Note 10 - Debt

6 Months Ended

Jun. 30, 2013

Disclosure Text Block Supplement [Abstract]

Debt and Capital Leases Disclosures [Text Block]

Note 10 — Debt

At June 30, 2013 and December 31, 2012, debt consisted of the following:

	June 30, 2013		December 31, 2012
	(in thousands)
$170.9 million Convertible Notes, 6.5%, due March 2015, net of discount of ($13.8) million at June 30, 2013 and ($17.4) million at December 31, 2012	$	157,132	$	153,479
$75.0 million Secured Debt Facility, 3-month LIBOR plus 9%, due July 2015		-		35,000
$40.0 million Secured Debt Facility, 3-month LIBOR plus 8%, due January 2015		40,000		32,727
		197,132		221,206
Less: Current maturity of long-term debt		17,000		24,046
Long-term debt, net	$	180,132	$	197,160

$170.9 million Convertible Notes due 2015

During the first quarter of 2010, the Company closed on a private offering for an aggregate of $170.9 million of convertible notes due 2015. The 2015 Convertible Notes are the Company’s general senior unsecured obligations and rank equally in right of payment with all of the Company’s other existing and future senior unsecured indebtedness.  The 2015 Convertible Notes are effectively subordinate to all of the Company’s secured indebtedness to the extent of the value of the assets collateralizing such indebtedness.  The 2015 Convertible Notes are not guaranteed by the Company’s subsidiaries.

The interest rate on the 2015 Convertible Notes is 6.50% per year with interest payments due on March 1st and September 1st of each year.  The 2015 Convertible Notes mature with repayment of $170.9 million (assuming no conversion) due on March 1, 2015.

The initial conversion rate of 148.3856 shares per $1,000 principal amount (equal to an initial conversion price of approximately $6.74 per share of common stock) was adjusted on February 3, 2011 in accordance with the terms of the Indenture.

As a result, the conversion rate and conversion price changed to 169.0082 and $5.9169, respectively. Upon conversion, the Company must deliver, at its option, either (1) a number of shares of its common stock determined as set forth in the Indenture, (2) cash, or (3) a combination of cash and shares of its common stock.

Holders may convert their 2015 Convertible Notes at their option at any time prior to the close of business on the second business day immediately preceding the maturity date under any of the following circumstances:

(1) during any fiscal quarter (and only during such fiscal quarter) commencing after March 31, 2010, if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the conversion price of the 2015 Convertible Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter;

(2) prior to January 1, 2015, during the five business-day period after any ten consecutive trading-day period in which the trading price of $1,000 principal amount of the 2015 Convertible Notes for each trading day in the measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day;

(3) if the 2015 Convertible Notes have been called for redemption; or

(4) upon the occurrence of one of a specified number of corporate transactions.

Holders may also convert the 2015 Convertible Notes at their option at any time beginning on February 1, 2015, and ending at the close of business on the second business day immediately preceding the maturity date.

As of February 3, 2013, the Company may redeem for cash all or a portion of the 2015 Convertible Notes at a redemption price of 100% of the principal amount of the notes to be redeemed plus any accrued and unpaid interest to, but not including, the redemption date, plus a “make-whole” payment if: (1) for at least 20 trading days in any consecutive 30 trading days ending within 5 trading days immediately before the date the Company mails the redemption notice, the “last reported sale price” of its common stock exceeded 175% of the conversion price in effect on that trading day, and (2) there is no continuing default with respect to the notes that has not been cured or waived on or before the redemption date.

If the Company experiences any one of certain specified types of corporate transactions, holders may require the Company to purchase all or a portion of their 2015 Convertible Notes. Any repurchase of the notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date.

The indenture agreement contains customary terms and covenants and events of default, the occurrence and continuation of which could result in the acceleration of amounts due under the 2015 Convertible Notes.

