currency transaction loss (gain) related to the repayment of debt was reclassified from accumulated other comprehensive income to general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations. The amortization of accumulated other comprehensive loss components for the retirement plans are included in the computation of net periodic benefit cost which is a component of general and administrative expenses on the accompanying Condensed Consolidated Statements of Operations (see Note 9 for additional details).

13.    FAIR VALUE MEASUREMENTS
 
The carrying values of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and accrued current liabilities approximate their fair values due to the short-term nature of the instruments. The carrying value of the note receivable approximates fair value as it has been recorded at a discount using an interest rate based on market rates for similar instruments. The carrying value of long-term debt approximates fair value as the terms approximate current market terms for similar debt instruments of comparable risk and maturities.
 
The estimated fair values of oil and natural gas properties and the asset retirement obligation assumed in the acquisition of additional non-operated working interests located in the Progress area of Alberta, Canada, are based on an estimated discounted cash flow model and market assumptions. The significant Level 3 assumptions used in the calculation of estimated discounted cash flows included future commodity prices,

22



projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development, operating and asset retirement costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates. See Note 7 for additional information regarding the Progress acquisition.

14.    COMMITMENTS AND CONTINGENCIES
 
Environmental Matters
 
In January 2015, there was an oil and salt water spill at one of our operated oil properties in Alberta, Canada. We have estimated that probable environmental remediation costs will be approximately $2,300,000. Barnwell’s working interest in the well is 58%, and we have recovered substantially all of the monies from the other working interest owners for their share of the costs. Additionally, we have filed a claim under our insurance policy, which has a deductible of approximately $80,000, and as of June 30, 2015, we have collected $722,000 in insurance proceeds and have recorded a receivable of $410,000 for the remaining estimated recovery amount. The total estimated net financial impact for Barnwell, which includes the insurance deductible, estimated legal fees and estimated monitoring and other costs, is approximately $221,000, which has been recorded as a charge to operating results in the nine months ended June 30, 2015.

Liabilities at June 30, 2015 and September 30, 2014, include environmental remediation costs of $390,000 and $501,000, respectively, for estimated probable environmental remediation costs for soil contamination from infrastructure issues at the Dunvegan and Wood River properties in which we own a non-operating working interest. The estimated liability is based on authorization for expenditure requests and cost estimates received by Barnwell from the property operators in 2013. Environmental remediation costs for Dunvegan and Wood River have not been discounted and were accrued in “Accrued operating and other expenses” on the Condensed Consolidated Balance Sheets.

Because of the inherent uncertainties associated with environmental assessment and remediation activities, future expenses to remediate the currently identified sites, and sites identified in the future, if any, could be incurred.
 
Guarantee
 
See Note 6 for a discussion of Barnwell’s guarantee of the Kukio Resort land development partnership’s performance bonds.



23



15.    INFORMATION RELATING TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine months ended 
 June 30,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
235,000

 
$
489,000

Income taxes paid
$

 
$
(103,000
)
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Note receivable for sale of investment
$
907,000

 
$

 
Capital expenditure accruals related to oil and natural gas exploration and development increased $95,000 and decreased $1,329,000 during the nine months ended June 30, 2015 and 2014, respectively. Additionally, capital expenditure accruals related to oil and natural gas asset retirement obligations increased $938,000 and $58,000 during the nine months ended June 30, 2015 and 2014, respectively.

16.    RELATED PARTY TRANSACTIONS
 
Kaupulehu Developments is entitled to receive a percentage of the gross receipts from the sales of single-family residential lots in Increment I from KD I, a land development partnership in which Barnwell holds a 19.6% non-controlling ownership interest accounted for under the equity method of investment. The percentage payments are part of a 2004 transaction where Kaupulehu Developments sold its leasehold interest in Increment I, which was prior to Barnwell’s affiliation with KD I which commenced on November 27, 2013, the acquisition date of our ownership interest in the Kukio Resort land development partnerships.

During the nine months ended June 30, 2015, Barnwell received $3,623,000 in percentage of sales payments from KD I from the sale of six contiguous lots within Phase I of Increment I to a single buyer and ten lots within Phase II of Increment I. During the three months ended June 30, 2014, Barnwell received $300,000 in percentage of sales payments from KD I from the sale of one lot within Phase II of Increment I. The lot sale during the first quarter of fiscal 2014 occurred prior to our purchase of ownership interests in the Kukio Resort land development partnerships. 

