UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended March 31, 2016
or

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

Commission file number: 001-16179

 

EPL Oil & Gas, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		72-1409562
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1021 Main Street, Suite 2626, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

(713) 351-3000

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

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

Large accelerated filer o		Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.Yes x No o

There is no market for the common stock of EPL Oil & Gas, Inc.

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		Page
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 3. Quantitative and Qualitative Disclosures about Market Risk			56
Item 4. Controls and Procedures			57
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			59
Item 1A. Risk Factors			59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 3. Defaults Upon Senior Securities			64
Item 4. Mine Safety Disclosures			64
Item 5. Other Information			64
Item 6. Exhibits			64
SIGNATURES			65
EXHIBIT INDEX			66

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements and information in this quarterly report on Form 10-Q (this “Quarterly Report”) may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors the Company believes are appropriate under the circumstances and their potential effect on us. While management believes that these forward-looking statements are reasonable, such statements are not guarantees of future performance and the actual results or developments anticipated may not be realized or, even if substantially realized, may not have the expected consequences to or effects on the Company’s business or results. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

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For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 (the “2015 Annual Report”), Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2015 and Part II, “Item 1A. Risk Factors” in this Quarterly Report.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date upon which they are made, whether as a result of new information, future events or otherwise.

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PART I — FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements.

EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		March 31, 2016				June 30, 2015
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	—			$	217
Trade accounts receivable – net			34,808				71,323
Derivative financial instruments			—				888
Restricted cash			6,027				6,024
Prepaid expenses			2,146				1,831
Total current assets			42,981				80,283
Property and equipment, net – full cost method of accounting, including $40.8 million and $435.4 million of unevaluated properties not being amortized at March 31, 2016 and June 30, 2015, respectively			389,939				1,415,025
Restricted cash			30,030				—
Other assets and debt issuance costs, net of accumulated amortization			608				1,039
Total assets		$	463,558			$	1,496,347
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Accounts payable		$	16,867			$	24,548
Due to EGC			315,894				170,728
Accrued liabilities			71,942				95,981
Asset retirement obligations			35,366				38,056
Derivative financial instruments			—				1,057
Promissory note payable to EGC			325,000				—
Current maturities of long-term debt due to EGC			266,567				—
Current maturities of long-term debt			313,089				3,364
Total current liabilities			1,344,725				333,734
Long-term debt, less current maturities			—				689,459
Promissory note payable to EGC			—				325,000
Asset retirement obligations			199,318				202,306
Total liabilities			1,544,043				1,550,499
Commitments and contingencies (Note 12)
Stockholder’s deficit:
Preferred stock, par value $0.001 per share. Authorized 1,000,000 shares; no shares issued and outstanding at March 31, 2016 and June 30, 2015			—				—
Common stock, par value $0.001 per share. Authorized 75,000,000 shares; shares issued and outstanding: 1,000 at March 31, 2016 and June 30, 2015			—				—
Additional paid-in capital			1,599,341				1,599,341
Accumulated deficit			(2,679,826	)			(1,653,493	)
Total stockholder’s deficit			(1,080,485	)			(54,152	)
Total liabilities and stockholder’s deficit		$	463,558			$	1,496,347

 
 
See accompanying Notes to Consolidated Financial Statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands)

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
Revenues
Oil sales		$	37,869			$	74,551			$	165,649			$	353,695
Natural gas sales			7,579				10,872				28,453				37,374
Gain (loss) on derivative financial instruments			—				(2,213	)			3,684				41,906
Total Revenues			45,448				83,210				197,786				432,975
Costs and expenses
Lease operating			33,053				49,571				90,095				161,175
Transportation			425				543				1,812				2,317
Depreciation, depletion and amortization			28,487				73,349				148,480				235,641
Accretion of asset retirement obligations			5,866				5,509				18,924				17,788
Impairment of oil and natural gas properties			115,625				404,254				928,475				1,094,566
Goodwill impairment			—				—				—				329,293
General and administrative expense			9,572				11,998				27,494				26,850
Taxes, other than on earnings			36				3,057				(860	)			7,529
Other			—				(3	)			—				18
Total costs and expenses			193,064				548,278				1,214,420				1,875,177
Operating Loss			(147,616	)			(465,068	)			(1,016,634	)			(1,442,202	)
Other income (expense):
Other income, net			24				6				2,429				10
Gain on early extinguishment of debt			—				—				21,269				—
Interest (expense) income, net, including debt premium amortization			359				(12,558	)			(33,397	)			(34,406	)
Total other income (expense), net			383				(12,552	)			(9,699	)			(34,396	)
Loss before income taxes			(147,233	)			(477,620	)			(1,026,333	)			(1,476,598	)
Income tax benefit			—				(181,987	)			—				(419,997	)
Net loss		$	(147,233	)		$	(295,633	)		$	(1,026,333	)		$	(1,056,601	)

 
 
See accompanying Notes to Consolidated Financial Statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

		Nine Months Ended March 31,
		2016				2015
Cash flows from operating activities:
Net loss		$	(1,026,333	)		$	(1,056,601	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			148,480				235,641
Accretion of asset retirement obligations			18,924				17,788
Gain on early extinguishment of debt			(21,269	)			—
Change in fair value of derivative financial instruments			(1,573	)			(13,043	)
Deferred income taxes			—				(419,997	)
Impairment of oil and natural gas properties			928,475				1,094,566
Goodwill impairment			—				329,293
Amortization of premium and debt issuance costs			(27,173	)			(7,688	)
Changes in operating assets and liabilities:
Trade accounts receivable			34,726				19,267
Prepaid expenses and other assets			(315	)			20,702
Accounts payable and accrued liabilities			(18,448	)			(90,559	)
Asset retirement obligation settlements			(68,031	)			(39,025	)
Net cash provided by (used in) operating activities			(32,537	)			90,344
Cash flows used in investing activities:
Property acquisitions			—				(350	)
Capital expenditures			(18,488	)			(271,496	)
Other property and equipment additions			—				(58	)
Net cash used in investing activities			(18,488	)			(271,904	)
Cash flows provided by (used in) financing activities:
Payments on long-term debt			(3,395	)			(325,000	)
Proceeds from intercompany promissory note			—				325,000
Cash restricted under revolving credit facility			(30,030	)			—
Advances from EGC			84,573				177,832
Debt issuance costs and other			(340	)			(1,778	)
Net cash provided by financing activities			50,808				176,054
Net decrease in cash and cash equivalents			(217	)			(5,506	)
Cash and cash equivalents at beginning of period			217				5,601
Cash and cash equivalents at end of period		$	—			$	95
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash investing and financing information:
Changes in capital expenditures accrued in accounts payable		$	(10,048	)		$	(76,689	)
Changes in asset retirement obligations			43,429				2,727
Advances from EGC applied to Revolving Credit Facility and bond repurchase			60,593				—
Cash paid during the period for:
Interest		$	45,750			$	51,024

