0001214659-18-006991.txt : 20181109 0001214659-18-006991.hdr.sgml : 20181109 20181109143254 ACCESSION NUMBER: 0001214659-18-006991 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 35 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIDGEWOOD ENERGY A-1 FUND LLC CENTRAL INDEX KEY: 0001457919 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-53895 FILM NUMBER: 181172606 BUSINESS ADDRESS: STREET 1: 14 PHILIPS PARKWAY CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 201-447-9000 MAIL ADDRESS: STREET 1: 14 PHILIPS PARKWAY CITY: MONTVALE STATE: NJ ZIP: 07645 10-Q 1 a103018910q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from _______________________to____________________________

 

Commission File No. 000-53895

 

Ridgewood Energy A-1 Fund, LLC

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

01-0921132

(I.R.S. Employer

Identification No.)

 

14 Philips Parkway, Montvale, NJ  07645

(Address of principal executive offices) (Zip code)

 

(800) 942-5550

(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.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes x     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o

Non-accelerated filer

 

x

Smaller reporting company

Emerging growth company

x
o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of November 9, 2018 there were 207.7026 shares of LLC Membership Interest outstanding.

 

 

   
 

 

Table of Contents

 

   PAGE
PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements 1
      Unaudited Condensed Balance Sheets as of September 30, 2018 and December 31, 2017 1
      Unaudited Condensed Statements of Operations and Comprehensive Income (Loss) for the
three and nine months ended September 30, 2018 and 2017
2
     

Unaudited Condensed Statements of Cash Flows for the nine months ended
September 30, 2018 and 2017

3
      Notes to Unaudited Condensed Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
    
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Mine Safety Disclosures 18
Item 5. Other Information 18
Item 6. Exhibits 19
     
   SIGNATURES 20

 

   

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED BALANCE SHEETS

(in thousands, except share data)

 

     September 30, 2018   December 31, 2017 
Assets        
Current assets:        
Cash and cash equivalents  $2,449   $2,423 
Salvage fund   880    1,191 
Production receivable   223    491 
Other current assets   73    52 
Total current assets   3,625    4,157 
Salvage fund   791    355 
Oil and gas properties:          
Proved properties   20,080    20,498 
Less:  accumulated depletion and amortization   (8,806)   (7,391)
Total oil and gas properties, net   11,274    13,107 
Total assets  $15,690   $17,619 
Liabilities and Members' Capital          
Current liabilities:          
Due to operators  $623   $609 
Accrued expenses   52    54 
Current portion of long-term borrowings   431    1,566 
Asset retirement obligations   880    1,191 
Other current liabilities   40    40 
Total current liabilities   2,026    3,460 
Long-term borrowings   2,792    5,639 
Asset retirement obligations   485    210 
Total liabilities   5,303    9,309 
Commitments and contingencies (Note 6)          
Members' capital:          
Manager:          
Distributions   (5,058)   (5,058)
Retained earnings   5,907    5,484 
Manager's total   849    426 
Shareholders:          
Capital contributions (250 shares authorized;          
   207.7026 issued and outstanding)   41,143    41,143 
Syndication costs   (4,804)   (4,804)
Distributions   (35,427)   (35,427)
Retained earnings   8,625    6,970 
Shareholders' total   9,537    7,882 
Accumulated other comprehensive income   1    2 
Total members' capital   10,387    8,310 
Total liabilities and members' capital  $15,690   $17,619 

 

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

 

 1 

  

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

 

   Three months ended September 30,  

Nine months ended Sepember 30,

 
   2018   2017   2018   2017 
Revenue                
Oil and gas revenue  $1,092   $777   $3,719   $2,692 
Expenses                    
Depletion and amortization   636    395    2,598    2,563 
Management fees to affiliate (Note 4)   93    93    280    280 
Operating expenses   156    164    443    515 
General and administrative expenses   50    38    143    126 
Total expenses   935    690    3,464    3,484 
Gain on sale of oil and gas properties   899    -    899    - 
Income (loss) from operations   1,056    87    1,154    (792)
Other income (loss)                    
Gain on debt extinguishment   1,313    -    1,313    - 
Interest expense, net   (103)   (187)   (389)   (557)
Total other income (loss)   1,210    (187)   924   (557)
Net income (loss)   2,266    (100)   2,078    (1,349)
Other comprehensive income (loss)                    
Unrealized loss on marketable securities   -    -    (1)   (1)
Total comprehensive income (loss)  $2,266   $(100)  $2,077   $(1,350)
                     
Manager Interest                    
Net income  $134   $68   $423   $239 
                     
Shareholder Interest                    
Net income (loss)  $2,132   $(168)  $1,655   $(1,588)
Net income (loss) per share  $10,262   $(813)  $7,968   $(7,649)

 

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

 

 2 

 

RIDGEWOOD ENERGY A-1 FUND, LLC

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Nine months ended Sepember 30, 
   2018   2017 
         
Cash flows from operating activities          
Net income (loss)  $2,078   $(1,349)
Adjustments to reconcile net income (loss) to net cash          
   provided by operating activities:          
Depletion and amortization   2,598    2,563 
Gain on sale of oil and gas properties   (899)   - 
Accretion expense   16    22 
Gain on debt extinguishment   (1,313)   - 
Amortization of debt discounts and deferred financing costs   -    91 
Changes in assets and liabilities:          
Decrease in production receivable   268    114 
(Increase) decrease in other current assets   (21)   45 
(Decrease) increase in due to operators   (20)   38 
Decrease in accrued expenses   (2)   (14)
Settlement of asset retirement obligations   (13)   (82)
Net cash provided by operating activities   2,692    1,428 
           
Cash flows from investing activities          
Capital expenditures for oil and gas properties   (1,673)   (2,160)
Proceeds from sale of oil and gas properties   3,099    - 
(Increase) decrease in salvage fund   (126)   51 
Net cash provided by (used in) investing activities   1,300    (2,109)
           
Cash flows from financing activities          
Repayments of long-term borrowings   (3,966)   - 
Net cash used in financing activities   (3,966)   - 
           
Net increase (decrease) in cash and cash equivalents   26    (681)
Cash and cash equivalents, beginning of period   2,423    3,458 
Cash and cash equivalents, end of period  $2,449   $2,777 
           
Supplemental disclosure of cash flow information          
Cash paid for interest, net of amounts capitalized  $396   $485 
           
Supplemental disclosure of non-cash investing activities          
Due to operators for accrued capital expenditures for
oil and gas properties
  $534   $467 

  

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

 

 3 

  

RIDGEWOOD ENERGY A-1 FUND, LLC

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

1.Organization and Summary of Significant Accounting Policies

 

Organization

The Ridgewood Energy A-1 Fund, LLC (the “Fund”), a Delaware limited liability company, was formed on February 3, 2009 and operates pursuant to a limited liability company agreement (the “LLC Agreement”) dated as of March 2, 2009 by and among Ridgewood Energy Corporation (the “Manager”) and the shareholders of the Fund, which addresses matters such as the authority and voting rights of the Manager and shareholders, capitalization, transferability of membership interests, participation in costs and revenues, distribution of assets and dissolution and winding up. The Fund was organized to primarily acquire interests in oil and gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico.

 

The Manager has direct and exclusive control over the management of the Fund’s operations. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for the Fund’s operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations, the preparation, review and dissemination of tax and other financial information and the management of the Fund’s investments in projects. In addition, the Manager provides office space, equipment and facilities and other services necessary for the Fund’s operations. The Manager also engages and manages contractual relations with unaffiliated custodians, depositories, accountants, attorneys, corporate fiduciaries, insurers, banks and others as required. See Notes 4, 5 and 6.

 

Basis of Presentation

These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements. The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results. These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 2017 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K (“2017 Annual Report”) filed with the Securities and Exchange Commission (“SEC”). The year-end condensed balance sheet data was derived from audited financial statements for the year ended December 31, 2017, but does not include all annual disclosures required by GAAP.

 

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, depletion and amortization, determination of proved reserves, impairment of long-lived assets and asset retirement obligations. Actual results may differ from those estimates.

 

Summary of Significant Accounting Policies

The Fund has provided discussion of significant accounting policies in Note 1 of “Notes to Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 8. “Financial Statements and Supplementary Data” within its 2017 Annual Report. There have been no significant changes to the Fund’s significant accounting policies during the three and nine months ended September 30, 2018, except as noted below for revenue recognition. See Note 2. “Revenue Recognition” for discussion of the Fund’s updated accounting policies related to revenue recognition for revenue from contracts with customers.

 

Fair Value Measurements

The Fund follows the accounting guidance for fair value measurement for measuring fair value of assets and liabilities in its financial statements. The Fund’s financial instruments consist of cash and cash equivalents, salvage fund, production receivable, other current assets, due to operators, accrued expenses, other current liabilities and long-term debt. Except for long-term debt, the carrying amounts of these instruments approximate fair value due to their short-term nature. The Fund’s salvage fund is a separate interest-bearing account that has no restrictions on withdrawals, therefore its carrying amount approximates fair value. The portion of the Fund’s investments in federal agency mortgage-backed securities are carried in the financial statements at fair value as noted below. The Fund’s long-term debt is valued using an income approach and classified as Level 3 in the fair value hierarchy. The Fund applies the provisions of the fair value measurement accounting guidance to its non-financial assets and liabilities, such as oil and gas properties and asset retirement obligations, on a non-recurring basis.

 

 4 

 

Salvage Fund

The Fund deposits cash in a separate interest-bearing account, or salvage fund, to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives in accordance with applicable federal and state laws and regulations. As of September 30, 2018 and December 31, 2017, the Fund had investments in federal agency mortgage-backed securities as detailed in the following table, which are classified as available-for-sale. Available-for-sale securities are carried in the financial statements at fair value. Mortgage-backed securities within the salvage fund are recorded based on Level 2 inputs, as such instruments trade in over-the-counter markets and the inputs are consistent with the Level 2 definition.

 

       Gross     
   Amortized   Unrealized   Fair 
   Cost   Gains   Value 
   (in thousands) 
Government National Mortgage Association security (GNMA July 2041) 
September 30, 2018  $46   $1   $47 
December 31, 2017  $46   $2   $48 

 

The unrealized gains on the Fund's investments in federal agency mortgage-backed securities were the result of fluctuations in market interest rates. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Unrealized gains or losses on available-for-sale debt securities are reported in other comprehensive income until realized.

 

For all investments, interest income is accrued as earned and amortization of premium or discount, if any, is included in interest income. Interest earned on the account will become part of the salvage fund. There are no restrictions on withdrawals from the salvage fund.

 

Asset Retirement Obligations

For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. Upon the determination that a property is either proved or dry, a retirement obligation is incurred. The Fund recognizes the fair value of a liability for an asset retirement obligation in the period incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs. Annually, or more frequently if an event occurs that would dictate a change in assumptions or estimates underlying the obligations, the Fund reassesses its asset retirement obligations to determine whether any revisions to the obligations are necessary. The Fund maintains a salvage fund to provide for the funding of future asset retirement obligations. The following table presents changes in asset retirement obligations for the following periods:

 

   Nine months ended September 30, 
   2018   2017 
   (in thousands) 
Balance, beginning of period  $1,401   $1,675 
Liabilities incurred   2    2 
Liabilities settled/relieved   (54)   (82)
Accretion expense   16    22 
Revision of estimates   -    (122)
Balance, end of period  $1,365   $1,495 

 

During the nine months ended September 30, 2017, the Fund recorded credits to depletion expense totaling $0.1 million related to an adjustment to the asset retirement obligation for a fully depleted property.

 

 5 

 

Impairment of Long-Lived Assets

The Fund reviews the carrying value of its oil and gas properties for impairment whenever events and circumstances indicate that the recorded carrying value of the assets may not be recoverable. Impairments are determined by comparing estimated future net undiscounted cash flows to the carrying value of the assets at the time of the review. If the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the asset is written down to estimated fair value, which is determined using a valuation technique that considers both market and income approaches and uses Level 3 inputs. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. 