17.    SUBSEQUENT EVENT

In August 2015, Barnwell entered into a purchase and sale agreement with an independent third party to sell the interest in its principal oil and natural gas properties located in the Dunvegan and Belloy areas of Alberta, Canada. The Company's share of the sales price per the agreement is approximately $15,000,000 which will be adjusted at closing for customary purchase price adjustments in order to, among other things, reflect an economic effective date of April 1, 2015. On closing the buyer will withhold 50 percent of the proceeds in trust for the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes related to the sale and the precise timing for the release of these funds cannot be determined. Barnwell will be required to use a portion of the proceeds received upon closing for Canadian income tax payments and repayment of most or all of the $4,800,000 of the Canadian credit facility currently outstanding as there will be a significant reduction of the borrowing capacity as a result of the sale. The sale of these interests is expected to close in the fourth quarter of fiscal 2015, subject to customary closing conditions. However,

24



there can be no assurance that all of the conditions to closing the sale will be satisfied. The difference in the relationship between capitalized costs and proved reserves of Dunvegan and Belloy as compared to that of the retained properties is significant. Accordingly, Barnwell expects to record a gain on the sale of Dunvegan and Belloy in accordance with the guidance in Rule 4-10(c)(6)(i) of Regulation S-X.

25



ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Statement Relevant to Forward-Looking Information
For the Purpose Of “Safe Harbor” Provisions Of The
Private Securities Litigation Reform Act of 1995
 
This Form 10-Q, and the documents incorporated herein by reference, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement is one which is based on current expectations of future events or conditions and does not relate to historical or current facts. These statements include various estimates, forecasts, projections of Barnwell’s future performance, statements of Barnwell’s plans and objectives, and other similar statements. Forward-looking statements include phrases such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates,” “assumes,” “projects,” “may,” “will,” “will be,” “should,” or similar expressions. Although Barnwell believes that its current expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Forward-looking statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The risks, uncertainties and other factors that might cause actual results to differ materially from Barnwell’s expectations are set forth in the “Forward-Looking Statements” and “Risk Factors” sections of Barnwell’s Annual Report on Form 10-K for the year ended September 30, 2014 and the “Risk Factors” section in this Form-10Q. Investors should not place undue reliance on these forward-looking statements, as they speak only as of the date of filing of this Form 10-Q, and Barnwell expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein.

General

In light of the circumstances discussed in Note 2 to the Condensed Consolidated Financial Statements, our primary focus is on cash management and potential asset sales to solve our liquidity issues. See our discussion under “Liquidity and Capital Resources” below.

Critical Accounting Policies and Estimates
 
Management has determined that our most critical accounting policies and estimates are those related to the evaluation of recoverability of assets, depletion of our oil and natural gas properties, income taxes and asset retirement obligation which are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. There have been no significant changes to these critical accounting policies and estimates during the three and nine months ended June 30, 2015. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.

Impact of Recently Issued Accounting Standards on Future Filings
 
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU relates to discontinued operations reporting for disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued

26



operation. The amendments are effective for annual periods beginning after December 15, 2014 and subsequent interim periods. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. On July 9, 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of the original effective date, which is annual reporting periods beginning after December 15, 2016 and subsequent interim periods. The new standard is to be applied retrospectively and permits the use of either the retrospective or cumulative effect transition method. Barnwell is currently evaluating the effect that the adoption of this update will have on the consolidated financial statements.
 
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires an entity to evaluate at each reporting period whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year from the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is permitted. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.
 
In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” which eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to separately classify, present and disclose extraordinary events and transactions. The amendment is effective for annual reporting periods beginning after December 15, 2015 and subsequent interim periods. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis," which simplifies the current consolidation guidance and will require companies to reevaluate limited partnerships and similar entities for consolidation. The amendment is effective for annual reporting periods beginning after December 15, 2015 and subsequent interim periods. Barnwell is currently evaluating the effect that the adoption of this update will have on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This amendment was issued to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. This will make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The amendment is effective for annual reporting periods beginning after December 15, 2015 and subsequent interim periods, with early adoption permitted. The adoption of this update is not expected to have a material impact on Barnwell’s consolidated financial statements.