 
 
See accompanying Notes to Consolidated Financial Statements.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 — Organization and Chapter 11 Proceedings

Nature of Operations

EPL Oil & Gas, Inc. (referred to herein as “we,” “our,” “us,” “EPL” or “the Company”) was incorporated as a Delaware corporation on January 29, 1998 and is a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (“EGC”), a Delaware corporation and an indirect wholly-owned subsidiary of Energy XXI Ltd, an exempted company under the laws of Bermuda and our ultimate parent company (“Energy XXI” or “parent”). We operate as an independent oil and natural gas exploration and production company with our current operations concentrated in the U.S. Gulf of Mexico shelf (the “GoM shelf”) focusing on state and federal waters offshore Louisiana, which we consider our core area.

Bankruptcy Proceedings and Restructuring Support Agreement

On April 14, 2016, the Company, Energy XXI, EGC and certain other subsidiaries of Energy XXI (excluding Energy XXI GIGS Services, LLC, which leases a subsea pipeline gathering system located in the shallow GoM shelf and storage and onshore processing facilities on Grand Isle, Louisiana) listed on Schedule 1 of the Restructuring Support Agreement (as defined below) (together with the Company, Energy XXI and EGC, the “Debtors”) filed voluntary petitions for reorganization (the petitions collectively, the “Bankruptcy Petitions”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 (“Chapter 11”) of the United States Bankruptcy Code (the “Bankruptcy Code”). The Debtors’ Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being administered under the caption “In re: Energy XXI Ltd, et al., Case No. 16-31928.” The Debtors will continue to operate their businesses and manage their assets as debtors-in-possession under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Concurrently with the filing of the Bankruptcy Petitions, Energy XXI filed a winding-up petition commencing an official liquidation proceeding under the laws of Bermuda before the Supreme Court of Bermuda. On April 15, 2016, John C. McKenna was appointed as provisional liquidator by the Supreme Court of Bermuda.

Prior to filing the Bankruptcy Petitions, on April 11, 2016, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with certain holders (the “Second Lien Noteholders”) of EGC’s 11.0% Senior Secured Second Lien Notes due 2020 (the “Second Lien Notes”), providing that the Second Lien Noteholders party thereto will support a restructuring of the Debtors, subject to the terms and conditions of the Restructuring Support Agreement. The restructuring transactions contemplated by the Restructuring Support Agreement will be effectuated through a joint prearranged plan of reorganization (as may be amended, restated, supplemented, or otherwise modified from time to time, the “Plan”). The Plan will represent a settlement of various issues, controversies, and disputes.

The Restructuring Support Agreement provides, among other things, that:

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

Milestones

The Restructuring Support Agreement also contains the following proposed milestones (the “Milestones”) for progress in the Chapter 11 proceedings:

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

The Majority Restructuring Support Parties have the right, but not the obligation, to terminate their obligations under the Restructuring Support Agreement upon the failure of the Debtors to meet any of the Milestones unless (i) such failure is the direct result of any act, omission, or delay on the part of any Restructuring Support Parties in violation of its obligations under the Restructuring Support Agreement or (ii) such Milestone is extended with the express prior written consent of the Majority Restructuring Support Parties.

Reorganization Process

On the Petition Date, the Bankruptcy Court issued certain additional interim and final orders with respect to the Debtors’ first-day motions and other operating motions that allow the Debtors to operate their businesses in the ordinary course. The first-day motions provided for, among other things, the payment of certain pre-petition employee and retiree expenses and benefits, the use of the Debtors’ existing cash management system, the payment of certain pre-petition amounts to certain critical vendors, the ability to pay certain pre-petition taxes and regulatory fees, and the payment of certain pre-petition claims owed on account

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 — Organization and Chapter 11 Proceedings  – (continued)

of insurance policies and programs. With respect to those first-day motions for which only interim approval has been granted, the Bankruptcy Court had scheduled final hearings on such motions for May 13, 2016, which have been subsequently rescheduled to May 19, 2016 at the request of the unsecured creditors’ committee.

Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors’ may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions, including approval of the majority of Majority Restructuring Support Parties in accordance with the Restructuring Support Agreement.

A Chapter 11 plan (including the Plan) determines the rights and satisfaction of claims and interests of various creditors and security holders and is subject to the ultimate outcome of negotiations and the Court’s decisions through the date on which a Chapter 11 plan (including the Plan) is confirmed. The Debtors currently expect that any proposed Chapter 11 plan (including the Plan), among other things, would provide mechanisms for settlement of the Debtors’ pre-petition obligations, changes to certain operational cost drivers, treatment of Energy XXI’s existing equity holders, potential income tax liabilities and certain corporate governance and administrative matters pertaining to the reorganized New Entity. Any proposed Chapter 11 plan will (and the Plan may) be subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Debtors’ creditors, including the Lenders under the Revolving Credit Facility and holders of the EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, and EXXI Convertible Notes Claims, and other interested parties, and thereafter in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court. There can be no assurance that the Debtors will be able to secure approval for the Plan or any other Chapter 11 plan from the Bankruptcy Court or that any Chapter 11 plan will be accepted by the Debtors’ creditors.