 

There were no impairments of oil and gas properties during each of the three and nine months ended September 30, 2018 and 2017. Fluctuations in oil and natural gas prices may impact the fair value of the Fund’s oil and gas properties. If oil and natural gas prices decline, even if only for a short period of time, it is possible that impairments of oil and gas properties will occur.

 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on fair value measurement, which adds, among other things, disclosure requirements for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This accounting guidance is effective for the Fund in the first quarter 2020 with early adoption permitted. The Fund does not expect this accounting guidance will have a material impact on its financial statements upon adoption.

 

In May 2014, the FASB issued accounting guidance on revenue recognition (“New Revenue Standard”), which provides for a single five-step model to be applied to all revenue contracts with customers. In July 2015, the FASB issued a deferral of the effective date of the New Revenue Standard to 2018, with early adoption permitted in 2017. In March 2016, the FASB issued accounting guidance, which clarifies the implementation guidance on principal versus agent considerations in the New Revenue Standard. In April 2016, the FASB issued guidance on identifying performance obligations and licensing and in May 2016, the FASB issued final amendments which provided narrow scope improvements and practical expedients related to the implementation of the New Revenue Standard. The New Revenue Standard may be applied either retrospectively or through the use of a modified-retrospective method. Under the New Revenue Standard, the revenue associated with the Fund’s existing contracts will be recognized in the period that control of the related commodity is transferred to the customer, which is generally consistent with the Fund’s previous revenue recognition model. The Fund adopted the New Revenue Standard using the modified retrospective method on January 1, 2018. See Note 2. “Revenue Recognition” for the required disclosures related to the impact of adopting this guidance and a discussion of the Fund’s updated policies related to revenue recognition for revenue from contracts with customers.

 

2.Revenue Recognition

 

The Fund adopted the New Revenue Standard on January 1, 2018 using the modified retrospective method for all new contracts entered into after January 1, 2018 and all existing contracts for which revenues have not been recognized under the previous revenue guidance as of December 31, 2017. Although the Fund did not identify changes to its revenue recognition that resulted in a cumulative adjustment to retained earnings on January 1, 2018, the adoption of the accounting guidance resulted in enhanced disclosures related to revenue recognition policies, the Fund’s performance obligations and significant judgments used in applying the New Revenue Standard.

 

Revenue from Contracts with Customers

Oil and gas revenues are recognized at the point when control of oil and natural gas is transferred to the customers. Natural gas liquid (“NGL”) sales are included within gas sales. The Fund’s oil and natural gas generally is sold to its customers at prevailing market prices based on an index in which the prices are published, adjusted for pricing differentials, quality of the oil and pipeline allowances.

 

Oil and Gas Revenue

Generally, the Fund sells oil and natural gas under two types of agreements, which are common in the oil and gas industry. In the first type of agreement, or a netback agreement, the Fund receives a price, net of pricing differentials as well as transportation expense incurred by the customer, and the Fund records revenue at the wellhead at the net price received where control transfers to the customer. In the second type of agreement, the Fund delivers oil and natural gas to the customer at a contractually agreed-upon delivery point where the customer takes control. The Fund pays a third-party to transport the oil and natural gas and receives a specific market price from the customer net of pricing adjustments. The Fund records the transportation expense within operating expenses in the statements of operations.

 

 6 

 

Under the Fund’s natural gas processing contracts, the Fund delivers natural gas to a midstream processing company at the inlet of the midstream processing company’s facility. The midstream processing company gathers and processes the natural gas and remits the proceeds to the Fund for the sale of NGLs. In this type of arrangement, the Fund evaluates whether it is the principal or agent in the transaction. The Fund concluded that it is the principal and the ultimate third-party purchaser is the customer, therefore, the Fund recognizes revenue on a gross basis, with transportation, gathering and processing fees recorded as an expense within operating expenses in the statements of operations.

 

In certain instances, the Fund may elect to take its residue gas and NGLs in-kind at the tailgate of the midstream company’s processing plant and subsequently market such volumes. Through its marketing process, the Fund delivers the residue gas and NGLs to the ultimate third-party customer at a contractually agreed-upon delivery point and receives a specified market price from the customer. In this arrangement, the Fund recognizes revenue when control transfers to the customer at the delivery point based on the market price received from the customer. The transportation, gathering and processing fees are recorded as expense within operating expenses in the statements of operations.

 

The Fund assesses the performance obligations promised in its oil and natural gas contracts based on each unit of oil and natural gas that will be transferred to its customer because each unit is capable of being distinct. The Fund satisfies its performance obligation when control transfers at a point in time when its customer is able to direct the use of, and obtain substantially all of the benefits from, the oil and natural gas delivered. Under each of the Fund’s oil and natural gas contracts, contract prices are variable and based on an index in which the prices are published, which fluctuate as a result of related industry variables, adjusted for pricing differentials, quality of the oil and pipeline allowances. The use of index-based pricing with predictable differentials reduces the level of uncertainty related to oil and gas prices. Additionally, any variable consideration is not constrained. Payments are received in the month following the oil and natural gas production month. Adjustments that occur after delivery, such as quality bank adjustments, are reflected in revenue in the month payments are received.

 

Transaction price allocated to remaining performance obligations

Under the Fund’s oil and natural gas contracts, each unit of oil and natural gas represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and the transaction price related to the remaining performance obligations is the variable index-based price attributable to each unit of oil and natural gas that is transferred to the customer.

 

Contract balances

The Fund invoices customers once its performance obligations have been satisfied, at which point the payment is unconditional. Accordingly, the Fund’s oil and natural gas contracts do not give rise to contract assets or liabilities under the New Revenue Standard. The receivables related to the Fund’s oil and gas revenue are included within “Production receivable” on the balance sheets.

 

Prior period performance obligations

The Fund records oil and gas revenue in the month production is delivered to its customers. However, settlement statements for residue gas and NGLs sales may not be received for 30 to 60 days after the date production is delivered. As a result, the Fund is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the residue gas and NGLs. The Fund records the differences between its estimates and the actual amounts received in the month that the payment is received from the customer. The Fund has an estimation process for revenue and related accruals, and any identified difference between its revenue estimates and actual revenue historically have not been significant. There was no material revenue recognized in the current period from performance obligations satisfied in previous periods.

 

3.Oil and Gas Properties

 

On August 10, 2018, the Fund entered into a purchase and sale agreement (“PSA”) to sell a portion of the Fund’s working interest in the Beta Project to Walter Oil & Gas Corporation and Gordy Oil Company (collectively the “Buyers”) with an effective date of January 1, 2018. Certain other funds managed by the Manager were also parties to the PSA. The Fund had a 2.0% working interest in the Beta Project and sold a 0.364% working interest to the Buyers for a total purchase price of $3.3 million, subject to purchase price and customary post-closing adjustments. The transaction closed on August 10, 2018 and the Fund received $3.1 million in cash, which included preliminary purchase price adjustments primarily related to the net cash flows from the effective date to the closing date.

 

 7 

 

The net carrying value of the working interest sold as of the closing date was approximately $2.2 million and the related asset retirement obligation was approximately $40 thousand. A gain to the Fund of approximately $0.9 million was recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale were utilized to repay a portion of the long-term debt outstanding under the credit agreement. The sale did not qualify as discontinued operations because it did not represent a strategic shift that has, or will have, a major effect on the Fund’s operations and financial results.

 

4.Related Parties

 

Pursuant to the terms of the LLC Agreement, the Manager is entitled to receive an annual management fee, payable monthly, of 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, however, the Manager is permitted to waive the management fee at its own discretion. Therefore, the management fee may be temporarily waived to accommodate the Fund’s short-term commitments. Management fees during each of the three and nine months ended September 30, 2018 and 2017 were $0.1 million and $0.3 million, respectively.

 

The Manager is also entitled to receive 15% of the cash distributions from operations made by the Fund. The Fund did not pay distributions during the three and nine months ended September 30, 2018 and 2017. 

 

The Fund utilizes Beta Sales and Transport, LLC, a wholly-owned subsidiary of the Manager, to facilitate the transportation and sale of oil and natural gas produced from the Beta Project.

 

At times, short-term payables and receivables, which do not bear interest, arise from transactions with affiliates in the ordinary course of business.

 

The Fund has working interest ownership in certain oil and natural gas projects, which are also owned by other entities that are likewise managed by the Manager.

 

5.Credit Agreement – Beta Project Financing

  

On June 1, 2018, the Fund and other participating funds managed by the Manager, and Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendment (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the credit agreement, dated as of November 27, 2012 (as amended by the first amendment to credit agreement, dated September 30, 2016, and the second amendment to credit agreement and reaffirmation of waiver, dated September 15, 2017 and as amended by the Third Amendment, the “Credit Agreement”). In conjunction with the sale of a portion of the Beta Project working interest and the repayment of a portion of amounts outstanding on the Credit Agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager and the Lenders entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement effective as of September 1, 2018 (“Fourth Amendment Effective Date”).

 

The Third Amendment extended the loan maturity from December 31, 2020 to December 31, 2022, revised the interest rate and required a monthly payment amount based on a fixed percentage of the Fund’s Net Revenue (as defined in the Credit Agreement) derived from the Beta Project, changed the overriding royalty interest (“ORRI”) in its working interest in the Beta Project conveyed to the Lenders to a fixed percentage of 10.81% from a tiered structure, and deferred the payment of such ORRI, which will not become payable to the Lenders until January 1, 2023. The proceeds from the sale of a portion of the working interest in the Beta Project were used to reduce the outstanding debt under the Credit Agreement. As a result, the Fourth Amendment principally reduced the fixed percentage for the calculation of the monthly payments and amended the interest calculation. Beginning on September 1, 2018 up to and including March 31, 2019, the Fund’s fixed percentage is 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project determined on September 1, 2018, as scheduled in the Credit Agreement. Beginning on April 1, 2019 and each April 1st thereafter, the Fund’s fixed percentage will be the greater of (i) 30% or (ii) the Fixed Reassessment Percentage, as defined in the Credit Agreement. The Fixed Reassessment Percentage is determined annually and will be based on the Fund’s ratio of its outstanding debt as of the reassessment date relative to 80% of third-party reserve engineers’ proved plus probable future undiscounted cash flows attributable to the Beta Project through the maturity of the loan. Beginning on September 1, 2018 and thereafter until the loan is repaid in full, in no event later than December 31, 2022, the loan will bear interest at a rate equal to 8.75% compounded monthly.

 

 8 

 

The Fund reviewed the terms of the Third Amendment and determined that the conditions were met, pursuant to Accounting Standard Codification 470-50 Debt: Modification and Extinguishments (“ASC 470-50”) guidance, to treat the Third Amendment as a debt modification in a non-troubled debt restructuring. The Fund then reviewed the terms of the Fourth Amendment and determined that the Fourth Amendment met the conditions of debt extinguishment pursuant to ASC 470-50 guidance in a non-troubled debt restructuring. Pursuant to ASC 470-50 guidance, the new debt instrument shall be initially recorded at fair value and the difference between the fair value of the new debt instrument and the carrying amount of the debt being extinguished is recognized as a gain or loss on extinguishment of debt. Additionally, the difference in the fair value of the ORRI before and after the Fourth Amendment is included in the gain or loss recognized upon extinguishment of the debt.

 

The Fund recognized a gain on debt extinguishment of $1.3 million during third quarter 2018, which is recorded within “Other income (loss)” in its condensed statements of operations. The gain on debt extinguishment primarily represents non-cash gains associated with the change in the fair value of ORRI conveyed to the Lenders totaling $1.3 million and the difference between the fair value of the new debt and the carrying amount of the old debt totaling $16 thousand. The Fund estimated the fair value of the ORRI before and after the Fourth Amendment using a discounted cash flow method based on Level 3 inputs, which included future revenue from proved and probable oil and natural gas reserves from the Beta Project, future commodity pricing curves to derive future cash flows and risk-adjusted discount rate of 9%. The change in the fair value of the ORRI of $1.3 million is recorded within “Total oil and gas properties, net” on the Fund’s balance sheet, which will be amortized to depletion expense using the units-of-production method over the life of the Beta Project. The Fund estimated the fair value of the amended debt by discounting future cash payments of principal and interest to a present value amount using a market yield for debt instruments with similar terms, maturities and credit ratings. The Fund used a market yield of 9.25% to estimate the fair value of the amended debt, which was determined to be $3.3 million. The discounted loan is being accreted to its face value using the effective interest method over the remaining term of the amended debt.