27



Overview
 
Barnwell is engaged in the following lines of business: 1) exploring for, developing, acquiring, producing and selling oil and natural gas in Canada (oil and natural gas segment), 2) investing in land interests in Hawaii (land investment segment), 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling segment), and 4) developing homes for sale in Hawaii (residential real estate segment).
 
Oil and Natural Gas Segment
 
Barnwell is involved in the acquisition, exploration and development of oil and natural gas properties in Canada where we acquire or initiate and participate in exploratory and developmental operations for oil and natural gas on properties in which we have an interest, and evaluate proposals by third parties with regard to participation in such exploratory and developmental operations elsewhere.

Land Investment Segment
 
The land investment segment is comprised of the following components:
 
1)   Through Barnwell’s 77.6% controlling interest in Kaupulehu Developments, a Hawaii general partnership, 75% controlling interest in KD Kona 2013 LLLP, a Hawaii limited liability limited partnership, and 34.45% non-controlling interest in KKM Makai, LLLP, a Hawaii limited liability limited partnership, the Company’s land investment interests include the following:
 
The right to receive payments from KD Acquisition, LLLP (“KD I”) and KD Acquisition II, LLLP (“KD II”), resulting from the sale of lots and/or residential units within approximately 870 acres of the Kaupulehu Lot 4A area, located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, adjacent to Hualalai Resort at Historic Ka`upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean, by KD I and KD II in two increments (“Increment I” and “Increment II”). Increment I is an area zoned for approximately 80 single-family lots, of which 29 lots are remaining to be sold, and a beach club on the portion of the property bordering the Pacific Ocean, and is partially developed. The purchasers of the 80 single-family lots will have the right to apply for membership in the Kuki`o Golf and Beach Club, which is located adjacent to and south of the Four Seasons Resort Hualalai at Historic Ka`upulehu. Increment II is the remaining portion of the approximately 870-acre property and is zoned for single-family and multi-family residential units and a golf course and clubhouse. Two residential lots approximately two to three acres in size fronting the ocean are currently being developed within Increment II by KD II, and the remaining acreage within Increment II is not yet under development.
 
An indirect 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP. These entities own certain real estate and development rights interests in the Kukio, Maniniowali and Kaupulehu portions of Kukio Resort, a private residential community on the Kona coast of the island of Hawaii, as well as Kukio Resort’s real estate sales office operations. KD Kaupulehu, LLLP, which wholly owns KD I and KD II, is the developer of Kaupulehu Lot 4A Increments I and II, the area in which Barnwell has interests in percentage of sales payments.
 
Approximately 1,000 acres of vacant leasehold land zoned conservation in the Kaupulehu Lot 4C area located adjacent to the 870-acre Lot 4A described above.

28



 
2)   Barnwell owns an 80% controlling interest in Kaupulehu 2007, LLLP (“Kaupulehu 2007”), a Hawaii limited liability limited partnership. Kaupulehu 2007 owns one residential parcel in the Kaupulehu area that is held for investment.
 
Contract Drilling Segment
 
Barnwell drills water and water monitoring wells and installs and repairs water pumping systems in Hawaii. Contract drilling results are highly dependent upon the quantity, dollar value and timing of contracts awarded by governmental and private entities and can fluctuate significantly.

Residential Real Estate Segment
 
Barnwell, through its 80%-owned real estate joint venture, Kaupulehu 2007, constructs and sells luxury single-family homes. Kaupulehu 2007, in addition to the parcel described above, owns a luxury residence in the Kaupulehu area that is available for sale. Kaupulehu 2007 does not currently have any homes under construction.

Changes in Business Environment
 
Oil and Natural Gas Segment
 
Our revenue, profitability, and future rate of growth are substantially dependent on oil and natural gas prices. The industry has experienced a significant decline in oil and natural gas prices in recent months that has negatively impacted our operating results, cash flows and liquidity. Barnwell realized an average price for oil of $48.55 per barrel during the nine months ended June 30, 2015, down 39% from $79.78 per barrel realized during the same period in the prior year. Barnwell realized an average price for natural gas of $2.29 per Mcf during the nine months ended June 30, 2015, down 41% from $3.91 per Mcf realized during the same period in the prior year.
 