Under the priority rankings established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a Chapter 11 plan (including the Plan). The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a Chapter 11 plan (including the Plan). No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. A Chapter 11 plan (including the Plan) could result in holders of certain liabilities and/or securities, including common stock, receiving no distribution on account of their interests. Because of such possibilities, there is significant uncertainty regarding the value of our liabilities and securities, including our common stock. At this time, there is no assurance we will be able to restructure as a going concern or successfully propose or implement a Chapter 11 plan (including the Plan).

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Principles of Consolidation and Reporting.  The accompanying consolidated financial statements include the accounts of EPL and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All significant intercompany transactions are eliminated in consolidation. Our interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated.

For the three and nine months ended March 31, 2016 and 2015, the consolidated financial statements have not been modified to reflect the bankruptcy filing. For periods subsequent to filing the Bankruptcy Petitions, the Company will apply the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the Chapter 11 Cases will be recorded in a reorganization line item on the consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process will be classified on the balance sheet in liabilities subject to compromise. These liabilities will be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

Interim Financial Statements.  The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. The results of operations for the interim period are not necessarily indicative of the results that will be realized for the entire fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2015 Annual Report.

Going Concern Matters.  The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, although the Bankruptcy Petitions noted above and sustained depressed commodity prices raise substantial doubt about our ability to continue as a going concern. Accordingly, the financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that would be required should we be unable to continue as a going concern.

Use of Estimates.  The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates of proved reserves are key components of our depletion rate for our proved oil and natural gas properties and the full cost ceiling test limitation. Other items subject to estimates and assumptions include fair value estimates used in accounting for acquisitions and dispositions; carrying amounts of property, plant and equipment; goodwill; asset retirement obligations; deferred income taxes; and valuation of derivative financial instruments, among others. Accordingly, our accounting estimates require the exercise of judgment by management in preparing such estimates. While we believe that the estimates and assumptions used in preparation of our consolidated financial statements are appropriate, actual results could differ from those estimates, and any such differences may be material.

Recent Accounting Pronouncements.  In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements  – (continued)

will supersede most current revenue recognition guidance. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09. With the one-year deferral, ASU No. 2014-09 is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU No. 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are evaluating the impact of the pending adoption of ASU No. 2014-09 on our financial position and results of operations and have not yet determined the method that will be adopted.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU No. 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. Our early adoption of ASU No. 2014-15 during the quarter ended December 31, 2015 impacted our disclosures but had no effect on our consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30). ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In June 2015, the FASB issued ASU No. 2015-15 as an amendment to this guidance to address the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements. The SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

The ASU is effective for public entities for annual periods beginning after December 15, 2015, and interim periods within those annual reporting periods. Early adoption is permitted for financial statements that have not been previously issued. The guidance will be applied on a retrospective basis. As a result of adopting ASU No. 2015-15, debt issuance costs will be presented in our consolidated balance sheets as a reduction in the carrying amount of the related debt liability, although we are continuing to evaluate the impact of ASU No. 2015-15 as it relates to debt issuance costs associated with line-of-credit arrangements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 simplifies the presentation of deferred taxes on the balance sheet by requiring classification of all deferred tax items as noncurrent including valuation allowances by jurisdiction. The ASU is effective for public entities for annual periods beginning after December 15, 2016, and interim periods within those annual reporting periods. Early adoption is permitted as of the beginning of any interim or annual reporting period. Our early adoption of ASU No. 2015-17 during the quarter ended December 31, 2015 had no effect on our consolidated financial position, results of operations or cash flows other than presentation.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 2 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements  – (continued)

In February 2016, the FASB issued ASU No. 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification and creating Topic 842, Leases. The guidance in this ASU supersedes Topic 840, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the provisions of this new standard and assessing the impact it may have on our consolidated financial position, results of operations or cash flows.

Note 3 — Liquidity and Capital Resources

As of March 31, 2016, we had no cash or cash equivalents and no available borrowing capacity under our Revolving Credit Facility. As of March 31, 2016, the total carrying value of our indebtedness was $904.6 million and was classified as current due to covenant violations that existed at March 31, 2016 and that were not cured prior to the Bankruptcy Petitions filed by us on April 14, 2016. Our indebtedness was comprised of $99.4 million of secured indebtedness outstanding under our Revolving Credit Facility, $325.0 million of secured indebtedness payable to EGC and $480.2 million of unsecured notes of which $266.6 million are held by EGC.

Liquidity Before Filing Under Chapter 11 of the United States Bankruptcy Code

We have historically funded our operations primarily through cash flows from operating activities and advances from EGC, which historically has funded its operations primarily through cash flows from operating activities, borrowings under the Revolving Credit Facility, proceeds from the issuance of debt and equity securities and proceeds from asset sales. However, future cash flows are subject to a number of variables, and are highly dependent on the prices we receive for oil and natural gas. Oil and natural gas prices declined severely during fiscal year 2015 and have declined even further through fiscal 2016 to date. The price of WTI crude oil per barrel dropped below $27.00 per barrel in January 2016 for the first time in twelve years. Although oil prices have rebounded above $40.00 per barrel in April and May 2016, there is still significant volatility in commodity prices and these prices are still significantly lower than the industry has experienced in recent years. These lower commodity prices have negatively impacted revenues, earnings and cash flows, and sustained low oil and natural gas prices will have a material and adverse effect on our liquidity position.

As a result of the material adverse effect of commodity price declines on EGC’s liquidity position, uncertainty arose in the third quarter of fiscal 2016 as to whether EGC would be able to deliver the quarterly compliance certificate required under the Revolving Credit Facility, which among other things, requires that EGC make certain representations regarding its solvency and ongoing compliance with the financial ratios under the Revolving Credit Facility. In light of this uncertainty, on February 29, 2016, we and EGC entered into the Thirteenth Amendment and Waiver to the Revolving Credit Facility described below (the “Thirteenth Amendment”) which, among other things, waived EGC’s requirement to deliver a compliance certificate for the fiscal quarter ended December 31, 2015. On March 14, 2016, we and EGC entered into the Fourteenth Amendment and Waiver to the Revolving Credit Facility (the “Fourteenth Amendment”), which, among other things, extended the term of the waiver of the compliance certificate included in the Thirteenth Amendment until April 15, 2016.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 3 — Liquidity and Capital Resources  – (continued)