Net proceeds from the sale of the 2015 Convertible Notes, after deducting the discounts and commissions and any offering expenses payable by the Company, were approximately $164.9 million.  The initial purchaser received commissions of approximately $5.5 million in connection with the sale and the Company incurred approximately $0.6 million of direct expenses in connection with the offering.  The Company used the net proceeds for general corporate purposes, including capital expenditures and working capital, reduction or refinancing of debt, and other corporate obligations.

The Company accounts for the 2015 Convertible Notes in accordance with ASC Topic 470, “Debt”, as it pertains to accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). Under the accounting guidance, convertible debt instruments that may be settled entirely or partially in cash upon conversion are required to be separated into liability and equity components, with the liability component amount determined in a manner that reflects the issuer’s non-convertible debt borrowing rate. The value assigned to the liability component is determined by measuring the fair value of a similar liability that does not have an equity conversion feature. The value assigned to the equity component is determined by deducting the fair value of the liability component from the initial proceeds. The excess of the principal amount of the liability component over its carrying amount (the non-cash discount) is amortized to interest cost using the effective interest method over the term of the debt agreement. In addition, transaction costs incurred that directly relate to the issuance of convertible debt instruments must be allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively.

The Company estimated its non-convertible borrowing rate at the date of issuance of the 2015 Convertible Notes to be 12%. The 12% non-convertible borrowing rate represented the borrowing rate of similar companies with the same credit quality as the Company and was obtained through a quote from the initial purchaser. Using the income method and discounting the principal and interest payments of the 2015 Convertible Notes using the 12% non-convertible borrowing rate, the Company estimated the fair value of the $170.9 million 2015 Convertible Notes to be approximately $136.3 million with the discount being approximately $34.6 million. The discount is being amortized as non-cash interest expense over the life of the notes using the effective interest method. In addition, the Company allocated approximately $4.8 million of the $6.1 million of fees and commissions as debt issue costs that are being amortized as non-cash interest expense over the life of the notes using the effective interest method. The remaining $1.3 million of fees and commissions were treated as transaction costs associated with the equity component.

The following table is the estimated remaining cash payments including interest payments related to the 2015 Convertible Notes, assuming no conversion (in thousands):

Year
2013	$	5,556
2014		11,111
2015		176,493
Total estimated remaining cash payments related to the 2015 Convertible Notes	$	193,160

The Company evaluated the 2015 Convertible Notes agreement for potential embedded derivatives, noting that the conversion feature and make-whole provisions did not meet the embedded derivative criteria as set forth in ASC Topic 815, “Derivatives and Hedging”. Therefore, no additional amounts have been recorded for those items.

As of June 30, 2013, the net amount of $157.1 million includes the $170.9 million of principal reduced by $13.8 million of the remaining unamortized discount. The net amount of the equity component is $33.3 million, which includes the initial discount of $34.6 million reduced by $1.3 million of direct transaction costs. The remaining unamortized discount of $13.8 million will be amortized into interest expense, using the effective interest method, over the remaining life of the loan agreement, whose term expires in March 2015.  At June 30, 2013, using the conversion rate of 169.0082 shares per $1,000 principal amount of the 2015 Convertible Notes, if the $170.9 million of principal were converted into shares of common stock, the notes would convert into approximately 28.9 million shares of common stock.  As of June 30, 2013, there is no excess if-converted value to the holders of the 2015 Convertible Notes as the price of the Company’s common stock at June 30, 2013, $1.79 per share, is less than the conversion price.

For the three and six months ended June 30, 2013, the annual effective interest rate on the 2015 Convertible Notes, including the amortization of debt issue costs, was approximately 12.6%.