On April 10, 2015, Barnwell’s credit facility at Royal Bank of Canada was amended and renewed. The amendment, among other things, provides for a decrease in the aggregate principal amount of the revolving credit facility to $6,500,000 Canadian dollars, or US$5,211,000 at the June 30, 2015 exchange rate, from $11,800,000 Canadian dollars. This reduction in the borrowing capacity is largely due to a tightening credit market for oil and natural gas companies due to the uncertainty of future oil and natural gas prices and significant declines in Royal Bank of Canada’s forecast of oil and natural gas prices and leaves Barnwell with minimal available credit under the facility.

In August 2015, Barnwell entered into a purchase and sale agreement with an independent third party to sell the interest in its principal oil and natural gas properties located in the Dunvegan and Belloy areas of Alberta, Canada. The Company's share of the sales price per the agreement is approximately $15,000,000 which will be adjusted at closing for customary purchase price adjustments in order to, among other things, reflect an economic effective date of April 1, 2015. On closing the buyer will withhold 50 percent of the proceeds in trust for the Canada Revenue Agency for potential amounts due for Barnwell’s Canadian income taxes related to the sale and the precise timing for the release of these funds cannot be determined. The sale of these interests is expected to close in the fourth quarter of fiscal 2015, subject to customary closing conditions. However, there can be no assurance that all of the conditions to closing the sale will be satisfied. Barnwell will be required to use a portion of the proceeds received upon closing for Canadian income tax

29



payments and repayment of most or all of the $4,800,000 of the Canadian credit facility currently outstanding as there will be a significant reduction of the borrowing capacity as a result of the sale.

Oil and natural gas prices affect the value of our oil and natural gas properties as determined in our full cost ceiling calculation and sustained low prices will result in future reductions of the full cost ceiling value which could result in future reductions of the carrying value of our oil and natural gas properties and a charge to operating results.
 
Negative impacts to our projected future oil and natural gas segment discretionary cash flow due to the decline in prices and other factors has resulted in the conclusion that it is not more likely than not that all of our deferred tax assets under Canadian tax law are realizable.  As a result, the Company recorded a valuation allowance of $863,000 during the nine months ended June 30, 2015 for the portion of Canadian tax law deferred tax assets related to asset retirement obligations that may not be realizable. This valuation allowance has negatively impacted our financial results for the nine months ended June 30, 2015. Additional valuation allowances for these deferred tax assets may be required in the future based on changes in facts and circumstances and future activity.

Results of Operations
 
Summary
 
Net income attributable to Barnwell for the three months ended June 30, 2015 totaled $971,000, a $1,187,000 increase in operating results from a net loss of $216,000 for the three months ended June 30, 2014. The following factors affected the results of operations for the three months ended June 30, 2015 as compared to the prior year period:
 
A $1,367,000 decrease in oil and natural gas segment operating results, before income taxes, primarily due to decreases in prices for all products which was partially offset by a reduction in operating expenses and the benefit from a decreased depletion rate primarily related to the divestitures of certain oil and natural gas properties in fiscal 2014;

A $1,008,000 increase in land investment segment operating profit, before income taxes and non-controlling interests’ share of such profits, due to increased percentage of sales receipts; and

A $1,101,000 increase in equity in income from affiliates as a result of increased Kukio Resort land development partnerships’ operating results.

Barnwell incurred a net loss of $1,513,000 for the nine months ended June 30, 2015, a $23,000 decrease in operating results from a net loss of $1,490,000 for the nine months ended June 30, 2014. The following factors affected the results of operations for the nine months ended June 30, 2015 as compared to the prior year period:
A $4,604,000 decrease in oil and natural gas segment operating results, before income taxes, primarily due to decreases in prices for all products as well as a reduction in revenue due to decreases in production for oil and natural gas partially offset by a reduction in operating expenses and the benefit from a decreased depletion rate all primarily related to the divestitures of certain oil and natural gas properties in fiscal 2014;


30



A $2,737,000 increase in land investment segment operating profit, before income taxes and non-controlling interests’ share of such profits, due to increased percentage of sales receipts;

A $1,820,000 increase in equity in income from affiliates as a result of increased Kukio Resort land development partnerships’ operating results; and

An $863,000 valuation allowance recorded in the current year period for deferred tax assets under Canadian tax law related to asset retirement obligations which increased deferred income tax expense.
 