In addition to providing that EGC was not required to deliver a compliance certificate for the fiscal quarter ended December 31, 2015 until its expiration date, the following additional changes to the First Lien Credit Agreement became effective upon the execution of the Thirteenth Amendment:

The Fourteenth Amendment further provided for the reduction of our borrowing base under the First Lien Credit Agreement. EGC’s borrowing base under the First Lien Credit Agreement as of the effectiveness of the Fourteenth Amendment was reduced from $500 million to $377.8 million, with such reduction effectively removing any further borrowing capacity under the First Lien Credit Agreement beyond an aggregate amount equal to the amount of outstanding letters of credit that have been issued thereunder plus the amount of outstanding loans to us thereunder. The Fourteenth Amendment further provided that EGC unwind certain hedging transactions and use the proceeds therefrom to repay amounts of outstanding loans to us under the First Lien Credit Agreement, and for such repayments to then result in an automatic and permanent reduction in our borrowing base. Accordingly, on March 15, 2016, EGC unwound and monetized all of its outstanding crude oil and natural gas contracts and received $50.6 million and paid this amount to reduce our borrowing base. As of March 31, 2016, EGC’s borrowing base was $327.2 million and our portion of that borrowing base was $99.4 million.

In addition, in response to commodity price declines, our fiscal year 2016 capital budget was substantially reduced compared to actual capital expenditures in fiscal year 2015. Due to the depressed commodity prices and our lack of capital resources to develop our properties, the Company believed that all of its proved undeveloped oil and gas reserves no longer qualified as being proved as of the period ended December 31, 2015. As a result, we removed all of our proved undeveloped oil and gas reserves from the proved category as of December 31, 2015. Almost all of the proved undeveloped reserves that were removed from the proved category as of December 31, 2015 are still economic at current prices, but were reclassed to the probable category because they are no longer expected to be drilled within five years of initial booking due to current constraints on our ability to fund development drilling. In addition, as of December 31, 2015, we identified certain of our unevaluated properties totaling $314.4 million as being uneconomical and transferred such amounts to the full cost pool, subject to amortization. The curtailment of the development of our properties will eventually lead to a decline in our production and reserves which would further reduce our liquidity and ability to satisfy our debt obligations by negatively impacting our cash flow from operating activities and the value of our assets.

Our liquidity may be further adversely affected if the BOEM requires us to provide additional bonding as a means to assure our decommissioning obligations, such as the plugging of wells, the removal of platforms and other offshore facilities, the abandonment of offshore pipelines and the clearing of the seafloor of obstructions, or if the surety companies providing such bonds on our behalf require us to provide additional cash collateral for such new or existing bonds. Any further expense in providing additional bonds or restrictions on our cash to collateralize existing bonds or new bonds would further reduce our liquidity.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 3 — Liquidity and Capital Resources  – (continued)

As a result of continued decreases in commodity prices and our substantial debt burden, we continued throughout the third quarter of fiscal 2016 to work with our financial and legal advisors to analyze a variety of solutions to reduce our overall financial leverage, while maintaining primary focus on preserving liquidity. As part of this process, we engaged in discussions with certain of our debtholders and other stakeholders to develop and implement a comprehensive plan to restructure our balance sheet. As previously disclosed, as part of these ongoing discussions, on February 16, 2016, we had elected to enter into the 30-day grace period under the terms of the indenture governing our outstanding 8.25% Senior Notes due February 2018 (the “8.25% Senior Notes”) to extend the timeline for making the cash interest payment to March 17, 2016. In February 2016, EGC also repurchased $266.6 million of the 8.25% Senior Notes in open market transactions at a total cost of approximately $11.4 million, including accrued interest of $10.4 million, as described below in Note 7 — Long-Term Debt, and continues to hold those securities. Contemporaneously with these initial restructuring discussions, on March 8, 2016, our board of directors appointed James R. Latimer, III as an additional independent member of our board of directors to ensure that the interests of our stakeholders would be appropriately considered and protected. Mr. Latimer, as the sole member of an independent Special Committee established by our board of directors, was and continues to be tasked with reviewing and evaluating, in connection with any potential restructuring transaction, the treatment of the 8.25% Senior Notes, the treatment of the Promissory Note, and any matters on which an actual conflict exists between us and any of the other Debtors. Mr. Latimer, through the Company, engaged the law firm of Porter Hedges LLP to assist him in carrying out these duties.

On March 15, 2016, as part of our ongoing discussions with certain of our debtholders, EGC elected to make the deferred interest payment on the 8.25% Senior Notes, while also electing not to make the interest payments due on the Second Lien Notes and on EGC’s 6.875% Senior Notes due 2024, commencing a new 30-day grace period. During the new 30-day grace period, we continued discussions with an ad hoc committee of Second Lien Noteholders and a steering committee of Lenders under the Revolving Credit Facility regarding a potential restructuring. On April 11, 2016, we entered into the Restructuring Support Agreement with certain of the Second Lien Noteholders. Pursuant to the Restructuring Support Agreement, we expect to eliminate substantially all of our prepetition indebtedness other than indebtedness under the Revolving Credit Facility, resulting in a significantly deleveraged capital structure. For more information regarding the Restructuring Support Agreement, see Note 1 — Organization and Chapter 11 Proceedings. On April 14, 2016, the Debtors filed Bankruptcy Petitions in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code.

Liquidity After Filing Under Chapter 11 of the United States Bankruptcy Code

As described in Note 1 — Organization and Chapter 11 Proceedings, the filing of the Bankruptcy Petitions constituted an event of default with respect to our existing debt obligations. However, subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

The Bankruptcy Court has approved payment of certain pre-petition obligations, including payments for employee wages, salaries and certain other benefits, customer programs, taxes, utilities, insurance, surety bond premiums as well as payments to critical vendors and possessory lien vendors. Despite the liquidity provided by EGC’s existing cash on hand, our ability to maintain normal credit terms with our suppliers may become impaired. We may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would further reduce our liquidity. If liquidity problems persist, our

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 3 — Liquidity and Capital Resources  – (continued)

suppliers could refuse to provide key products and services in the future. In addition, due to the public perception of our financial condition and results of operations, in particular with regard to our potential failure to meet our debt obligations, some vendors could be reluctant to enter into long-term agreements with us.