 

As of September 30, 2018 and December 31, 2017, the Fund had borrowings of $3.2 million and $7.2 million, respectively, under the Credit Agreement. The loan may be prepaid by the Fund without premium or penalty. As of September 30, 2018, the estimated fair value of the debt approximates its carrying value.

 

There were no unamortized debt discounts and deferred financing costs as of September 30, 2018 and December 31, 2017. Amortization expense during the three and nine months ended September 30, 2017 of $31 thousand and $0.1 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”. There were no such amounts recorded during the three and nine months ended September 30, 2018.

 

As of September 30, 2018 and December 31, 2017, there were no accrued interest costs outstanding. Interest costs incurred during the three and nine months ended September 30, 2018 of $0.1 million and $0.4 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”. Interest costs incurred during the three and nine months ended September 30, 2017 of $0.2 million and $0.5 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”.

 

The Credit Agreement contains customary covenants, with which the Fund was in compliance as of September 30, 2018 and December 31, 2017.

 

6.Commitments and Contingencies

 

Capital Commitments

As of September 30, 2018, the Fund’s estimated capital commitments related to its oil and gas properties were $3.5 million (which include asset retirement obligations for the Fund’s projects of $1.9 million), of which $2.0 million is expected to be spent during the next twelve months. Future results of operations and cash flows are dependent on the continued successful development and the related production of oil and gas revenues from the Beta Project.

 

Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, borrowing repayments and ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision. However, if cash flow from operations is not sufficient to meet the Fund’s commitments, the Manager will temporarily waive all or a portion of the management fee as well as provide short-term financing to accommodate the Fund’s short-term commitments if needed.

 

 9 

 

Environmental and Governmental Regulations

Many aspects of the oil and gas industry are subject to federal, state and local environmental laws and regulations. The Manager and operators of the Fund’s properties are continually taking action they believe appropriate to satisfy applicable federal, state and local environmental regulations. However, due to the significant public and governmental interest in environmental matters related to those activities, the Manager cannot predict the effects of possible future legislation, rule changes, or governmental or private claims. As of September 30, 2018 and December 31, 2017, there were no known environmental contingencies that required adjustment to, or disclosure in, the Fund’s financial statements.

 

Oil and gas industry legislation and administrative regulations are periodically changed for a variety of political, economic, and other reasons. Any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which could have a material adverse effect on the Fund’s operating results and cash flows. It is not possible at this time to predict whether such legislation or regulation, if proposed, will be adopted as initially written, if at all, or how legislation or new regulation that may be adopted would impact the Fund’s business.

 

BOEM Notice to Lessees on Supplemental Bonding

On July 14, 2016, the Bureau of Ocean Energy Management (“BOEM”) issued a Notice to Lessees (“NTL”) that discontinued and materially replaced existing policies and procedures regarding financial security (i.e. supplemental bonding) for decommissioning obligations of lessees of federal oil and gas leases and owners of pipeline rights-of-way, rights-of use and easements on the Outer Continental Shelf (“Lessees”).  Generally, the new NTL (i) ended the practice of excusing Lessees from providing such additional security where co-lessees had sufficient financial strength to meet such decommissioning obligations, (ii) established new criteria for determining financial strength and additional security requirements of such Lessees,  (iii) provided acceptable forms of such additional security and (iv) replaced the waiver system with one of self-insurance. The new rule became effective as of September 12, 2016; however on January 6, 2017, the BOEM announced that it was suspending the implementation timeline for six months in certain circumstances. On June 22, 2017, the BOEM announced that the implementation timeline extension will remain in effect pending the completion of its review of the new NTL. The Fund, as well as other industry participants, are working with the BOEM, its operators and working interest partners to determine and agree upon the correct level of decommissioning obligations to which they may be liable and the manner in which such obligations will be secured.  The impact of the NTL, if enforced without change or amendment, may require the Fund to fully secure all of its potential abandonment liabilities to the BOEM’s satisfaction using one or more of the enumerated methods for doing so.  Potentially this could increase costs to the Fund if the Fund is required to obtain additional supplemental bonding, fund escrow accounts or obtain letters of credit.

 

Insurance Coverage

The Fund is subject to all risks inherent in the oil and natural gas business. Insurance coverage as is customary for entities engaged in similar operations is maintained, but losses may occur from uninsurable risks or amounts in excess of existing insurance coverage. The occurrence of an event that is not insured or not fully insured could have a material adverse impact upon earnings and financial position. Moreover, insurance is obtained as a package covering all of the entities managed by the Manager. Depending on the extent, nature and payment of claims made by the Fund or other entities managed by the Manager, yearly insurance coverage may be exhausted and become insufficient to cover a claim by the Fund in a given year.

 

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ITEM 2.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the documents Ridgewood Energy A-1 Fund, LLC (the “Fund”) has incorporated by reference into this Quarterly Report, other than purely historical information, including estimates, projections, statements relating to the Fund’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. You are therefore cautioned against relying on any such forward-looking statements. Forward-looking statements can generally be identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will,” “will likely result,” and similar expressions and references to future periods. Examples of events that could cause actual results to differ materially from historical results or those anticipated include weather conditions, such as hurricanes, changes in market and other conditions affecting the pricing, production and demand of oil and natural gas, the cost and availability of equipment, and changes in domestic and foreign governmental regulations. Examples of forward-looking statements made herein include statements regarding projects, investments, insurance, capital expenditures and liquidity. Forward-looking statements made in this document speak only as of the date on which they are made. The Fund undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Critical Accounting Policies and Estimates

 

There were no changes to the Fund’s critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017, except for the revenue recognition for revenue from contracts with customers. See Note 2 of “Notes to Unaudited Condensed Financial Statements” - “Revenue Recognition” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for a discussion of the Fund’s updated accounting policies on revenue recognition upon adoption of the related new standard.

 

Overview of the Fund’s Business

 

The Fund was organized primarily to acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico. The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of oil and natural gas projects. Distributions to shareholders are made in accordance with the Fund’s limited liability company agreement (the “LLC Agreement”).

 

Ridgewood Energy Corporation (the “Manager”) is the Manager, and as such, has direct and exclusive control over the management of the Fund’s operations. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for the Fund’s operations. As compensation for its services, the Manager is entitled to an annual management fee, payable monthly, equal to 2.5% of the total capital contributions made by the Fund’s shareholders, net of cumulative dry-hole and related well costs incurred by the Fund. The Fund does not currently, nor is there any plan to, operate any project in which the Fund participates. The Manager enters into operating agreements with third-party operators for the management of all exploration, development and producing operations, as appropriate. The Manager also participates in distributions.

 

Commodity Price Changes

 

Changes in oil and natural gas commodity prices may significantly affect liquidity and expected operating results. Declines in oil and natural gas commodity prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable and result in non-cash charges to earnings due to impairment.

 

Oil and natural gas commodity prices have been subject to significant fluctuations during the past several years. The Fund anticipates price cyclicality in its planning and believes it is well positioned to withstand price volatility. Despite operating in a volatile oil and natural gas commodity price environment, the Fund continued to advance the development of the Beta Project, which commenced production in 2016. The Fund has suspended distributions and continues to conserve cash to provide for the continued development of the Beta Project.  See “Results of Operations” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for more information on the average oil and natural gas prices received by the Fund during the three and nine months ended September 30, 2018 and 2017 and the effect of such average prices on the Fund’s results of operations. If oil and natural gas commodity prices decline, even if only for a short period of time, the Fund’s results of operations and liquidity will be adversely impacted.

 

 11 

 

Market pricing for oil and natural gas is volatile, and is likely to continue to be volatile in the future. This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence. Therefore, it is impossible to predict the future price of oil and natural gas with any certainty. Factors affecting market pricing for oil and natural gas include:

 

·weather conditions;
·economic conditions, including demand for petroleum-based products;
·actions by OPEC, the Organization of Petroleum Exporting Countries;
·political instability in the Middle East and other major oil and gas producing regions;
·governmental regulations, both domestic and foreign;
·domestic and foreign tax policy;
·the pace adopted by foreign governments for the exploration, development, and production of their national reserves;
·the supply and price of foreign oil and gas;
·the cost of exploring for, producing and delivering oil and gas;
·the discovery rate of new oil and gas reserves;
·the rate of decline of existing and new oil and gas reserves;
·available pipeline and other oil and gas transportation capacity;
·the ability of oil and gas companies to raise capital;
·the overall supply and demand for oil and gas; and
·the price and availability of alternate fuel sources.

 

Business Update

 

Information regarding the Fund’s current projects, all of which are located in the United States offshore waters in the Gulf of Mexico, is provided in the following table. See “Liquidity Needs” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for information regarding the funding of the Fund’s capital commitments.

 

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      Total Spent   Total    
   Working  through   Fund    
Project  Interest  September 30, 2018   Budget   Status
      (in thousands)    
Producing Properties                
Beta Project  1.64%  $15,591   $17,947   The Beta Project is expected to include the development of seven wells.  Wells #1 and #2 commenced production in 2016.  Wells #3  and #4 commenced production in second  quarter 2017 and  third quarter 2017, respectively. Wells #5 and #6 commenced production in first quarter 2018 and third quarter 2018, respectively. Well #7, which began drilling in third quarter 2018, is expected to commence production in first quarter 2019. The Fund expects to spend $1.6 million for additional development costs and $0.8 million for asset retirement obligations.
Liberty Project  2.0%  $3,004   $3,268   The Liberty Project, a single-well project, commenced production in 2010.  The Fund expects to spend $0.3 million for asset retirement obligations.

 

Beta Project – Partial Sale of Working Interest

 

On August 10, 2018, the Fund entered into a purchase and sale agreement (“PSA”) to sell a portion of the Fund’s working interest in the Beta Project to Walter Oil & Gas Corporation and Gordy Oil Company (collectively the “Buyers”) with an effective date of January 1, 2018. Certain other funds managed by the Manager were also parties to the PSA. The Fund had a 2.0% working interest in the Beta Project and sold a 0.364% working interest to the Buyers for a total purchase price of $3.3 million, subject to purchase price and customary post-closing adjustments. The transaction closed on August 10, 2018 and the Fund received $3.1 million in cash, which included preliminary purchase price adjustments primarily related to the net cash flows from the effective date to the closing date.

 

The net carrying value of the working interest sold as of the closing date was approximately $2.2 million and the related asset retirement obligation was approximately $40 thousand. A gain to the Fund of approximately $0.9 million was recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale were utilized to repay a portion of the long-term debt outstanding under the credit agreement.

 

 13 

 

Results of Operations

 

The following table summarizes the Fund’s results of operations during the three and nine months ended September 30, 2018 and 2017, and should be read in conjunction with the Fund’s financial statements and notes thereto included within Item 1. “Financial Statements” in Part I of this Quarterly Report. 

 

   Three months ended September 30,   Nine months ended Sepember 30, 
   2018   2017   2018   2017 
   (in thousands) 
Revenue    
Oil and gas revenue  $1,092   $777   $3,719   $2,692 
Expenses                    
Depletion and amortization   636    395    2,598    2,563 
Management fees to affiliate   93    93    280    280 
Operating expenses   156    164    443    515 
General and administrative expenses   50    38    143    126 
Total expenses   935    690    3,464    3,484 
Gain on sale of oil and gas properties   899    -    899    - 
Income (loss) from operations   1,056    87    1,154    (792)
Other income (loss)                    
Gain on debt extinguishment   1,313    -    1,313    - 
Interest expense, net   (103)   (187)   (389)   (557)
Total other income (loss)   1,210    (187)   924    (557)
Net income (loss)   2,266    (100)   2,078    (1,349)
Other comprehensive income (loss)                    
Unrealized loss on marketable securities   -    -    (1)   (1)
Total comprehensive income (loss)  $2,266   $(100)  $2,077   $(1,350)

 

Overview. The following table provides information related to the Fund’s oil and natural gas production and oil and gas revenue during the three and nine months ended September 30, 2018 and 2017. Natural gas liquid (“NGL”) sales are included within gas sales.