General
 
Barnwell conducts operations in the U.S. and Canada. Consequently, Barnwell is subject to foreign currency translation and transaction gains and losses due to fluctuations of the exchange rates between the Canadian dollar and the U.S. dollar. Barnwell cannot accurately predict future fluctuations of the exchange rates and the impact of such fluctuations may be material from period to period. To date, we have not entered into foreign currency hedging transactions.
 
The average exchange rate of the Canadian dollar to the U.S. dollar decreased 11% and 10% in the three and nine months ended June 30, 2015, respectively, as compared to the same periods in the prior year, and the exchange rate of the Canadian dollar to the U.S. dollar decreased 10% at June 30, 2015, as compared to September 30, 2014. Accordingly, the assets, liabilities, stockholders’ equity and revenues and expenses of Barnwell’s subsidiaries operating in Canada have been adjusted to reflect the change in the exchange rates. Barnwell’s Canadian dollar assets are greater than its Canadian dollar liabilities; therefore, increases or decreases in the value of the Canadian dollar to the U.S. dollar generate other comprehensive income or loss, respectively. Other comprehensive income and losses are not included in net loss. Other comprehensive income due to foreign currency translation adjustments, net of taxes, for the three months ended June 30, 2015 was $132,000, a $224,000 change from other comprehensive income due to foreign currency translation adjustments, net of taxes, of $356,000 for the same period in the prior year. Other comprehensive loss due to foreign currency translation adjustments, net of taxes, for the nine months ended June 30, 2015 was $1,047,000, a $298,000 change from other comprehensive loss due to foreign currency translation adjustments, net of taxes, of $1,345,000 for the same period in the prior year. There were no taxes on other comprehensive income (loss) due to foreign currency translation adjustments in the three and nine months ended June 30, 2015 and 2014 due to a full valuation allowance on the related deferred tax asset.

Oil and natural gas
 
The following tables set forth Barnwell’s average prices per unit of production and net production volumes. Production amounts reported are net of royalties.
 
 
Average Price Per Unit
 
Three months ended
 
Increase
 
June 30,
 
(Decrease)
 
2015
 
2014
 
$
 
%
Natural Gas (Mcf)*
$
1.88

 
$
4.02

 
$
(2.14
)
 
(53
%)
Oil (Bbls)**
$
49.18

 
$
92.71

 
$
(43.53
)
 
(47
%)
Liquids (Bbls)**
$
15.76

 
$
44.19

 
$
(28.43
)
 
(64
%)
 

31



 
Average Price Per Unit
 
Nine months ended
 
Increase
 
June 30,
 
(Decrease)
 
2015
 
2014
 
$
 
%
Natural Gas (Mcf)*
$
2.29

 
$
3.91

 
$
(1.62
)
 
(41
%)
Oil (Bbls)**
$
48.55

 
$
79.78

 
$
(31.23
)
 
(39
%)
Liquids (Bbls)**
$
20.10

 
$
46.11

 
$
(26.01
)
 
(56
%)

 
Net Production
 
Three months ended
 
Increase
 
June 30,
 
(Decrease)
 
2015
 
2014
 
Units
 
%
Natural Gas (Mcf)*
398,000

 
464,000

 
(66,000
)
 
(14
%)
Oil (Bbls)**
22,000

 
21,000

 
1,000

 
5
%
Liquids (Bbls)**
17,000

 
16,000

 
1,000

 
6
%

 
Net Production
 
Nine months ended
 
Increase
 
June 30,
 
(Decrease)
 
2015
 
2014
 
Units
 
%
Natural Gas (Mcf)*
1,298,000

 
1,490,000

 
(192,000
)
 
(13
%)
Oil (Bbls)**
59,000

 
97,000

 
(38,000
)
 
(39
%)
Liquids (Bbls)**
53,000

 
53,000

 

 
%
_______________________________________
*            Mcf = 1,000 cubic feet.  Natural gas price per unit is net of pipeline charges.
**          Bbl = stock tank barrel equivalent to 42 U.S. gallons
 
Oil and natural gas revenues decreased $2,423,000 (52%) and $9,083,000 (56%) for the three and nine months ended June 30, 2015, respectively, as compared to the same periods in the prior year primarily due to decreases in prices realized for all products. Also impacting revenues for the nine months ended June 30, 2015, were decreases in oil and natural gas production as a result of divestitures of certain oil and natural gas properties in fiscal 2014 and from natural declines in production from older natural gas properties.
 
