ACCOUNTING POLICIES, DISCLOSURES AND NATURE OF OPERATIONS

The accompanying condensed consolidated interim financial statements have not been audited. In management’s opinion, the accompanying condensed consolidated interim financial statements contain all adjustments necessary to fairly present our financial position as of September 30, 2014 and our results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature unless otherwise noted. The results for interim periods are not necessarily indicative of annual results.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during each reporting period. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from management’s estimates.

Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K.

Our ability to borrow under our Combined Credit Agreements depends on our global borrowing base, which is scheduled to be redetermined twice each year. A reduction to the global borrowing base during the spring or autumn redetermination, or upon a special redetermination requested by our administrative agent under the Combined Credit Agreements, would adversely impact our liquidity and ability to meet our future obligations. Our derivatives contribute to the global borrowing base. Most of our derivative positions expire at year-end 2015. The expiration of these derivatives will adversely affect our global borrowing base, and absent an improvement in natural gas and NGL prices, significant deleveraging from a strategic transaction, reduced interest costs on our debt through refinancing, significant cost savings through avoidance or deferral, or operational efficiencies, we expect to need additional sources of liquidity, including additional debt or equity financing or proceeds from asset sales, at the beginning of 2016 assuming no material debt maturities prior to that date. In addition, we are exploring potential transactions involving any and all of our assets, including our Horn River Asset. If successful, a sale of our Horn River Asset could eliminate or defray our need to make or fund significant capital investments in the Horn River Asset but would also reduce our global borrowing base if not offset by the effects of any related debt reduction. A sale of our other assets could also enhance liquidity if the sale proceeds exceed the associated decrease to the global borrowing base, if any.

In November 2014, the Combined Credit Agreements were amended to eliminate the requirement to meet the minimum interest coverage ratio covenant beginning in the fourth quarter of 2014 through and including the fourth quarter of 2015. A minimum EBITDAX covenant was added beginning in the fourth quarter of 2014 through and including the fourth quarter of 2015. While we believe with these amendments we will be able to comply with the financial covenants contained in our Combined Credit Agreements through the end of 2015, we do not expect to exceed the required levels by a significant margin, particularly the minimum EBITDAX covenant under our Combined Credit Agreements. Accordingly, even a modest decline in prices for natural gas and NGLs, our failure to achieve anticipated cost savings through avoidance or deferral or operational efficiencies, our failure to execute certain asset purchases or the inaccuracy in any material respect of any of the other assumptions underlying our forecast could cause us to fall short of the financial covenants contained in the Combined Credit Agreements. Absent an improvement in natural gas and NGL prices, significant deleveraging from a strategic transaction, reduced interest costs on our debt through refinancing, significant cost savings through avoidance or deferral, or operational efficiencies, we do not expect to comply with our interest coverage ratio covenant under our Combined Credit Agreements beginning in the first quarter of 2016 and expect that we would need to seek additional covenant relief under the Combined Credit Agreements at that time. In addition, we have benefitted from our natural gas derivatives, which have resulted in cash proceeds being greater than the prevailing price for natural gas. Without the benefit of these derivatives, most of which expire at year-end 2015, our earnings would be reduced and our cash interest expense would exceed our resulting EBITDAX. Any inability to comply with the financial covenants contained in our Combined Credit Agreements, unless waived or amended by the requisite lenders, could materially and adversely affect our liquidity by precluding further borrowings under our credit facilities and by accelerating the maturity of our debt. We may be unsuccessful in obtaining the necessary waivers or amendments.

In addition, we have significant fixed and springing debt maturities in 2015 and 2016, including the Combined Credit Agreements, the Second Lien Term Loan, the Second Lien Notes and the Senior Subordinated Notes. Note 5 contains a more complete description of our long-term debt, including springing maturities, which could occur as early as October 1, 2015. We do not expect to be able to satisfy these obligations with our cash on hand, committed financing or cash flow from operations. In order to satisfy these obligations we will need to obtain additional debt or equity financing or to sell assets, which we may not be able to do on satisfactory terms, or at all. We are limited in our ability to incur additional debt by the indenture restrictions. We may also seek to address the springing maturities by extending the maturity of or refinancing all or a portion of our Senior Subordinated Notes. If we are unsuccessful in extending or refinancing, we may not be able to satisfy such obligations when they mature.

Although we have been in discussions on a potential transaction involving our Horn River Asset and have proposed transaction terms, we reached no agreement on any material terms, including structure or valuation. Accordingly, we developed a formalized marketing process for this asset, along with any and all of our assets. We may be unsuccessful in consummating a transaction involving our Horn River Asset or any of our other assets being marketed on acceptable terms, or at all.

We have retained Houlihan Lokey Capital, Inc., Deloitte Transactions and Business Analytics LLP and other advisors to assist us in one or more of the following exercises:


•	evaluation of options to address near-term debt maturities;


•	enhancement of our liquidity position;


•	evaluation of various strategic alternatives, including the acquisition or monetization of any and all assets or the Company; and


•	employee retention.

Recently Issued Accounting Standards

In May 2014, the FASB issued accounting guidance, “Revenue from Contracts with Customers,” requiring 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 updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for us in the first quarter of 2017. We have not yet selected a transition method and we are currently evaluating the effect, if any, that the updated standard will have on our consolidated financial statements and related disclosures.

No other pronouncements materially affecting our financial statements have been issued since the filing of our 2013 Annual Report on Form 10-K.