 

   Three months ended September 30,   Nine months ended Sepember 30, 
   2018   2017   2018   2017 
Number of wells producing   7    5    7    5 
Total number of production days   415    280    1,266    859 
Oil sales (in thousands of barrels)   15    17    56    56 
Average oil price per barrel  $67   $43   $63   $44 
Gas sales (in thousands of mcfs)   22    21    79    73 
Average gas price per mcf  $3.63   $3.61   $3.50   $3.35 

 

The increases in the number of wells producing and production days primarily related to the commencement of production of three wells in the Beta Project, one well in third quarter 2017 and two wells during 2018. The increases in gas sales volume were primarily related to the Liberty Project, which experienced increased production as a result of recompletion work in third quarter 2017, partially offset by the Beta Project, which experienced shut-ins during third quarter 2018 due to facility downtime. See additional discussion in “Business Update” section above.

 

Oil and Gas Revenue. Oil and gas revenue during the three months ended September 30, 2018 was $1.1 million, an increase of $0.3 million from the three months ended September 30, 2017. The increase was attributable to increased oil and gas prices totaling $0.4 million, partially offset by decreased sales volume totaling $0.1 million.

 

Oil and gas revenue during the nine months ended September 30, 2018 was $3.7 million, an increase of $1.0 million from the nine months ended September 30, 2017. The increase was attributable to increased oil and gas prices totaling $1.1 million, partially offset by decreased sales volume totaling $0.1 million.

 

See “Overview” above for factors that impact the oil and gas revenue volume and rate variances.

 

 14 

 

Depletion and Amortization. Depletion and amortization during the three months ended September 30, 2018 was $0.6 million, an increase of $0.2 million from the three months ended September 30, 2017. The increase was attributable to an increase in the average depletion rate totaling $0.3 million, partially offset by a decrease in production volumes totaling $0.1 million. The increase in the average depletion rate was primarily attributable to the onset of an additional well from the Beta Project in third quarter 2018, which had higher cost of reserves compared to third quarter 2017.

 

Depletion and amortization during the nine months ended September 30, 2018 was $2.6 million, an increase of $35 thousand from the nine months ended September 30, 2017. The increase was attributable to an adjustment to the asset retirement obligation related to a fully depleted property totaling $0.1 million, which was recorded in first quarter 2017.

 

See “Overview” above for certain factors that impact the depletion and amortization volume and rate variances. Depletion and amortization rates may also be impacted by changes in reserve estimates provided annually by the Fund’s independent petroleum engineers.

 

Management Fees to Affiliate. An annual management fee, totaling 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, is paid monthly to the Manager. Such fee may be temporarily waived by the Manager to accommodate the Fund’s short-term commitments. 

 

Operating Expenses. Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells, as detailed in the following table.

 

   Three months ended September 30,   Nine months ended Sepember 30, 
   2018   2017   2018   2017 
   (in thousands) 
Lease operating expense  $102   $98   $304   $333 
Insurance expense   33    42    85    103 
Transportation and processing expense   6    12    24    28 
Accretion expense   8    7    16    22 
Workover expense and other   7    5    14    29 
   $156   $164   $443   $515 

 

Lease operating expense and transportation and processing expense, relate to the Fund’s producing properties. Insurance expense represents premiums related to the Fund’s properties, which vary depending upon the number of wells producing or drilling. Accretion expense relates to the asset retirement obligations established for the Fund’s oil and gas properties. Workover expense represents costs to restore or stimulate production of existing reserves.

 

The average production cost, which includes lease operating expense, transportation and processing expense and insurance expense, was $7.59 per barrel of oil equivalent (“BOE”) and $6.00 per BOE during the three and nine months ended September 30, 2018, respectively, compared to $7.32 per BOE and $6.79 per BOE during the three and nine months ended September 30, 2017, respectively. The decrease in the average production cost per BOE during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily attributable to the Beta Project, which has lower cost per BOE as compared to the Liberty Project due to the processing of production through its standalone facility. The production costs per BOE may decline over time as throughput increases from the project or other projects expected to tie-in to the facility.

 

General and Administrative Expenses. General and administrative expenses represent costs specifically identifiable or allocable to the Fund, such as accounting and professional fees and insurance expenses.

 

Gain on Sale of Oil and Gas Properties. During the three and nine months ended September 30, 2018, the Fund recorded a gain on sale of oil and gas properties of $0.9 million related to the sale of a portion of the Fund’s working interest in the Beta Project. There was no such amount recorded during the three and nine months ended September 30, 2017. See “Beta Project – Partial Sale of Working Interest” section above for more information. 

 

Gain on Debt Extinguishment. During the three and nine months ended September 30, 2018, the Fund recorded a gain on debt extinguishment of $1.3 million related to accounting for the fourth amendment to the credit agreement. See Note 5 of “Notes to Unaudited Condensed Financial Statements” - “Credit Agreement - Beta Project Financing” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for more information regarding the gain on debt extinguishment. There was no such amount recorded during the three and nine months ended September 30, 2017.

 

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Interest Expense, Net. Interest expense, net is comprised of interest expense and amortization of debt discounts and deferred financing costs related to the Fund’s long-term borrowings (see “Liquidity Needs - Credit Agreement” below for additional information), and interest income earned on cash and cash equivalents and salvage fund. 

 

Unrealized Loss on Marketable Securities. The Fund has available-for-sale investments within its salvage fund in federal agency mortgage-backed securities. Available-for-sale debt securities are carried in the financial statements at fair value and unrealized gains and losses related to the securities’ changes in fair value are recorded in other comprehensive income until realized.

 

Capital Resources and Liquidity

 

Operating Cash Flows

Cash flows provided by operating activities during the nine months ended September 30, 2018 were $2.7 million, primarily related to revenue received of $4.0 million, partially offset by operating expenses of $0.4 million, interest payments of $0.4 million, management fees of $0.3 million and general and administrative expenses of $0.1 million.

 

Cash flows provided by operating activities during the nine months ended September 30, 2017 were $1.4 million, related to revenue received of $2.8 million, partially offset by interest payments of $0.5 million, operating expenses of $0.4 million, management fees of $0.3 million, general and administrative expenses of $0.1 million and the settlement of asset retirement obligations of $0.1 million.

 

Investing Cash Flows

Cash flows provided by investing activities during the nine months ended September 30, 2018 were $1.3 million, related to proceeds from sale of oil and gas properties of $3.1 million, partially offset by capital expenditures for oil and gas properties of $1.7 million and investments in salvage fund of $0.1 million. 

 

Cash flows used in investing activities during the nine months ended September 30, 2017 were $2.1 million, primarily related to capital expenditures for oil and gas properties.

 

Financing Cash Flows

Cash flows used in financing activities during the nine months ended September 30, 2018 were $4.0 million, related to the repayments of long-term borrowings.

 

There were no cash flows from financing activities during the nine months ended September 30, 2017.

 

Estimated Capital Expenditures

 

Capital expenditures for oil and gas properties have been funded with the capital raised by the Fund in its private placement offering and through debt financing. The Fund’s remaining capital has been fully allocated to its projects. As a result, the Fund will not invest in any new projects and will limit its investment activities, if any, to those projects in which it currently has a working interest. See “Business Update” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for information regarding the Fund’s current projects. See “Liquidity Needs” below for additional information.

 

Liquidity Needs

 

The Fund’s primary short-term liquidity needs are to fund its operations, capital expenditures for its oil and gas properties and borrowing repayments. Such needs are funded utilizing operating income and existing cash on-hand.

 

As of September 30, 2018, the Fund’s estimated capital commitments related to its oil and gas properties were $3.5 million (which include asset retirement obligations for the Fund’s projects of $1.9 million), of which $2.0 million is expected to be spent during the next twelve months. Future results of operations and cash flows are dependent on the continued successful development and the related production of oil and gas revenues from the Beta Project.

 

Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, borrowing repayments and ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision. However, if cash flow from operations is not sufficient to meet the Fund’s commitments, the Manager will temporarily waive all or a portion of the management fee as well as provide short-term financing to accommodate the Fund’s short-term commitments if needed.

 

 16 

 

The Manager is entitled to receive an annual management fee from the Fund regardless of the Fund’s profitability in that year. However, pursuant to the terms of the LLC Agreement, the Manager is also permitted to waive the management fee at its own discretion.

 

Distributions, if any, are funded from available cash from operations, as defined in the LLC Agreement, and the frequency and amount are within the Manager’s discretion. Due to the significant capital required to develop the Beta Project, distributions have been impacted, and may be impacted in the future, by amounts reserved to provide for its ongoing development costs, borrowing repayments and funding its estimated asset retirement obligations.

 

Credit Agreement

On June 1, 2018, the Fund and other participating funds managed by the Manager, and Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendment (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the credit agreement, dated as of November 27, 2012 (as amended by the first amendment to credit agreement, dated September 30, 2016, and the second amendment to credit agreement and reaffirmation of waiver, dated September 15, 2017, and as amended by the Third Amendment, the “Credit Agreement”). In conjunction with the sale of a portion of the Beta Project working interest and the repayment of a portion of amounts outstanding on the Credit Agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager and the Lenders entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement effective as of September 1, 2018 (“Fourth Amendment Effective Date”). As of September 30, 2018 and December 31, 2017, the Fund had borrowings of $3.2 million and $7.2 million, respectively, under the Credit Agreement.

 

The Third Amendment extended the loan maturity from December 31, 2020 to December 31, 2022, revised the interest rate and required a monthly payment amount based on a fixed percentage of the Fund’s Net Revenue (as defined in the Credit Agreement) derived from the Beta Project, changed the overriding royalty interest (“ORRI”) in its working interest in the Beta Project conveyed to the Lenders to a fixed percentage of 10.81% from a tiered structure, and deferred the payment of such ORRI, which will not become payable to the Lenders until January 1, 2023. The proceeds from the sale of a portion of the working interest in the Beta Project were used to reduce the outstanding debt under the Credit Agreement. As a result, the Fourth Amendment principally reduced the fixed percentage for the calculation of the monthly payments and amended the interest calculation. Beginning on September 1, 2018 up to and including March 31, 2019, the Fund’s fixed percentage is 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project determined on September 1, 2018, as scheduled in the Credit Agreement. Beginning on April 1, 2019 and each April 1st thereafter, the Fund’s fixed percentage will be the greater of (i) 30% or (ii) the Fixed Reassessment Percentage, as defined in the Credit Agreement. The Fixed Reassessment Percentage is determined annually and will be based on the Fund’s ratio of its outstanding debt as of the reassessment date relative to 80% of third-party reserve engineers’ proved plus probable future undiscounted cash flows attributable to the Beta Project through the maturity of the loan. Beginning on September 1, 2018 and thereafter until the loan is repaid in full, in no event later than December 31, 2022, the loan will bear interest at a rate equal to 8.75% compounded monthly. The loan may be prepaid by the Fund without premium or penalty.

 

The Credit Agreement contains customary negative covenants including covenants that limit the Fund’s ability to, among other things, grant liens, change the nature of its business, or merge into or consolidate with other persons. The events which constitute events of default are also customary for credit facilities of this nature and include payment defaults, breaches of representations, warrants and covenants, insolvency and change of control. Upon the occurrence of a default, in some cases following a notice and cure period, the Lenders under the Credit Agreement may accelerate the maturity of the loan and require full and immediate repayment of all borrowings under the Credit Agreement. The Fund believes it is in compliance with all covenants under the Credit Agreement as of September 30, 2018 and December 31, 2017.