Although we have lowered our capital budget and reduced the scale of our operations significantly, our business remains capital intensive. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with our Chapter 11 proceedings (approximately $2.8 million through March 31, 2016, of which approximately $0.1 million was capitalized as debt issue costs) and expect that we will continue to incur significant professional fees and other restructuring costs throughout our Chapter 11 proceedings, including adequate protection payments required under the Interim Cash Collateral Order. Assuming that the Chapter 11 proceedings do not interrupt our ability to draw from cash on hand at EGC (including approximately $159 million of cash on hand at EGC as of March 31, 2016 and funds generated from ongoing operations at EGC and EPL), we believe we have sufficient liquidity to fund anticipated cash requirements through the Chapter 11 proceedings for minimum operating and capital expenditures and for working capital purposes and excluding principal and interest payments on our outstanding debt. As such, we expect to pay vendor, royalty and surety obligations on a go-forward basis according to the terms of our current contracts and consistent with applicable court orders approving such payments. We do not intend to seek debtor-in-possession (“DIP”) financing at this time. However, given the current level of volatility in the market and the unpredictability of certain costs that could potentially arise in our operations, our liquidity needs could be significantly higher than we currently anticipate. There are no assurances that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases, allow us to proceed with the confirmation of a Chapter 11 plan of reorganization and allow us to emerge from bankruptcy. We can provide no assurance that we will be able to secure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms.

The Court has entered an Interim Cash Collateral Order authorizing the Debtors’ use of cash collateral in accordance with the terms of such order and the cash collateral budget described therein. The Bankruptcy Court had scheduled a final hearing on the Cash Collateral Motion for May 13, 2016, which has been subsequently rescheduled to May 19, 2016 at the request of the unsecured creditors’ committee. If the Bankruptcy Court enters a final order approving the Cash Collateral Motion, the Debtors will have the conditional authority, subject to the terms and conditions of the Bankruptcy Court’s orders, the Restructuring Support Agreement, and the cash collateral budget, to use cash collateral for a certain period of time from the Petition Date, and the Debtors have agreed to pursue the confirmation and implementation of the Plan within that period of time. The Debtors’ use of cash collateral is critical to their ability to operate during the course of the Chapter 11 Cases, to remain current on their post-petition operating costs, to pursue a reorganization pursuant to the Plan and to emerge successfully as a going concern from the Chapter 11 proceedings.

Our ability to maintain adequate liquidity through the reorganization process and beyond depends on our and EGC’s ability to successfully implement the Plan (or another Chapter 11 plan), successful operation of our business, and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors. If we are unable to meet our liquidity needs, we may have to take other actions to seek additional financing to the extent available or we could be forced to consider other alternatives to maximize potential recovery for the creditors, including possible sale of the Company or certain material assets pursuant to Section 363 of the Bankruptcy Code, or a liquidation under Chapter 7 of the Bankruptcy Code.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 4 — Pushdown Accounting and Goodwill

On June 3, 2014, Energy XXI, EGC, Clyde Merger Sub, Inc., a wholly owned subsidiary of EGC (“Merger Sub”), and EPL, completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 12, 2014 (as amended, the “Merger Agreement”), by and among Energy XXI, EGC, Merger Sub, and EPL, pursuant to which Merger Sub was merged with and into EPL with EPL continuing as the surviving corporation (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), the issued and outstanding shares of EPL common stock, par value $0.001 per share (“EPL Common Stock”), were converted, in the aggregate, into the right to receive merger consideration (the “Merger Consideration”) consisting of approximately 65% in cash and 35% in shares of common stock of Energy XXI, par value $0.005 per share (“Energy XXI Common Stock”). The Merger resulted in EPL becoming an indirect, wholly owned subsidiary of Energy XXI. Therefore, in the preparation of our financial statements, we have applied “pushdown” accounting, based on guidance from the Securities and Exchange Commission (“SEC”). Pushdown accounting refers to the use of the acquiring entity’s basis of accounting in the preparation of the acquired entity’s financial statements.

In accordance with the acquisition method of accounting, the purchase price established in the Merger was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The excess of the total consideration over the estimated fair value of the amounts initially assigned to the identifiable assets acquired and liabilities assumed was recorded as goodwill. Goodwill recorded in connection with the Merger is not deductible for income tax purposes.

ASC 350, Intangibles — Goodwill and Other (ASC 350), requires that intangible assets with indefinite lives, including goodwill, be evaluated for impairment on an annual basis or more frequently if events occur or circumstances change that could potentially result in impairment. Our annual goodwill impairment test is performed during the third quarter each fiscal year.

Impairment testing for goodwill is performed at the reporting unit level. We have only one reporting unit, which includes all of our oil and natural gas properties. Accordingly, all of our goodwill, as well as all of our other assets and liabilities, are included in our single reporting unit.

At September 30, 2014, we conducted a qualitative goodwill impairment assessment by examining relevant events and circumstances that could have a negative impact on our goodwill, such as macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, dispositions and acquisitions, and any other relevant events or circumstances. After assessing the relevant events and circumstances for the qualitative impairment assessment, we determined that performing a quantitative goodwill impairment test was necessary. In the first step of the goodwill impairment test, we determined that the fair value of our reporting unit was less than the carrying amount, including goodwill, primarily due to price deterioration in forward pricing curves for oil and natural gas and an increase in our weighted average cost of capital used to estimate fair value, both factors which adversely impacted the fair value of our estimated reserves. Therefore, we performed the second step of the goodwill impairment test, which led us to conclude that there was no remaining implied fair value attributable to goodwill. As a result, we recorded a goodwill impairment charge of $329.3 million to reduce the carrying value of goodwill to zero at September 30, 2014.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 4 — Pushdown Accounting and Goodwill  – (continued)

In estimating the fair value of our reporting unit and our estimated reserves, we used an income approach which estimated fair value primarily based on the anticipated cash flows associated with our estimated reserves, discounted using a weighted average cost of capital rate based on market participant data. The estimation of the fair value of our reporting unit includes the use of significant inputs not observable in the market, such as estimates of reserves quantities, the weighted average cost of capital (discount rate), future pricing beyond a certain period and estimated future capital and operating costs. The use of these unobservable inputs resulted in the fair value estimate being classified as a Level 3 measurement. Although we believe the assumptions and estimates used in the fair value calculation of our reporting unit are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions.