The following table is the amount of interest expense related to the 2015 Convertible Notes, disregarding capitalized interest considerations, for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in thousands)
Interest expense related to the contractual interest coupon	$	2,777	$	2,777	$	5,555	$	5,555
Amortization of debt discount expense		1,862		1,656		3,653		3,251
Amortization of debt issue costs		250		238		495		473
Interest expense related to the 2015 Convertible Notes	$	4,889	$	4,671	$	9,703	$	9,279

$75.0 Million Secured Debt Facility

On July 6, 2011, the Company and its subsidiaries entered into a credit agreement with Credit Suisse and other parties (collectively the “lenders”), where the lenders agreed to provide a $75.0 million secured debt facility in two loan tranches to the Company’s subsidiary, BPZ E&P. The full amount available under the $75.0 million secured debt facility was drawn down by the Company on July 7, 2011. In April 2012, the Company and the lenders amended the terms of the $75.0 million secured debt facility and in May 2012, the Company prepaid $40.0 million of the principal balance of the $75.0 million secured debt facility. In May 2013, the Company prepaid the remaining principal balance of the $75.0 million secured debt facility.

Proceeds from the $75.0 million secured debt facility were utilized to pay certain fees and expenses under the $75.0 million secured debt facility, to fund a debt service reserve account under the $75.0 million secured debt facility, to reimburse certain affiliates of BPZ E&P for up to $14.0 million of capital and exploratory expenditures incurred by them in connection with the development of Block Z-1 and up to $6.0 million of capital and exploratory expenditures incurred by them in connection with the development in Block XIX in northwest Peru, and to finance BPZ E&P’s capital and exploratory expenditures in connection with the development of Block Z-1.

As a result of the prepayment of the remaining principal balance during the second quarter of 2013, the Company incurred $2.4 million of fees and a prepayment premium. The $2.4 million in fees and prepayment premium were recognized as a “Loss on extinguishment of debt” in the Consolidated Statement of Operations. Approximately $1.4 million representing the remaining unamortized debt issue costs loan was expensed as a “Loss on extinguishment of debt” in the Consolidated Statement of Operations when the Company prepaid the remaining principal. For further information on debt issue costs see Note-5, “Prepaid and Other Current Assets and Other Non-Current Assets.”

As a result of the prepayment and amendment during the second quarter of 2012, the Company incurred $5.8 million of fees and a prepayment premium and $1.1 million of debt issue costs. The $5.8 million in fees and prepayment premium were recognized as a “Loss on extinguishment of debt” in the Consolidated Statement of Operations, of which 25% was paid at the time of the amendment and prepayment and 25% was paid at the time of each of the next three quarterly interest payment dates ending in January 2013. Approximately $1.5 million of the remaining $2.8 million of unamortized debt issue costs associated with the initial loan was expensed as a “Loss on extinguishment of debt” in the Consolidated Statement of Operations when the Company prepaid $40.0 million of principal. For further information on debt issue costs see Note-5, “Prepaid and Other Current Assets and Other Non-Current Assets.”

The $75.0 million secured debt facility, as amended, provides for an ongoing fee through July 2014 payable by BPZ E&P to the lenders, of the performance based arranger fee (the “Performance Based Arranger Fee”) whose amount is determined by the change in the price of Brent crude oil at inception of the loans and the price at each principal repayment date in accordance with the original loan principal repayment dates, subject to a 12% ceiling of the original principal amount borrowed. For further information on the Performance Based Arranger Fee, see Note-11, “Derivative Financial Instruments” and Note-13, “Fair Value Measurements and Disclosures.”

$40.0 Million Secured Debt Facility

In January 2011, the Company, through its subsidiaries, completed a credit agreement with Credit Suisse where Credit Suisse provided a $40.0 million secured debt facility to the Company’s power generation subsidiary, Empresa Eléctrica Nueva Esperanza S.R.L. On April 27, 2012, the Company and its subsidiaries, Empresa Eléctrica Nueva Esperanza S.R.L. and BPZ E&P, entered into a fourth amendment to the $40.0 million secured debt facility with Credit Suisse. In May 2013, the Company amended and restated the $40.0 million secured debt facility (which had been repaid by scheduled principal repayments to $25.5 million) by increasing the facility size and borrowing an additional $14.5 million.    