 

Off-Balance Sheet Arrangements

 

The Fund had no off-balance sheet arrangements as of September 30, 2018 and December 31, 2017 and does not anticipate the use of such arrangements in the future.

 

 17 

 

Contractual Obligations

 

The Fund enters into participation and joint operating agreements with operators. On behalf of the Fund, an operator enters into various contractual commitments pertaining to exploration, development and production activities. The Fund does not negotiate such contracts. No contractual obligations exist as of September 30, 2018 and December 31, 2017, other than those discussed in “Estimated Capital Expenditures” and “Liquidity Needs – Credit Agreement” above.

 

Recent Accounting Pronouncements

 

See Note 1 of “Notes to Unaudited Condensed Financial Statements” - “Organization and Summary of Significant Accounting Policies” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for a discussion of recent accounting pronouncements. 

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

ITEM 4.CONTROLS AND PROCEDURES

 

In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Fund’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Fund’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective as of September 30, 2018.

 

There has been no change in the Fund’s internal control over financial reporting that occurred during the three months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.RISK FACTORS

 

Not required.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.OTHER INFORMATION

 

None.

 

 18 

 

ITEM 6.EXHIBITS

 

EXHIBIT

NUMBER

TITLE OF EXHIBIT   METHOD OF FILING
       
31.1

Certification of Robert E. Swanson, Chief Executive Officer of
the Fund, pursuant to Exchange Act Rule 13a-14(a)

  Filed herewith
       
31.2

Certification of Kathleen P. McSherry, Executive Vice President
and Chief Financial Officer of the Fund, pursuant to Exchange
Act Rule 13a-14(a)

  Filed herewith
       
32

Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Robert E. Swanson, Chief Executive Officer of the
Fund and Kathleen P. McSherry, Executive Vice President and
Chief Financial Officer of the Fund
 

  Filed herewith
       
10.4 Third Amendment to Credit Agreement dated June 1, 2018 by and among Ridgewood Energy O Fund, LLC, Ridgewood Energy Q Fund, LLC, Ridgewood Energy S Fund, LLC, Ridgewood Energy T Fund, LLC, Ridgewood Energy V Fund, LLC, Ridgewood Energy W Fund, LLC, Ridgewood Energy A-1 Fund, LLC, Ridgewood Energy B-1 Fund, LLC, Rahr Energy Investments LLC, as Administrative Agent, and certain Lenders party thereto  

Incorporated by reference to the Fund’s Form 8-K filed on June 7, 2018

 

       
10.5 Fourth Amendment to Credit Agreement dated August 10, 2018 by and among Ridgewood Energy O Fund, LLC, Ridgewood Energy Q Fund, LLC, Ridgewood Energy S Fund, LLC, Ridgewood Energy T Fund, LLC, Ridgewood Energy V Fund, LLC, Ridgewood Energy W Fund, LLC, Ridgewood Energy A-1 Fund, LLC, Ridgewood Energy B-1 Fund, LLC, Rahr Energy Investments LLC, as Administrative Agent, and certain Lenders party thereto   Incorporated by reference to the Fund’s Form 10-Q filed on August 14, 2018
       
10.6 Purchase and Sale Agreement dated August 10, 2018 by and among Ridgewood Energy O Fund, LLC, Ridgewood Energy S Fund, LLC, Ridgewood Energy T Fund, LLC, Ridgewood Energy V Fund, LLC, Ridgewood Energy W Fund, LLC, Ridgewood Energy A-1 Fund, LLC, Ridgewood Energy B-1 Fund, LLC, as Sellers and each individually a Seller and Walter Oil & Gas Corporation and Gordy Oil Company as Buyers and each individually a Buyer   Incorporated by reference to the Fund’s Form 10-Q filed on August 14, 2018
       
101.INS XBRL Instance Document   Filed herewith
       
101.SCH XBRL Taxonomy Extension Schema   Filed herewith
       
101.CAL XBRL Taxonomy Extension Calculation Linkbase   Filed herewith
       
101.DEF XBRL Taxonomy Extension Definition Linkbase Document   Filed herewith
       
101.LAB XBRL Taxonomy Extension Label Linkbase   Filed herewith
       
101.PRE XBRL Taxonomy Extension Presentation Linkbase   Filed herewith

 

 19 

  

SIGNATURES

 

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

 

 

           

RIDGEWOOD ENERGY A-1 FUND, LLC

 

Dated: November 9, 2018 By: /s/     ROBERT E. SWANSON
      Name:     Robert E. Swanson
      Title:     Chief Executive Officer
            (Principal Executive Officer)
             
             
Dated: November 9, 2018 By: /s/     KATHLEEN P. MCSHERRY
      Name:     Kathleen P. McSherry
      Title:     Executive Vice President and Chief Financial Officer
            (Principal Financial and Accounting Officer)

 

 

20

 

 

EX-31.1 2 ex31_1.htm EXHIBIT 31.1

  

EXHIBIT 31.1

CERTIFICATION

 

I, Robert E. Swanson, certify that:

 

1.            I have reviewed this Quarterly Report on Form 10-Q of Ridgewood Energy A-1 Fund, LLC;

 

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.            The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

 

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.            The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Dated:     November 9, 2018  
         
/s/     ROBERT E. SWANSON  
Name:     Robert E. Swanson  
         
Title:     Chief Executive Officer  
      (Principal Executive Officer)  

 

 

 

 

 

 

EX-31.2 3 ex31_2.htm EXHIBIT 31.2

  

EXHIBIT 31.2

CERTIFICATION

 

I, Kathleen P. McSherry, certify that:

 

1.             I have reviewed this Quarterly Report on Form 10-Q of Ridgewood Energy A-1 Fund, LLC;

 

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.             The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d – 15(f)) for the registrant and have:

 

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.            The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Dated:     November 9, 2018  
         
/s/     KATHLEEN P. MCSHERRY  
Name:     Kathleen P. McSherry  
         
Title:     Executive Vice President and Chief Financial Officer  
      (Principal Financial and Accounting Officer)  

 

 

 

 

 

EX-32 4 ex32.htm EXHIBIT 32

 

EXHIBIT 32

 

 

 

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with this Quarterly Report on Form 10-Q of the Ridgewood Energy A-1 Fund, LLC (the “Fund”) for the period ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof, (the “Report”), each of the undersigned officers of the Fund hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund.
         

 

Dated: November 9, 2018        
        /s/ ROBERT E. SWANSON
        Name: Robert E. Swanson
        Title: Chief Executive Officer
          (Principal Executive Officer)
           
Dated: November 9, 2018        
        /s/ KATHLEEN P. MCSHERRY
        Name: Kathleen P. McSherry
        Title: Executive Vice President and Chief Financial Officer
          (Principal Financial and Accounting Officer)
           
           

 

A signed original of this written statement or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Fund and will be retained by the Fund and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this report or as a separate disclosure document.

 

 

 

 

 

 

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Disclosure of accounting policy for the salvage fund. The entire disclosure for revenue recognition. Overriding royalty interest rate. The working interest owned, expressed as a percentage, that an entity has in a particular well(s). The carrying value of the working interest in the oil and gas property. The amount of non-cash gains associated with the change in fair value on the debt instrument. The change in fair value on the debt instrument. Interest rate used to find the present value of an amount to be paid or received in the future as an input to measure fair value for overriding royalty interest. For example, but not limited to, weighted average cost of capital (WACC), cost of capital, cost of equity and cost of debt. Interest rate used to find the present value of an amount to be paid or received in the future as an input to measure fair value for long-term debt. 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Assets, Current Salvage fund [Default Label] Oil and Gas Property, Successful Effort Method, Accumulated Depreciation, Depletion and Amortization Oil and Gas Property, Successful Effort Method, Net Assets [Default Label] Liabilities, Current Asset Retirement Obligations, Noncurrent Liabilities Manager Distributions Managers Capital Shareholders Syndication Costs Shareholders Distributions Accumulated deficit Shareholders Capital Stockholders' Equity Attributable to Parent Liabilities and Equity Operating Expenses Operating Income (Loss) Nonoperating Income (Expense) Net Income (Loss) Attributable to Parent Comprehensive Income (Loss), Net of Tax, Attributable to Parent Increase (Decrease) in Accounts Receivable Increase (Decrease) in Other Current Assets Net Cash Provided by (Used in) Operating Activities PaymentsForCreditsOfAcquisitionOfOilAndGasProperties Proceeds From Investments In Salvage Fund Net Net Cash Provided by (Used in) Investing Activities Repayments of Long-term Debt Net Cash Provided by (Used in) Financing Activities Cash and Cash Equivalents, Period Increase (Decrease) RevenueRecognitionTextBlock Asset Retirement Obligation, Liabilities Settled Distributions Paid During Period Long-term Debt EX-101.PRE 10 cik1457919-20180930_pre.xml XBRL PRESENTATION FILE XML 11 R1.htm IDEA: XBRL DOCUMENT v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Nov. 09, 2018
Document And Entity Information Abstract    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Entity Registrant Name RIDGEWOOD ENERGY A-1 FUND LLC  
Entity Central Index Key 0001457919  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Entity Filer Category Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   207.7026
XML 12 R2.htm IDEA: XBRL DOCUMENT v3.10.0.1
UNAUDITED CONDENSED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 2,449 $ 2,423
Salvage fund 880 1,191
Production receivable 223 491
Other current assets 73 52
Total current assets 3,625 4,157
Salvage fund 791 355
Oil and gas properties:    
Proved properties 20,080 20,498
Less: accumulated depletion and amortization (8,806) (7,391)
Total oil and gas properties, net 11,274 13,107
Total assets 15,690 17,619
Current liabilities:    
Due to operators 623 609
Accrued expenses 52 54
Current portion of long-term borrowings 431 1,566
Asset retirement obligations 880 1,191
Other current liabilities 40 40
Total current liabilities 2,026 3,460
Long-term borrowings 2,792 5,639
Asset retirement obligations 485 210
Total liabilities 5,303 9,309
Commitments and contingencies (Note 6)
Members' capital:    
Distributions (5,058) (5,058)
Retained earnings 5,907 5,484
Manager's total 849 426
Capital contributions (250 shares authorized; 207.7026 issued and outstanding) 41,143 41,143
Syndication costs (4,804) (4,804)
Distributions (35,427) (35,427)
Retained earnings 8,625 6,970
Shareholders' total 9,537 7,882
Accumulated other comprehensive income 1 2
Total members' capital 10,387 8,310
Total liabilities and members' capital $ 15,690 $ 17,619
XML 13 R3.htm IDEA: XBRL DOCUMENT v3.10.0.1
UNAUDITED CONDENSED BALANCE SHEETS (Parenthetical) - shares
Sep. 30, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Shares authorized 250 250
Shares issued 207.7026 207.7026
Shares outstanding 207.7026 207.7026
XML 14 R4.htm IDEA: XBRL DOCUMENT v3.10.0.1
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Revenue        
Oil and gas revenue $ 1,092 $ 777 $ 3,719 $ 2,692
Expenses        
Depletion and amortization 636 395 2,598 2,563
Management fees to affiliate 93 93 280 280
Operating expenses 156 164 443 515
General and administrative expenses 50 38 143 126
Total expenses 935 690 3,464 3,484
Gain on sale of oil and gas properties 899 899
Income (loss) from operations 1,056 87 1,154 (792)
Other income (loss)        
Gain on debt extinguishment 1,313 1,313
Interest expense, net (103) (187) (389) (557)
Total other income (loss) 1,210 (187) 924 (557)
Net income (loss) 2,266 (100) 2,078 (1,349)
Other comprehensive income (loss)        
Unrealized loss on marketable securities (1) (1)
Total comprehensive income (loss) 2,266 (100) 2,077 (1,350)
Manager Interest        
Net income 134 68 423 239
Shareholder Interest        
Net income (loss) $ 2,132 $ (168) $ 1,655 $ (1,588)
Net income (loss) per share $ 10,262 $ (813) $ 7,968 $ (7,649)
XML 15 R5.htm IDEA: XBRL DOCUMENT v3.10.0.1
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities    
Net income (loss) $ 2,078 $ (1,349)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depletion and amortization 2,598 2,563
Gain on sale of oil and gas properties (899)
Accretion expense 16 22
Gain on debt extinguishment (1,313)
Amortization of debt discounts and deferred financing costs 91
Changes in assets and liabilities:    
Decrease in production receivable 268 114
(Increase) decrease in other current assets (21) 45
(Decrease) increase in due to operators (20) 38
Decrease in accrued expenses (2) (14)
Settlement of asset retirement obligations (13) (82)
Net cash provided by operating activities 2,692 1,428
Cash flows from investing activities    
Capital expenditures for oil and gas properties (1,673) (2,160)
Proceeds from sale of oil and gas properties 3,099
(Increase) decrease in salvage fund (126) 51
Net cash provided by (used in) investing activities 1,300 (2,109)
Cash flows from financing activities    
Repayment of long-term borrowings (3,966)
Net cash used in financing activities (3,966)
Net increase (decrease) in cash and cash equivalents 26 (681)
Cash and cash equivalents, beginning of period 2,423 3,458
Cash and cash equivalents, end of period 2,449 2,777
Supplemental disclosure of cash flow information    
Cash paid for interest, net of amounts capitalized 396 485
Supplemental disclosure of non-cash investing activities    
Due to operators for accrued capital expenditures for oil and gas properties $ 534 $ 467
XML 16 R6.htm IDEA: XBRL DOCUMENT v3.10.0.1
Organization and Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Summary of Significant Accounting Policies