Note 5 — Property and Equipment

The following table summarizes our property and equipment.

		March 31, 2016				June 30, 2015
		(In thousands)
Proved oil and natural gas properties		$	3,442,675			$	2,993,012
Unevaluated oil and natural gas properties			40,751				435,429
Other			—				3,116
Less: accumulated depreciation, depletion, amortization and impairment			(3,093,487	)			(2,016,532	)
Total property and equipment, net of accumulated depreciation, depletion, amortization and impairment		$	389,939			$	1,415,025

At March 31, 2016 and June 30, 2015, our investment in unevaluated properties primarily relates to the fair value of unproved oil and natural gas properties determined during the Merger. Costs associated with unevaluated properties are transferred to evaluated properties upon the earlier of 1) a determination as to whether there are any proved reserves related to the properties, or 2) ratably over a period of time of not more than four years. As of December 31, 2015, we had identified certain of our unevaluated properties totaling $314.4 million as being uneconomical and transferred such amounts to the full cost pool, subject to amortization.

Due to the depressed commodity prices and our lack of capital resources to develop our properties, we believed that all of our proved undeveloped oil and gas reserves no longer qualified as being proved as of the period ended December 31, 2015. As a result, we removed all of our proved undeveloped oil and gas reserves from the proved category as of December 31, 2015. Almost all of the proved undeveloped reserves that were removed from the proved category as of December 31, 2015 are still economic at current prices, but were reclassed to the probable category because they are no longer expected to be drilled within five years of initial booking due to current constraints on ability to fund development drilling.

Under the full cost method of accounting at the end of each financial reporting period, we compare the present value of estimated future net cash flows from proved reserves (computed using the unweighted arithmetic average of the first-day-of-the-month historical price, net of applicable differentials, for each month within the previous 12-month period discounted at 10%, plus the lower of cost or fair market value of unproved properties and excluding cash flows related to estimated abandonment costs associated with developed properties) to the net full cost pool of oil and natural gas properties, net of related deferred income taxes. We refer to this comparison as a “ceiling test.” If the net capitalized costs of these oil and natural gas properties exceed the estimated discounted future net cash flows, we are required to write-down the value of our oil and natural gas properties to the amount of the discounted cash flows. For the three and nine months ended March 31, 2016, our ceiling test computations resulted in impairments of our oil and natural gas

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 5 — Property and Equipment  – (continued)

properties of $115.6 million and $928.5 million, respectively. If the current low commodity price environment or downward trend in oil and natural gas prices continues, we will incur further impairment to our full cost pool in fiscal 2016 based on the average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the previous 12-month period under the SEC pricing methodology.

Note 6 — Asset Retirement Obligations

The following table reconciles the changes to our asset retirement obligations.

		Nine Months Ended March 31, 2016
		(in thousands)
Beginning of period total		$	240,362
Accretion expense			18,924
Liabilities incurred			27,095
Revisions*			16,334
Liabilities settled			(68,031	)
End of period total			234,684
Less: End of period, current portion			(35,366	)
End of period, noncurrent portion		$	199,318

Note 7 — Long Term Debt

On April 14, 2016, the Debtors filed Bankruptcy Petitions in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code under the caption “In re: Energy XXI Ltd, et al., Case No. 16-31928.” The filing of the Bankruptcy Petitions constituted an event of default with respect to our existing debt obligations. As a result of the covenant violations that existed at March 31, 2016 and that were not cured prior to the filing of the Bankruptcy Petitions, our pre-petition secured indebtedness under the Revolving Credit Facility and unsecured notes became immediately due and payable and any efforts to enforce such payment obligations are automatically stayed as a result of the Chapter 11 Cases. Accordingly, all of our outstanding indebtedness has been classified as current in the accompanying consolidated balance sheet at March 31, 2016, and we accelerated the amortization of the fair value debt premium associated with our unsecured notes, fully amortizing that amount as of March 31, 2016. We currently believe that it is probable that we may enter into a potential restructuring agreement with the lenders under our Revolving Credit Facility. Accordingly, we have not accelerated the amortization of remaining debt issue costs related to the Revolving Credit Facility. We continue to accrue interest on the Revolving Credit Facility subsequent to the Bankruptcy Petition date of April 14, 2016 since we anticipate that such interest will be allowed by the Bankruptcy Court to be paid to the Lenders. However, for all our other indebtedness, in accordance with accounting guidance in ASC 852, Reorganizations, we will accrue interest only up to the pre-Bankruptcy Petition date of April 13, 2016. Additional information regarding the Chapter 11 proceedings is included in Note 1 — Organization and Chapter 11 Proceedings.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7 — Long Term Debt  – (continued)

The following table sets forth our indebtedness.

		March 31, 2016				June 30, 2015
		(In thousands)
8.25% Senior Notes due 2018		$	213,677			$	510,000
8.25% Senior Notes due 2018 due to EGC			266,567				—
Debt premium on 8.25% Senior Notes due 2018			—				29,459
Revolving Credit EPL Sub-Facility			99,412				150,000
Promissory note payable to EGC			325,000				325,000
Derivative instruments premium financing			—				3,364
Total debt			904,656				1,017,823
Less current maturities			(904,656	)			(3,364	)
Long term debt		$	—			$	1,014,459

During the nine months ended March 31, 2016, we repurchased $29.8 million in aggregate principal amount of the 8.25% Senior Notes in open market transactions at a total cost of approximately $10.5 million, including accrued interest of $0.5 million, and we recorded a gain on this repurchase of approximately $21.3 million, including the amount of associated unamortized premium. These repurchased notes were cancelled. During the three months ended March 31, 2016, EGC purchased $266.6 million in aggregate principal amount of the 8.25% Senior Notes in open market transactions at a total cost of approximately $11.4 million, including accrued interest of $10.4 million, and continues to hold those securities. However, because these notes were not cancelled by EGC, these notes remain included in the total 8.25% Senior Notes reflected in the table above. See below for further discussion of our 8.25% Senior Notes.