In 2013, the $14.5 million of proceeds from the amended and restated $40.0 million secured debt facility will be utilized to meet the Company’s 2013 capital, exploration and development work programs as well as general corporate purposes. In 2011, the proceeds from the $40.0 million secured debt facility were utilized to meet the Company’s 2011 capital, exploration and development work programs, and to reduce other debt obligations.

In May 2013, as a result of amending and restating the $40.0 million secured debt facility (which had been repaid by scheduled principal repayments to $25.5 million) by increasing the facility size and borrowing an additional $14.5 million, the Company added $1.8 million of debt issue costs. The $1.8 million of new debt issue costs was combined with the remaining $0.6 million of unamortized debt issue costs and will be amortized over the remaining term, ending in January 2015, using the effective interest method. For further information on debt issue costs, see Note-5, “Prepaid and Other Current Assets and Other Non-Current Assets.”

The $40.0 million secured debt facility, as amended, provides for ongoing fees payable to Credit Suisse including a Performance Based Arranger Fee whose amount is determined by the change in the price of Brent crude oil at inception of the loan and the price at each principal repayment date in accordance with the original loan principal repayment dates, subject to a 18% ceiling of the original principal amount borrowed. For further information on the Performance Based Arranger Fee, see Note-11, “Derivative Financial Instruments” and Note-13, “Fair Value Measurements and Disclosures.”

The $40.0 million secured debt facility is secured by three LM6000 gas-fired packaged power units (approximately $53.0 million) that were purchased by the Company from GE through its power generation subsidiary, Empresa Eléctrica Nueva Esperanza S.R.L. and the associated debt service reserve account. The Company and its subsidiary, BPZ E&P, also agreed to unconditionally guarantee the $40.0 million secured debt facility on an unsecured basis. 

The $40.0 million secured debt facility requires the Company to establish and maintain a debt service reserve account during the term of the facility. At June 30, 2013 the debt service reserve account maintained a balance equal to the aggregate amount of payments of principal and interest on the $40.0 million secured debt facility due immediately on the succeeding principal repayment date. For further information regarding the debt service reserve account and its requirements, see Note-9, “Restricted Cash and Performance Bonds.”

The amended and restated $40.0 million secured debt facility matures in January 2015, with revised principal repayments due in quarterly installments of $4.0 million to $9.0 million commencing in July 2013 and extending through January 2015.  The $40.0 million secured debt facility has an annual interest rate of the three month LIBOR rate plus 8%. Interest is due and payable quarterly.

The amended and restated $40.0 million secured debt facility subjects the Company to various financial covenants calculated as of the last day of each quarter, including a maximum consolidated leverage ratio, a maximum net consolidated leverage ratio, a minimum consolidated interest coverage ratio, a maximum consolidated capitalization ratio and minimum oil production quota per quarter. The Company was in compliance with these revised financial covenants at June 30, 2013.

The $40.0 million secured debt facility provides for events of default customary for facilities of this type, the occurrence and continuation of which could result in the acceleration of amounts due under the facility. In addition, the $40.0 million secured debt facility provides for a mandatory repayment of the loans if the Company secures financing for its gas-to-power project.

The following table is the estimated remaining cash payments related to the $40.0 million secured debt facility, as amended and restated, and excluding potential payments for the Performance Based Arranger Fee but including interest payments (in thousands).

Year
2013	$	9,574
2014		25,069
2015		9,186
Total estimated remaining cash payments related to the $40.0 million secured debt facility	$	43,829

Interest Expense

The following table is a summary of interest expense for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Interest expense	$	6,652		$	7,840		$	13,569		$	17,022
Capitalized interest expense		(2,372	)		(3,760	)		(4,991	)		(6,732	)
Interest expense, net	$	4,280		$	4,080		$	8,578		$	10,290