1.Organization and Summary of Significant Accounting Policies

 

Organization

The Ridgewood Energy A-1 Fund, LLC (the “Fund”), a Delaware limited liability company, was formed on February 3, 2009 and operates pursuant to a limited liability company agreement (the “LLC Agreement”) dated as of March 2, 2009 by and among Ridgewood Energy Corporation (the “Manager”) and the shareholders of the Fund, which addresses matters such as the authority and voting rights of the Manager and shareholders, capitalization, transferability of membership interests, participation in costs and revenues, distribution of assets and dissolution and winding up. The Fund was organized to primarily acquire interests in oil and gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico.

 

The Manager has direct and exclusive control over the management of the Fund’s operations. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for the Fund’s operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations, the preparation, review and dissemination of tax and other financial information and the management of the Fund’s investments in projects. In addition, the Manager provides office space, equipment and facilities and other services necessary for the Fund’s operations. The Manager also engages and manages contractual relations with unaffiliated custodians, depositories, accountants, attorneys, corporate fiduciaries, insurers, banks and others as required. See Notes 4, 5 and 6.

 

Basis of Presentation

These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements. The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results. These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 2017 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K (“2017 Annual Report”) filed with the Securities and Exchange Commission (“SEC”). The year-end condensed balance sheet data was derived from audited financial statements for the year ended December 31, 2017, but does not include all annual disclosures required by GAAP.

 

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, depletion and amortization, determination of proved reserves, impairment of long-lived assets and asset retirement obligations. Actual results may differ from those estimates.

 

Summary of Significant Accounting Policies

The Fund has provided discussion of significant accounting policies in Note 1 of “Notes to Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 8. “Financial Statements and Supplementary Data” within its 2017 Annual Report. There have been no significant changes to the Fund’s significant accounting policies during the three and nine months ended September 30, 2018, except as noted below for revenue recognition. See Note 2. “Revenue Recognition” for discussion of the Fund’s updated accounting policies related to revenue recognition for revenue from contracts with customers.

 

Fair Value Measurements

The Fund follows the accounting guidance for fair value measurement for measuring fair value of assets and liabilities in its financial statements. The Fund’s financial instruments consist of cash and cash equivalents, salvage fund, production receivable, other current assets, due to operators, accrued expenses, other current liabilities and long-term debt. Except for long-term debt, the carrying amounts of these instruments approximate fair value due to their short-term nature. The Fund’s salvage fund is a separate interest-bearing account that has no restrictions on withdrawals, therefore its carrying amount approximates fair value. The portion of the Fund’s investments in federal agency mortgage-backed securities are carried in the financial statements at fair value as noted below. The Fund’s long-term debt is valued using an income approach and classified as Level 3 in the fair value hierarchy. The Fund applies the provisions of the fair value measurement accounting guidance to its non-financial assets and liabilities, such as oil and gas properties and asset retirement obligations, on a non-recurring basis.

 

 

Salvage Fund

The Fund deposits cash in a separate interest-bearing account, or salvage fund, to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives in accordance with applicable federal and state laws and regulations. As of September 30, 2018 and December 31, 2017, the Fund had investments in federal agency mortgage-backed securities as detailed in the following table, which are classified as available-for-sale. Available-for-sale securities are carried in the financial statements at fair value. Mortgage-backed securities within the salvage fund are recorded based on Level 2 inputs, as such instruments trade in over-the-counter markets and the inputs are consistent with the Level 2 definition.

 

       Gross     
   Amortized   Unrealized   Fair 
   Cost   Gains   Value 
   (in thousands) 
Government National Mortgage Association security (GNMA July 2041) 
September 30, 2018  $46   $1   $47 
December 31, 2017  $46   $2   $48 

 

The unrealized gains on the Fund's investments in federal agency mortgage-backed securities were the result of fluctuations in market interest rates. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Unrealized gains or losses on available-for-sale debt securities are reported in other comprehensive income until realized.

 

For all investments, interest income is accrued as earned and amortization of premium or discount, if any, is included in interest income. Interest earned on the account will become part of the salvage fund. There are no restrictions on withdrawals from the salvage fund.

 

Asset Retirement Obligations

For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. Upon the determination that a property is either proved or dry, a retirement obligation is incurred. The Fund recognizes the fair value of a liability for an asset retirement obligation in the period incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs. Annually, or more frequently if an event occurs that would dictate a change in assumptions or estimates underlying the obligations, the Fund reassesses its asset retirement obligations to determine whether any revisions to the obligations are necessary. The Fund maintains a salvage fund to provide for the funding of future asset retirement obligations. The following table presents changes in asset retirement obligations for the following periods:

 

   Nine months ended September 30, 
   2018   2017 
   (in thousands) 
Balance, beginning of period  $1,401   $1,675 
Liabilities incurred   2    2 
Liabilities settled/relieved   (54)   (82)
Accretion expense   16    22 
Revision of estimates   -    (122)
Balance, end of period  $1,365   $1,495 

 

During the nine months ended September 30, 2017, the Fund recorded credits to depletion expense totaling $0.1 million related to an adjustment to the asset retirement obligation for a fully depleted property.

 

 

Impairment of Long-Lived Assets

The Fund reviews the carrying value of its oil and gas properties for impairment whenever events and circumstances indicate that the recorded carrying value of the assets may not be recoverable. Impairments are determined by comparing estimated future net undiscounted cash flows to the carrying value of the assets at the time of the review. If the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the asset is written down to estimated fair value, which is determined using a valuation technique that considers both market and income approaches and uses Level 3 inputs. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. 

 

There were no impairments of oil and gas properties during each of the three and nine months ended September 30, 2018 and 2017. Fluctuations in oil and natural gas prices may impact the fair value of the Fund’s oil and gas properties. If oil and natural gas prices decline, even if only for a short period of time, it is possible that impairments of oil and gas properties will occur.

 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on fair value measurement, which adds, among other things, disclosure requirements for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This accounting guidance is effective for the Fund in the first quarter 2020 with early adoption permitted. The Fund does not expect this accounting guidance will have a material impact on its financial statements upon adoption.

 

In May 2014, the FASB issued accounting guidance on revenue recognition (“New Revenue Standard”), which provides for a single five-step model to be applied to all revenue contracts with customers. In July 2015, the FASB issued a deferral of the effective date of the New Revenue Standard to 2018, with early adoption permitted in 2017. In March 2016, the FASB issued accounting guidance, which clarifies the implementation guidance on principal versus agent considerations in the New Revenue Standard. In April 2016, the FASB issued guidance on identifying performance obligations and licensing and in May 2016, the FASB issued final amendments which provided narrow scope improvements and practical expedients related to the implementation of the New Revenue Standard. The New Revenue Standard may be applied either retrospectively or through the use of a modified-retrospective method. Under the New Revenue Standard, the revenue associated with the Fund’s existing contracts will be recognized in the period that control of the related commodity is transferred to the customer, which is generally consistent with the Fund’s previous revenue recognition model. The Fund adopted the New Revenue Standard using the modified retrospective method on January 1, 2018. See Note 2. “Revenue Recognition” for the required disclosures related to the impact of adopting this guidance and a discussion of the Fund’s updated policies related to revenue recognition for revenue from contracts with customers.

XML 17 R7.htm IDEA: XBRL DOCUMENT v3.10.0.1
Revenue Recognition
9 Months Ended
Sep. 30, 2018
Revenue Recognition  
Revenue Recognition

2.Revenue Recognition

 

The Fund adopted the New Revenue Standard on January 1, 2018 using the modified retrospective method for all new contracts entered into after January 1, 2018 and all existing contracts for which revenues have not been recognized under the previous revenue guidance as of December 31, 2017. Although the Fund did not identify changes to its revenue recognition that resulted in a cumulative adjustment to retained earnings on January 1, 2018, the adoption of the accounting guidance resulted in enhanced disclosures related to revenue recognition policies, the Fund’s performance obligations and significant judgments used in applying the New Revenue Standard.

 

Revenue from Contracts with Customers

Oil and gas revenues are recognized at the point when control of oil and natural gas is transferred to the customers. Natural gas liquid (“NGL”) sales are included within gas sales. The Fund’s oil and natural gas generally is sold to its customers at prevailing market prices based on an index in which the prices are published, adjusted for pricing differentials, quality of the oil and pipeline allowances.

 

Oil and Gas Revenue

Generally, the Fund sells oil and natural gas under two types of agreements, which are common in the oil and gas industry. In the first type of agreement, or a netback agreement, the Fund receives a price, net of pricing differentials as well as transportation expense incurred by the customer, and the Fund records revenue at the wellhead at the net price received where control transfers to the customer. In the second type of agreement, the Fund delivers oil and natural gas to the customer at a contractually agreed-upon delivery point where the customer takes control. The Fund pays a third-party to transport the oil and natural gas and receives a specific market price from the customer net of pricing adjustments. The Fund records the transportation expense within operating expenses in the statements of operations.

 

 

Under the Fund’s natural gas processing contracts, the Fund delivers natural gas to a midstream processing company at the inlet of the midstream processing company’s facility. The midstream processing company gathers and processes the natural gas and remits the proceeds to the Fund for the sale of NGLs. In this type of arrangement, the Fund evaluates whether it is the principal or agent in the transaction. The Fund concluded that it is the principal and the ultimate third-party purchaser is the customer, therefore, the Fund recognizes revenue on a gross basis, with transportation, gathering and processing fees recorded as an expense within operating expenses in the statements of operations.

 

In certain instances, the Fund may elect to take its residue gas and NGLs in-kind at the tailgate of the midstream company’s processing plant and subsequently market such volumes. Through its marketing process, the Fund delivers the residue gas and NGLs to the ultimate third-party customer at a contractually agreed-upon delivery point and receives a specified market price from the customer. In this arrangement, the Fund recognizes revenue when control transfers to the customer at the delivery point based on the market price received from the customer. The transportation, gathering and processing fees are recorded as expense within operating expenses in the statements of operations.

 

The Fund assesses the performance obligations promised in its oil and natural gas contracts based on each unit of oil and natural gas that will be transferred to its customer because each unit is capable of being distinct. The Fund satisfies its performance obligation when control transfers at a point in time when its customer is able to direct the use of, and obtain substantially all of the benefits from, the oil and natural gas delivered. Under each of the Fund’s oil and natural gas contracts, contract prices are variable and based on an index in which the prices are published, which fluctuate as a result of related industry variables, adjusted for pricing differentials, quality of the oil and pipeline allowances. The use of index-based pricing with predictable differentials reduces the level of uncertainty related to oil and gas prices. Additionally, any variable consideration is not constrained. Payments are received in the month following the oil and natural gas production month. Adjustments that occur after delivery, such as quality bank adjustments, are reflected in revenue in the month payments are received.