Revolving Credit EPL Sub-Facility

The Revolving Credit Facility was entered into in May 2011, but was most recently amended under the Fourteenth Amendment, the Thirteenth Amendment, the Twelfth Amendment to the First Lien Credit Agreement on November 30, 2015 (the “Twelfth Amendment”) and the Eleventh Amendment and Waiver to the First Lien Credit Agreement on July 31, 2015 (the “Eleventh Amendment”). The Revolving Credit Facility currently has a maximum facility amount and borrowing base of $327.2 million, of which such amount $99.4 million is the borrowing base under the sub-facility established for EPL. Borrowings under the First Lien Credit Agreement are limited to a borrowing base based on oil and natural gas reserve values, which are redetermined on a periodic basis. The scheduled date of maturity of the First Lien Credit Agreement was April 9, 2018.

The Revolving Credit Facility permitted EGC to make a loan to us in the amount of $325 million using proceeds from the incurrence of additional permitted second lien or third lien indebtedness and permitted us to secure such loan by providing liens on substantially all of our assets that are second in priority to the liens of the lenders under the First Lien Credit Agreement pursuant to the terms of an intercreditor agreement. The Revolving Credit Facility restricted the transfer of EGC’s rights in respect of such loan or the making of any prepayment or otherwise modifying the terms of such arrangements.

The Revolving Credit Facility is secured by mortgages on at least 90% of the value of EGC and its subsidiaries’ (other than us and our subsidiaries until they shall have become guarantors of the EGC indebtedness under the First Lien Credit Agreement) proved reserves and proved developed producing reserves, but with the threshold for our and our subsidiaries’ properties (until they shall have become guarantors of the EGC indebtedness under the First Lien Credit Agreement) at 85%. Additionally, we are required to maintain $30 million of restricted cash in an account subject to a control agreement in favor of the administrative agent under the First Lien Credit Agreement.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7 — Long Term Debt  – (continued)

EGC’s election to not make an interest payment on our 8.25% Senior Notes due on February 16, 2016 commenced a 30-day grace period, although such an election did not constitute an event of default under the indenture governing the 8.25% Senior Notes or any other debt instruments; however, under the Revolving Credit Facility agreement, the missed payment constituted a default under which no portion of the outstanding principal amount may be continued as a London Interbank Offered Rate (“LIBOR”), plus applicable margins ranging from 2.75% to 3.75% rate loan. Accordingly, on February 25, 2016, all of the outstanding principal amount was subjected to an alternate base rate based on the federal funds effective rate plus applicable margins ranging from 1.75% to 2.75%. The applicable commitment fee under the facility is 0.50%. As a result of the filing of the Bankruptcy Petitions described in Note 1 — Organization and Chapter 11 Proceedings, the highest of the margins currently applies and default interest is accruing under the facility.

Lender consent is required for any asset disposition that would have the effect of reducing the borrowing base by more than $5 million in the aggregate.

On February 29, 2016, the Thirteenth Amendment became effective and on March 14, 2016, the Fourteenth Amendment became effective, extending the term of the Thirteenth Amendment until April 15, 2016.

The Thirteenth and Fourteenth Amendments provided that EGC was not required to deliver a compliance certificate for the fiscal quarter ended December 31, 2015 until their respective expiration dates. The following additional changes to the First Lien Credit Agreement became effective upon the execution of the Thirteenth Amendment:

The Fourteenth Amendment provided for the reduction of our borrowing base under the First Lien Credit Agreement. EGC’s borrowing base under the First Lien Credit Agreement as of the effectiveness of the Fourteenth Amendment was reduced from $500 million to $377.8 million, with such reduction effectively removing any further borrowing capacity under the First Lien Credit Agreement beyond an aggregate amount equal to the amount of outstanding letters of credit that have been issued thereunder plus the amount of outstanding loans to us thereunder. In connection with such reduction, the Fourteenth Amendment provided that EGC unwind certain hedging transactions and use the proceeds therefrom to repay amounts of outstanding loans to us under the First Lien Credit Agreement, and for such repayments to then result in an automatic and permanent reduction in our borrowing base. This further reduction in borrowing base was for both the overall borrowing base under the First Lien Credit Agreement as well as the borrowing base specific to us, and in each case, the reduction is an amount equal to the full extent of the aggregate amount of repaid principal relating to such unwound hedging transactions.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7 — Long Term Debt  – (continued)

The Fourteenth Amendment continued to allow EGC to get replacement letters of credit under the First Lien Credit Agreement without satisfying credit extension conditions so long as the replacement letter of credit did not have an aggregate face amount in excess of the available amount of the letter of credit being replaced and certain other conditions set forth in the Fourteenth Amendment were met.

As of March 31, 2016, we had $99.4 million in borrowings under the First Lien Credit Agreement. On April 14, 2016, however, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the Revolving Credit Facility and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, the Debtors, on behalf of the holders of the First Lien Claims arising on account of the Revolving Credit Facility and subject to further negotiations with the Lenders, have agreed to use their best efforts to ensure that at emergence from the Chapter 11 proceedings, the amount drawn under the Revolving Credit Facility either (i) remains outstanding or (ii) is refinanced with a new facility with terms acceptable to the Majority Restructuring Support Parties; provided, however that (a) $228 million of letters of credit usage remains outstanding and (b) other terms, including a borrowing base redetermination holiday, are acceptable to the Debtors and the Majority Restructuring Support Parties. If the Debtors are unable to obtain the foregoing treatment of the First Lien Claims, then the Debtors will use their best efforts to obtain treatment acceptable to the Debtors and the Majority Restructuring Support Parties. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