The oil and natural gas segment generated a $46,000 operating loss before general and administrative expenses in the three months ended June 30, 2015, a decrease in operating results of $1,367,000 as compared to the $1,321,000 operating profit generated during the same period of the prior year. Operating results decreased due to the significant decrease in revenue discussed above, partially offset by a decrease of $576,000 (27%) in oil and natural gas operating expenses and a decrease of $480,000 (40%) in depletion for the three months ended June 30, 2015, as compared to the same period in the prior year.

Oil and natural gas operating expenses for the three months ended June 30, 2015 decreased primarily due to lower production for natural gas as a result of natural declines in production, a decrease of $153,000 due to divestitures of certain oil and natural gas properties in fiscal 2014 and an 11% decrease in the average exchange rate of the Canadian dollar to the U.S. dollar that decreased oil and natural gas operating expenses $195,000 as compared to the same period in the prior year.


32



The oil and natural gas segment generated a $78,000 operating loss before general and administrative expenses in the nine months ended June 30, 2015, a decrease in operating results of $4,604,000 as compared to the $4,526,000 operating profit generated during the same period of the prior year. Operating results decreased due to the significant decrease in revenue discussed above, partially offset by a decrease of $1,798,000 (27%) in oil and natural gas operating expenses and a decrease of $2,681,000 (53%) in depletion for the nine months ended June 30, 2015, as compared to the same period in the prior year.

Oil and natural gas operating expenses for the nine months ended June 30, 2015 decreased primarily due to lower production for natural gas as a result of natural declines in production, a decrease of $743,000 due to divestitures of certain oil and natural gas properties in fiscal 2014 and a 10% decrease in the average exchange rate of the Canadian dollar to the U.S. dollar that decreased oil and natural gas operating expenses $555,000 as compared to the same period in the prior year.

Oil and natural gas segment depletion decreased for the three and nine ended June 30, 2015 as compared to the prior year periods primarily due to a 27% and 37% respective decrease in the depletion rates as a result of divestitures of certain oil and natural gas properties in fiscal 2014 as the proceeds from the sales were credited to the oil and natural gas cost pools in accordance with the full cost method, which resulted in a decrease in the future depletable base. Further contributing to the decrease in depletion for the three months ended June 30, 2015, was an 8% decrease in net production and an 11% decrease in the average exchange rate of the Canadian dollar to the U.S. dollar as compared to the same period in the prior year. There was a 17% decrease in net production and a 10% decrease in the average exchange rate of the Canadian dollar to the U.S. dollar for the nine months ended June 30, 2015 as compared to the same period in the prior year.
 
Sale of interest in leasehold land
 
Kaupulehu Developments is entitled to receive a percentage of the gross receipts from the sales of single-family residential lots in Increment I from KD I, a land development partnership in which Barnwell holds an indirect 19.6% non-controlling ownership interest accounted for under the equity method of investment. The percentage payments are part of a 2004 transaction where Kaupulehu Developments sold its leasehold interest in Increment I to KD I, which was prior to Barnwell’s affiliation with KD I on November 27, 2013, the acquisition date of our ownership interest in the Kukio Resort land development partnerships.

The following table summarizes the percentage of sales payment revenues received from KD I:
 
 
Three months ended 
 June 30,
 
Nine months ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Sale of interest in leasehold land:
 
 
 

 
 
 
 
Proceeds
$
1,473,000

 
$
300,000

 
$
3,623,000

 
$
440,000

Fees
(207,000
)
 
(42,000
)
 
(508,000
)
 
(62,000
)
Revenues – sale of interest in leasehold land, net
$
1,266,000

 
$
258,000

 
$
3,115,000

 
$
378,000

 
KD I sold five single-family lots within Phase II of Increment I during the three months ended June 30, 2015, and sold a total of six contiguous single-family lots to a single buyer within Phase I of Increment I and ten single-family lots within Phase II of Increment I during the nine months ended June 30, 2015.