 

Transaction price allocated to remaining performance obligations

Under the Fund’s oil and natural gas contracts, each unit of oil and natural gas represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and the transaction price related to the remaining performance obligations is the variable index-based price attributable to each unit of oil and natural gas that is transferred to the customer.

 

Contract balances

The Fund invoices customers once its performance obligations have been satisfied, at which point the payment is unconditional. Accordingly, the Fund’s oil and natural gas contracts do not give rise to contract assets or liabilities under the New Revenue Standard. The receivables related to the Fund’s oil and gas revenue are included within “Production receivable” on the balance sheets.

 

Prior period performance obligations

The Fund records oil and gas revenue in the month production is delivered to its customers. However, settlement statements for residue gas and NGLs sales may not be received for 30 to 60 days after the date production is delivered. As a result, the Fund is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the residue gas and NGLs. The Fund records the differences between its estimates and the actual amounts received in the month that the payment is received from the customer. The Fund has an estimation process for revenue and related accruals, and any identified difference between its revenue estimates and actual revenue historically have not been significant. There was no material revenue recognized in the current period from performance obligations satisfied in previous periods.

XML 18 R8.htm IDEA: XBRL DOCUMENT v3.10.0.1
Oil and Gas Properties
9 Months Ended
Sep. 30, 2018
Oil And Gas Properties  
Oil and Gas Properties

3.Oil and Gas Properties

 

On August 10, 2018, the Fund entered into a purchase and sale agreement (“PSA”) to sell a portion of the Fund’s working interest in the Beta Project to Walter Oil & Gas Corporation and Gordy Oil Company (collectively the “Buyers”) with an effective date of January 1, 2018. Certain other funds managed by the Manager were also parties to the PSA. The Fund had a 2.0% working interest in the Beta Project and sold a 0.364% working interest to the Buyers for a total purchase price of $3.3 million, subject to purchase price and customary post-closing adjustments. The transaction closed on August 10, 2018 and the Fund received $3.1 million in cash, which included preliminary purchase price adjustments primarily related to the net cash flows from the effective date to the closing date.

 

 

The net carrying value of the working interest sold as of the closing date was approximately $2.2 million and the related asset retirement obligation was approximately $40 thousand. A gain to the Fund of approximately $0.9 million was recognized in third quarter 2018, subject to customary post-closing adjustments. The proceeds from the sale were utilized to repay a portion of the long-term debt outstanding under the credit agreement. The sale did not qualify as discontinued operations because it did not represent a strategic shift that has, or will have, a major effect on the Fund’s operations and financial results.

XML 19 R9.htm IDEA: XBRL DOCUMENT v3.10.0.1
Related Parties
9 Months Ended
Sep. 30, 2018
Related Party Transactions [Abstract]  
Related Parties

4.Related Parties

 

Pursuant to the terms of the LLC Agreement, the Manager is entitled to receive an annual management fee, payable monthly, of 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, however, the Manager is permitted to waive the management fee at its own discretion. Therefore, the management fee may be temporarily waived to accommodate the Fund’s short-term commitments. Management fees during each of the three and nine months ended September 30, 2018 and 2017 were $0.1 million and $0.3 million, respectively.

 

The Manager is also entitled to receive 15% of the cash distributions from operations made by the Fund. The Fund did not pay distributions during the three and nine months ended September 30, 2018 and 2017. 

 

The Fund utilizes Beta Sales and Transport, LLC, a wholly-owned subsidiary of the Manager, to facilitate the transportation and sale of oil and natural gas produced from the Beta Project.

 

At times, short-term payables and receivables, which do not bear interest, arise from transactions with affiliates in the ordinary course of business.

 

The Fund has working interest ownership in certain oil and natural gas projects, which are also owned by other entities that are likewise managed by the Manager.

XML 20 R10.htm IDEA: XBRL DOCUMENT v3.10.0.1
Credit Agreement - Beta Project Financing
9 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
Credit Agreement - Beta Project Financing

5.Credit Agreement – Beta Project Financing

  

On June 1, 2018, the Fund and other participating funds managed by the Manager, and Rahr Energy Investments LLC, as administrative agent and lender (and other lenders that may become a party thereto, collectively “Lenders”), entered into a third amendment (the “Third Amendment”), effective as of September 1, 2018 (“Third Amendment Effective Date”), to the credit agreement, dated as of November 27, 2012 (as amended by the first amendment to credit agreement, dated September 30, 2016, and the second amendment to credit agreement and reaffirmation of waiver, dated September 15, 2017 and as amended by the Third Amendment, the “Credit Agreement”). In conjunction with the sale of a portion of the Beta Project working interest and the repayment of a portion of amounts outstanding on the Credit Agreement, on August 10, 2018, the Fund and other participating funds managed by the Manager and the Lenders entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement effective as of September 1, 2018 (“Fourth Amendment Effective Date”).

 

The Third Amendment extended the loan maturity from December 31, 2020 to December 31, 2022, revised the interest rate and required a monthly payment amount based on a fixed percentage of the Fund’s Net Revenue (as defined in the Credit Agreement) derived from the Beta Project, changed the overriding royalty interest (“ORRI”) in its working interest in the Beta Project conveyed to the Lenders to a fixed percentage of 10.81% from a tiered structure, and deferred the payment of such ORRI, which will not become payable to the Lenders until January 1, 2023. The proceeds from the sale of a portion of the working interest in the Beta Project were used to reduce the outstanding debt under the Credit Agreement. As a result, the Fourth Amendment principally reduced the fixed percentage for the calculation of the monthly payments and amended the interest calculation. Beginning on September 1, 2018 up to and including March 31, 2019, the Fund’s fixed percentage is 30%, which was based on the Fund’s ratio of outstanding debt to working interest ownership in the Beta Project determined on September 1, 2018, as scheduled in the Credit Agreement. Beginning on April 1, 2019 and each April 1st thereafter, the Fund’s fixed percentage will be the greater of (i) 30% or (ii) the Fixed Reassessment Percentage, as defined in the Credit Agreement. The Fixed Reassessment Percentage is determined annually and will be based on the Fund’s ratio of its outstanding debt as of the reassessment date relative to 80% of third-party reserve engineers’ proved plus probable future undiscounted cash flows attributable to the Beta Project through the maturity of the loan. Beginning on September 1, 2018 and thereafter until the loan is repaid in full, in no event later than December 31, 2022, the loan will bear interest at a rate equal to 8.75% compounded monthly.

 

 

The Fund reviewed the terms of the Third Amendment and determined that the conditions were met, pursuant to Accounting Standard Codification 470-50 Debt: Modification and Extinguishments (“ASC 470-50”) guidance, to treat the Third Amendment as a debt modification in a non-troubled debt restructuring. The Fund then reviewed the terms of the Fourth Amendment and determined that the Fourth Amendment met the conditions of debt extinguishment pursuant to ASC 470-50 guidance in a non-troubled debt restructuring. Pursuant to ASC 470-50 guidance, the new debt instrument shall be initially recorded at fair value and the difference between the fair value of the new debt instrument and the carrying amount of the debt being extinguished is recognized as a gain or loss on extinguishment of debt. Additionally, the difference in the fair value of the ORRI before and after the Fourth Amendment is included in the gain or loss recognized upon extinguishment of the debt.

 

The Fund recognized a gain on debt extinguishment of $1.3 million during third quarter 2018, which is recorded within “Other income (loss)” in its condensed statements of operations. The gain on debt extinguishment primarily represents non-cash gains associated with the change in the fair value of ORRI conveyed to the Lenders totaling $1.3 million and the difference between the fair value of the new debt and the carrying amount of the old debt totaling $16 thousand. The Fund estimated the fair value of the ORRI before and after the Fourth Amendment using a discounted cash flow method based on Level 3 inputs, which included future revenue from proved and probable oil and natural gas reserves from the Beta Project, future commodity pricing curves to derive future cash flows and risk-adjusted discount rate of 9%. The change in the fair value of the ORRI of $1.3 million is recorded within “Total oil and gas properties, net” on the Fund’s balance sheet, which will be amortized to depletion expense using the units-of-production method over the life of the Beta Project. The Fund estimated the fair value of the amended debt by discounting future cash payments of principal and interest to a present value amount using a market yield for debt instruments with similar terms, maturities and credit ratings. The Fund used a market yield of 9.25% to estimate the fair value of the amended debt, which was determined to be $3.3 million. The discounted loan is being accreted to its face value using the effective interest method over the remaining term of the amended debt.

 

As of September 30, 2018 and December 31, 2017, the Fund had borrowings of $3.2 million and $7.2 million, respectively, under the Credit Agreement. The loan may be prepaid by the Fund without premium or penalty. As of September 30, 2018, the estimated fair value of the debt approximates its carrying value.

 

There were no unamortized debt discounts and deferred financing costs as of September 30, 2018 and December 31, 2017. Amortization expense during the three and nine months ended September 30, 2017 of $31 thousand and $0.1 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”. There were no such amounts recorded during the three and nine months ended September 30, 2018.

 

As of September 30, 2018 and December 31, 2017, there were no accrued interest costs outstanding. Interest costs incurred during the three and nine months ended September 30, 2018 of $0.1 million and $0.4 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”. Interest costs incurred during the three and nine months ended September 30, 2017 of $0.2 million and $0.5 million, respectively, were expensed and included on the statements of operations within “Interest expense, net”.

 

The Credit Agreement contains customary covenants, with which the Fund was in compliance as of September 30, 2018 and December 31, 2017.

XML 21 R11.htm IDEA: XBRL DOCUMENT v3.10.0.1
Commitments and Contingencies
9 Months Ended
Sep. 30, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

6.Commitments and Contingencies

 

Capital Commitments

As of September 30, 2018, the Fund’s estimated capital commitments related to its oil and gas properties were $3.5 million (which include asset retirement obligations for the Fund’s projects of $1.9 million), of which $2.0 million is expected to be spent during the next twelve months. Future results of operations and cash flows are dependent on the continued successful development and the related production of oil and gas revenues from the Beta Project.

 

Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, borrowing repayments and ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision. However, if cash flow from operations is not sufficient to meet the Fund’s commitments, the Manager will temporarily waive all or a portion of the management fee as well as provide short-term financing to accommodate the Fund’s short-term commitments if needed.

 

 

Environmental and Governmental Regulations

Many aspects of the oil and gas industry are subject to federal, state and local environmental laws and regulations. The Manager and operators of the Fund’s properties are continually taking action they believe appropriate to satisfy applicable federal, state and local environmental regulations. However, due to the significant public and governmental interest in environmental matters related to those activities, the Manager cannot predict the effects of possible future legislation, rule changes, or governmental or private claims. As of September 30, 2018 and December 31, 2017, there were no known environmental contingencies that required adjustment to, or disclosure in, the Fund’s financial statements.

 

Oil and gas industry legislation and administrative regulations are periodically changed for a variety of political, economic, and other reasons. Any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which could have a material adverse effect on the Fund’s operating results and cash flows. It is not possible at this time to predict whether such legislation or regulation, if proposed, will be adopted as initially written, if at all, or how legislation or new regulation that may be adopted would impact the Fund’s business.