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One single-family lot was sold during the three months ended June 30, 2014 and a total of two single-family lots were sold during the nine months ended June 30, 2014. The lot sale during the first quarter of fiscal 2014 occurred prior to the acquisition of our ownership interest in the Kukio Resort land development partnerships.
 
As of June 30, 2015, all of the 38 single-family lots in Phase I of Increment I have been sold by KD I. Forty-two single-family lots are planned for Phase II of Increment I, for a total of 80 single-family lots planned for Increment I. A portion of the 42 single-family lots in Phase II of Increment I have been completed and thirteen have been sold as of June 30, 2015. Two residential lots approximately two to three acres in size fronting the ocean are also currently being developed within Increment II by KD II, and the remaining acreage within Increment II is not yet under development. It is uncertain when or if KD II will develop the other areas of Increment II, and there is no assurance with regards to the amounts of future sales from Increments I and II.

Contract drilling
 
Contract drilling revenues and contract drilling costs decreased $133,000 (9%) and $453,000 (36%), respectively, for the three months ended June 30, 2015, as compared to the same period in the prior year. The contract drilling segment generated a $534,000 operating profit before general and administrative expenses in the three months ended June 30, 2015, an increase in operating results of $333,000 as compared to the $201,000 operating profit generated during the same period of the prior year. The increase in operating results is primarily due to higher contract margins as well as a benefit realized from a contract loss accrual reversal in the current quarter as a result of a pump contract that was terminated. The Company had previously accrued loss provisions for the contract which had encountered difficulties for which the Company had expected to incur additional costs to complete.

Contract drilling revenues and contract drilling costs decreased $636,000 (14%) and $857,000 (23%), respectively, for the nine months ended June 30, 2015, as compared to the same period in the prior year. The contract drilling segment generated a $820,000 operating profit before general and administrative expenses in the nine months ended June 30, 2015, an increase in operating results of $249,000 as compared to the $571,000 operating profit generated during the same period of the prior year. The increase in operating results is primarily due to higher contract margins and a benefit realized from a contract loss accrual reversal in the current quarter as a result of a pump contract that was terminated as discussed above. These increases in operating results were partially offset by decreased water well drilling activity.
 
Contract drilling revenues and costs are not seasonal in nature, but can fluctuate significantly based on the awarding and timing of contracts, which are determined by contract drilling customer demand. There has been significant volatility in demand for water well drilling contracts in recent years due largely to the impact of the recession and reduced governmental capital improvement budgets. This has generally led to increased competition for available contracts and lower margins on awarded contracts. The Company is unable to predict the near-term and long-term availability of water well drilling and pump installation and repair contracts as a result of this volatility in demand.
 

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Gas processing and other

Included in gas processing and other income for the three and nine months ended June 30, 2015 is a $272,000 gain on the sale of a contract drilling rig and ancillary drilling equipment in May 2015. Included in gas processing and other income for the three and nine months ended June 30, 2014 were foreign currency transaction gains of $223,000 and $271,000, respectively, from the repayment of U.S. dollar denominated debt using Canadian dollars.

General and administrative expenses
 
General and administrative expenses increased $47,000 (3%) for the three months ended June 30, 2015, as compared to the same period in the prior year. The increase was primarily due to a $247,000 decrease in administrative expense reimbursements from oil and natural gas joint venture partners partially offset by a $95,000 decrease in rent expense and moving expenses due to the relocation of the Canadian office in the prior year period, a $48,000 decrease in professional services and a $32,000 decrease in current compensation costs due to cost reduction efforts.

General and administrative expenses increased $221,000 (4%) for the nine months ended June 30, 2015, as compared to the same period in the prior year. The increase was primarily due to a $438,000 decrease in administrative expense reimbursements from oil and natural gas joint venture partners, an increase in share-based compensation expense due to the fact that general and administrative expenses in the prior year period included a $209,000 reduction in share-based compensation expense as compared to a $69,000 reduction in share-based compensation expense in the current year period, and a $157,000 foreign currency transaction loss recognized in the current year period. These increases were partially offset by a $181,000 decrease in professional services due to legal costs and costs associated with the accounting for the acquisition of ownership interests in the land development partnerships incurred in the prior year period, a $152,000 decrease in rent expense and moving expenses due to the relocation of the Canadian office in the prior year period, and a $108,000 decrease in current compensation costs due to cost reduction efforts.
Depletion, depreciation, and amortization
 
Depletion, depreciation, and amortization decreased $495,000 (38%) and $2,716,000 (51%) for the three and nine months ended June 30, 2015, respectively, as compared to the same periods in the prior year primarily due to the decrease in the oil and natural gas segment depletion rate as discussed above.

Interest expense
 
Interest expense decreased $89,000 (54%) and $272,000 (52%) for the three and nine months ended June 30, 2015, respectively, as compared to the same periods in the prior year primarily due to the decrease in average outstanding debt balances as Barnwell repaid $5,000,000 of the Canadian credit facility during the second and third quarters of fiscal 2014 and an additional $2,200,000 during the nine months ended June 30, 2015, and as a result of the land investment loan which Barnwell obtained on November 27, 2013 and paid in full in September 2014.
 
Equity in income (loss) of affiliates
 
Barnwell’s investment in the Kukio Resort land development partnerships is accounted for using the equity method of accounting. Barnwell was allocated partnership income of $988,000 and $1,444,000 during the three and nine months ended June 30, 2015, respectively, as compared to allocated losses of $113,000

35



and $376,000 during the three and nine months ended June 30, 2014, respectively. The increase in the allocated partnership income in the current year periods is due to the increase in the number of single-family residential lots in Increment I sold by KD I as well as an increase in KD I's profit recognition under percentage-of-completion accounting due to additional development expenditures during the three and nine months ended June 30, 2015.

Income taxes
 
Barnwell’s effective consolidated income tax rate for the three and nine months ended June 30, 2015, after adjusting income (loss) before income taxes for non-controlling interests, was (17%) and (12%), respectively, as compared to (4220%) and (80%) for the three and nine months ended June 30, 2014, respectively. 
As a result of significant declines in prices, funds available for oil and natural gas capital expenditures are projected to be minimal in the near term and thus Barnwell's ability to replace production and abate declining reserves has been significantly restricted as compared to the recent past. Accordingly, Barnwell has determined that it is not more likely than not that all of our oil and natural gas deferred tax assets under Canadian tax law are realizable. Included in deferred income tax expense for the three and nine months ended June 30, 2015 was $78,000 and $863,000, respectively, for the valuation allowance necessary for the portion of Canadian tax law deferred tax assets that may not be realizable. There was no such valuation allowance recorded in the same periods of the prior year.

On June 29, 2015, the Canadian province of Alberta enacted legislation that increased the provincial corporate tax rate from 10% to 12% effective July 1, 2015, bringing the total Canadian statutory tax rate applicable to our business from 28.75% to 30.65%. The impact of the enactment of $92,000 was recorded as a charge to income taxes during the quarter ended June 30, 2015.

Consolidated taxes do not bear a customary relationship to pretax results due primarily to the fact that the Company is taxed separately in Canada based on Canadian source operations and in the U.S. based on consolidated operations, Canadian income taxes are not estimated to have a future benefit as foreign tax credits or deductions for U.S. tax purposes, and U.S. consolidated net operating losses and other deferred tax assets under U.S. tax law are not estimated to have any future U.S. tax benefit. In addition, consolidated taxes in the current year periods include the aforementioned valuation allowance for a portion of deferred tax assets under Canadian tax law. 

Net income (loss) attributable to non-controlling interests

Earnings and losses attributable to non-controlling interests represent the non-controlling interests’ share of revenues and expenses related to the various partnerships and joint ventures in which Barnwell has interests.

Net income attributable to non-controlling interests for the three months ended June 30, 2015 totaled $242,000, as compared to net income attributable to non-controlling interests of $18,000 for the same period in the prior year. Net income attributable to non-controlling interests for the nine months ended June 30, 2015 totaled $570,000, as compared to net loss attributable to non-controlling interests of $32,000 for the same period in the prior year. The increases of $224,000 and $602,000, respectively, are due primarily to greater percentage of sales proceeds received in the current year periods as compared to the same periods in the prior year.


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Liquidity and Capital Resources
 
Barnwell’s primary sources of liquidity are cash on hand and land investment segment proceeds. At June 30, 2015, Barnwell had $8,695,000 in cash and cash equivalents and $8,858,000 in working capital.