 

BOEM Notice to Lessees on Supplemental Bonding

On July 14, 2016, the Bureau of Ocean Energy Management (“BOEM”) issued a Notice to Lessees (“NTL”) that discontinued and materially replaced existing policies and procedures regarding financial security (i.e. supplemental bonding) for decommissioning obligations of lessees of federal oil and gas leases and owners of pipeline rights-of-way, rights-of use and easements on the Outer Continental Shelf (“Lessees”).  Generally, the new NTL (i) ended the practice of excusing Lessees from providing such additional security where co-lessees had sufficient financial strength to meet such decommissioning obligations, (ii) established new criteria for determining financial strength and additional security requirements of such Lessees,  (iii) provided acceptable forms of such additional security and (iv) replaced the waiver system with one of self-insurance. The new rule became effective as of September 12, 2016; however on January 6, 2017, the BOEM announced that it was suspending the implementation timeline for six months in certain circumstances. On June 22, 2017, the BOEM announced that the implementation timeline extension will remain in effect pending the completion of its review of the new NTL. The Fund, as well as other industry participants, are working with the BOEM, its operators and working interest partners to determine and agree upon the correct level of decommissioning obligations to which they may be liable and the manner in which such obligations will be secured.  The impact of the NTL, if enforced without change or amendment, may require the Fund to fully secure all of its potential abandonment liabilities to the BOEM’s satisfaction using one or more of the enumerated methods for doing so.  Potentially this could increase costs to the Fund if the Fund is required to obtain additional supplemental bonding, fund escrow accounts or obtain letters of credit.

 

Insurance Coverage

The Fund is subject to all risks inherent in the oil and natural gas business. Insurance coverage as is customary for entities engaged in similar operations is maintained, but losses may occur from uninsurable risks or amounts in excess of existing insurance coverage. The occurrence of an event that is not insured or not fully insured could have a material adverse impact upon earnings and financial position. Moreover, insurance is obtained as a package covering all of the entities managed by the Manager. Depending on the extent, nature and payment of claims made by the Fund or other entities managed by the Manager, yearly insurance coverage may be exhausted and become insufficient to cover a claim by the Fund in a given year.

XML 22 R12.htm IDEA: XBRL DOCUMENT v3.10.0.1
Organization and Summary of Significant Accounting Policies (Policy)
9 Months Ended
Sep. 30, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation

Basis of Presentation

These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements. The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results. These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 2017 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K (“2017 Annual Report”) filed with the Securities and Exchange Commission (“SEC”). The year-end condensed balance sheet data was derived from audited financial statements for the year ended December 31, 2017, but does not include all annual disclosures required by GAAP.

Use of Estimates

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, depletion and amortization, determination of proved reserves, impairment of long-lived assets and asset retirement obligations. Actual results may differ from those estimates.

Fair Value Measurements

Fair Value Measurements

The Fund follows the accounting guidance for fair value measurement for measuring fair value of assets and liabilities in its financial statements. The Fund’s financial instruments consist of cash and cash equivalents, salvage fund, production receivable, other current assets, due to operators, accrued expenses, other current liabilities and long-term debt. Except for long-term debt, the carrying amounts of these instruments approximate fair value due to their short-term nature. The Fund’s salvage fund is a separate interest-bearing account that has no restrictions on withdrawals, therefore its carrying amount approximates fair value. The portion of the Fund’s investments in federal agency mortgage-backed securities are carried in the financial statements at fair value as noted below. The Fund’s long-term debt is valued using an income approach and classified as Level 3 in the fair value hierarchy. The Fund applies the provisions of the fair value measurement accounting guidance to its non-financial assets and liabilities, such as oil and gas properties and asset retirement obligations, on a non-recurring basis.

Salvage Fund

Salvage Fund

The Fund deposits cash in a separate interest-bearing account, or salvage fund, to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives in accordance with applicable federal and state laws and regulations. As of September 30, 2018 and December 31, 2017, the Fund had investments in federal agency mortgage-backed securities as detailed in the following table, which are classified as available-for-sale. Available-for-sale securities are carried in the financial statements at fair value. Mortgage-backed securities within the salvage fund are recorded based on Level 2 inputs, as such instruments trade in over-the-counter markets and the inputs are consistent with the Level 2 definition.

 

       Gross     
   Amortized   Unrealized   Fair 
   Cost   Gains   Value 
   (in thousands) 
Government National Mortgage Association security (GNMA July 2041) 
September 30, 2018  $46   $1   $47 
December 31, 2017  $46   $2   $48 

 

The unrealized gains on the Fund's investments in federal agency mortgage-backed securities were the result of fluctuations in market interest rates. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Unrealized gains or losses on available-for-sale debt securities are reported in other comprehensive income until realized.

 

For all investments, interest income is accrued as earned and amortization of premium or discount, if any, is included in interest income. Interest earned on the account will become part of the salvage fund. There are no restrictions on withdrawals from the salvage fund.

Asset Retirement Obligations

Asset Retirement Obligations

For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. Upon the determination that a property is either proved or dry, a retirement obligation is incurred. The Fund recognizes the fair value of a liability for an asset retirement obligation in the period incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs. Annually, or more frequently if an event occurs that would dictate a change in assumptions or estimates underlying the obligations, the Fund reassesses its asset retirement obligations to determine whether any revisions to the obligations are necessary. The Fund maintains a salvage fund to provide for the funding of future asset retirement obligations. The following table presents changes in asset retirement obligations for the following periods:

 

   Nine months ended September 30, 
   2018   2017 
   (in thousands) 
Balance, beginning of period  $1,401   $1,675 
Liabilities incurred   2    2 
Liabilities settled/relieved   (54)   (82)
Accretion expense   16    22 
Revision of estimates   -    (122)
Balance, end of period  $1,365   $1,495 

 

During the nine months ended September 30, 2017, the Fund recorded credits to depletion expense totaling $0.1 million related to an adjustment to the asset retirement obligation for a fully depleted property.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Fund reviews the carrying value of its oil and gas properties for impairment whenever events and circumstances indicate that the recorded carrying value of the assets may not be recoverable. Impairments are determined by comparing estimated future net undiscounted cash flows to the carrying value of the assets at the time of the review. If the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the asset is written down to estimated fair value, which is determined using a valuation technique that considers both market and income approaches and uses Level 3 inputs. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. 

 

There were no impairments of oil and gas properties during each of the three and nine months ended September 30, 2018 and 2017. Fluctuations in oil and natural gas prices may impact the fair value of the Fund’s oil and gas properties. If oil and natural gas prices decline, even if only for a short period of time, it is possible that impairments of oil and gas properties will occur.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on fair value measurement, which adds, among other things, disclosure requirements for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This accounting guidance is effective for the Fund in the first quarter 2020 with early adoption permitted. The Fund does not expect this accounting guidance will have a material impact on its financial statements upon adoption.

 

In May 2014, the FASB issued accounting guidance on revenue recognition (“New Revenue Standard”), which provides for a single five-step model to be applied to all revenue contracts with customers. In July 2015, the FASB issued a deferral of the effective date of the New Revenue Standard to 2018, with early adoption permitted in 2017. In March 2016, the FASB issued accounting guidance, which clarifies the implementation guidance on principal versus agent considerations in the New Revenue Standard. In April 2016, the FASB issued guidance on identifying performance obligations and licensing and in May 2016, the FASB issued final amendments which provided narrow scope improvements and practical expedients related to the implementation of the New Revenue Standard. The New Revenue Standard may be applied either retrospectively or through the use of a modified-retrospective method. Under the New Revenue Standard, the revenue associated with the Fund’s existing contracts will be recognized in the period that control of the related commodity is transferred to the customer, which is generally consistent with the Fund’s previous revenue recognition model. The Fund adopted the New Revenue Standard using the modified retrospective method on January 1, 2018. See Note 2. “Revenue Recognition” for the required disclosures related to the impact of adopting this guidance and a discussion of the Fund’s updated policies related to revenue recognition for revenue from contracts with customers.

XML 23 R13.htm IDEA: XBRL DOCUMENT v3.10.0.1
Organization and Summary of Significant Accounting Policies (Tables)
9 Months Ended
Sep. 30, 2018
Organization And Summary Of Significant Accounting Policies Tables  
Schedule of Available-For-Sale Securities

       Gross     
   Amortized   Unrealized   Fair 
   Cost   Gains   Value 
   (in thousands) 
Government National Mortgage Association security (GNMA July 2041) 
September 30, 2018  $46   $1   $47 
December 31, 2017  $46   $2   $48 

 

Schedule of Changes in Asset Retirement Obligations

   Nine months ended September 30, 
   2018   2017 
   (in thousands) 
Balance, beginning of period  $1,401   $1,675 
Liabilities incurred   2    2 
Liabilities settled/relieved   (54)   (82)
Accretion expense   16    22 
Revision of estimates   -    (122)
Balance, end of period  $1,365   $1,495 

 

XML 24 R14.htm IDEA: XBRL DOCUMENT v3.10.0.1
Organization and Summary of Significant Accounting Policies (Narrative) (Details)
$ in Thousands
9 Months Ended
Sep. 30, 2017
USD ($)
Organization And Summary Of Significant Accounting Policies Narrative Details  
Credits to depletion $ (100)
XML 25 R15.htm IDEA: XBRL DOCUMENT v3.10.0.1
Organization and Summary of Significant Accounting Policies (Schedule of Available-For-Sale Securities) (Details) - GNMA July 2041 [Member] - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Amortized Cost $ 46 $ 46
Gross Unrealized Gains 1 2
Fair Value $ 47 $ 48
XML 26 R16.htm IDEA: XBRL DOCUMENT v3.10.0.1
Organization and Summary of Significant Accounting Policies (Schedule of Changes in Asset Retirement Obligations) (Details) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Organization And Summary Of Significant Accounting Policies Schedule Of Changes In Asset Retirement Obligations Details    
Balance, beginning of period $ 1,401 $ 1,675
Liabilities incurred 2 2
Liabilities settled/relieved (54) (82)
Accretion expense 16 22
Revision of estimates (122)
Balance, end of period $ 1,365 $ 1,495
XML 27 R17.htm IDEA: XBRL DOCUMENT v3.10.0.1
Oil and Gas Properties (Details) - USD ($)
$ in Thousands
1 Months Ended 3 Months Ended 9 Months Ended
Aug. 10, 2018
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Dec. 31, 2017
Dec. 31, 2016
Cash received       $ 3,099    
Asset retirement obligation   $ 1,365 $ 1,495 1,365 1,495 $ 1,401 $ 1,675
Gain on sale   $ 899 $ 899    
Beta Project [Member]              
Working interest percentage 2.00%            
Working interest acquired by buyers 0.364%            
Total purchase price $ 3,300            
Carrying value 2,200            
Asset retirement obligation $ 40            
XML 28 R18.htm IDEA: XBRL DOCUMENT v3.10.0.1
Related Parties (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Related Party Transactions [Abstract]        
Annual management fee percentage rate 2.50%   2.50%  
Annual management fees paid to Fund Manager $ 93 $ 93 $ 280 $ 280
Percentage of total distributions allocated to Fund Manager 15.00%   15.00%  
XML 29 R19.htm IDEA: XBRL DOCUMENT v3.10.0.1
Credit Agreement - Beta Project Financing (Details) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Dec. 31, 2017
Debt Disclosure [Abstract]          
Credit agreement, maturity date     Dec. 31, 2022    
Overriding royalty interest 10.81%   10.81%    
Interest rate 8.75%   8.75%    
Gain on debt extinguishment $ 1,313 $ 1,313  
Non-cash gains associated with the change in fair value     1,300    
Change in fair value     $ 16    
Overriding royalty interest fair value measurement input 9.00%   9.00%    
Long-term debt fair value measurement input 9.25%   9.25%    
Fair value of debt $ 3,300   $ 3,300    
Long-term borrowings 3,200   3,200   $ 7,200
Unamortized debt discounts and deferred financing costs    
Amortization of financing costs 31 100  
Accrued interest    
Interest expense $ 100 $ 200 $ 400 $ 500  
XML 30 R20.htm IDEA: XBRL DOCUMENT v3.10.0.1
Commitments and Contingencies (Details)
$ in Thousands
9 Months Ended
Sep. 30, 2018
USD ($)
Commitments and Contingencies Disclosure [Abstract]  
Commitments for the drilling and development of investment properties $ 3,500
Commitments for asset retirement obligations included in estimated capital commitments 1,900
Commitments for the drilling and development of investment properties expected to be incurred in the next 12 months $ 2,000
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