Promissory Note

On March 12, 2015, in connection with EGC’s issuance of the Second Lien Notes, we entered into a $325.0 million secured second lien promissory note between us, as the maker, and EGC, as the payee (the “Promissory Note”). Proceeds from the Promissory Note were used to repay a like amount of the outstanding borrowings under the Revolving Credit EPL Sub-Facility. The Promissory Note bears interest at an annual rate of 10%, has a maturity date of October 9, 2018, and is secured by a second priority lien on certain of our assets that secure the obligations under the First Lien Credit Agreement. EGC may release the collateral securing the Promissory Note at any time. The note has not been, and will not be, registered under the Securities Act of 1933, as amended or the securities laws of any other jurisdiction. We have an option to prepay this note in whole or in part at any time, without penalty or premium. The note bears interest from the date of issuance with interest due quarterly, in arrears, on January 5^th, April 5^th, July 5^th, and October 5^th, beginning September 5, 2015.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the Promissory Note and accelerated the indebtedness thereunder. The treatment of the Promissory Note will be determined in accordance with the Plan. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7 — Long Term Debt  – (continued)

8.25% Senior Notes due 2018

The 8.25% Senior Notes consist of $510.0 million in aggregate principal amount ($480.2 million carrying value at March 31, 2016, including $266.6 million held by EGC) of our 8.25% senior notes due 2018 issued under an Indenture dated February 14, 2011 (the “2011 Indenture”). The 8.25% Senior Notes bear interest from the date of their issuance at an annual rate of 8.25% with interest due semi-annually, in arrears, on February 15^th and August 15^th of each year. The 8.25% Senior Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured senior basis initially by each of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries). The 8.25% Senior Notes will mature on February 15, 2018.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the indenture governing the 8.25% Senior Notes and accelerated the indebtedness thereunder. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, if the holders of the EPL Unsecured Notes Claims vote to accept the Plan, then such holders will receive their pro rata share of the Warrant Package. If, however, the holders of such claims vote to reject the Plan, then such holders will not receive a distribution under the Plan. Subject to the terms of the Plan, the Warrant Package will be divided amongst the classes of EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, or EXXI Convertible Notes Claims, consistent with their respective legal entitlements. However, even if our Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of our Plan, and certain parties in interest may file objections to the Plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of our Plan are received from creditors entitled to vote on the Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Plan.

Derivative Instruments Premium Financing

We have historically financed premiums on derivative instruments that we purchase with our hedge counterparties. Substantially all of our hedge transactions were with lenders under the Revolving Credit EPL Sub-Facility. Derivative instruments premium financing is accounted for as debt and this indebtedness is pari passu with borrowings under the Revolving Credit EPL Sub-Facility. The derivative instruments premium financing is structured to mature when the derivative instrument settles so that we realize the value, net of derivative instrument premium financing. As of March 31, 2016, we had no outstanding derivative instruments premium financing.

Interest Expense

Filing of the Bankruptcy Petitions on April 14, 2016 constituted an event of default with respect to our existing debt obligations. Accordingly the Company’s pre-petition secured indebtedness under the Revolving Credit Facility, secured indebtedness payable to EGC and unsecured notes became immediately due and payable and any efforts to enforce such payment obligations are automatically stayed as a result of the Chapter 11 Cases. As a result of the covenant violations that existed at March 31, 2016 and that were not cured prior to the filing of the Bankruptcy Petitions, all of our outstanding indebtedness has been classified as current in the accompanying consolidated balance sheet at March 31, 2016, and we accelerated the amortization of the associated unsecured debt premium, fully amortizing that amount as of March 31, 2016. We currently believe that it is probable that we may enter into a potential restructuring agreement with the lenders under our Revolving Credit Facility. Accordingly, we have not accelerated the amortization of remaining debt issue costs related to the Revolving Credit Facility. We continue to accrue interest on the Revolving Credit Facility subsequent to the Bankruptcy Petition date of April 14, 2016 since we anticipate that such interest will be allowed by the Bankruptcy Court to be paid to the lenders. However, for all our other indebtedness, in accordance with accounting guidance in ASC 852, Reorganizations, we will accrue interest only up to the pre-Bankruptcy Petition date of April 13, 2016. For the three and nine months ended March 31, 2016 and 2015, interest expense (income) consisted of the following:

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7 — Long Term Debt  – (continued)

		Three Months Ended March 31,								Nine Months Ended March 31,
		2016				2015				2016				2015
		(In thousands)								(In thousands)
8.25% senior notes due 2018		$	10,057			$	10,518			$	30,706			$	31,556
Amortization of fair value premium – 8.25% senior notes			(3,325	)			(2,608	)			(10,048	)			(7,712	)
Amortization of fair value premium – 8.25% senior notes – accelerated			(17,892	)			—				(17,892	)			—
Revolving credit EPL sub-facility			1,656				2,982				4,606				8,941
Promissory note payable to EGC			8,486				1,625				25,097				1,625
Derivative instruments premium financing and other			659				41				928				(4	)
		$	(359	)		$	12,558			$	33,397			$	34,406

Note 8 — Derivative Financial Instruments

We enter into hedging transactions to reduce exposure to fluctuations in the price of crude oil and natural gas. We enter into hedging transactions with multiple investment-grade rated counterparties, primarily financial institutions, to reduce the concentration of exposure to any individual counterparty. We use various instruments including financially settled crude oil and natural gas puts, put spreads, swaps, zero-cost collars and three-way collars. Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the consolidated balance sheets. Any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included in gain (loss) on derivative financial instruments as a component of revenues in the accompanying consolidated statements of operations. We had no derivative instruments outstanding at March 31, 2016.

The effect of derivative financial instruments on our consolidated statements of operations was as follows:

		Three Months Ended March 31,								Nine Months Ended March 31,
Gain (loss) on derivative financial instruments		2016				2015				2016				2015
Cash settlements, net of purchased put premium amortization		$	—			$	(599	)		$	2,111			$	24,304
Proceeds from monetizations			—				—				—				4,559
Change in fair value			—				(1,614	)			1,573				13,043
Total gain (loss) on derivative financial instruments		$	—			$	(2,213	)		$	3,684			$	41,906

Note 9 — Fair Value Measurements

Certain assets and liabilities are measured at fair value on a recurring basis in our consolidated balance sheets. Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of these techniques requires significant judgment and is primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 9 — Fair Value Measurements  – (continued)

For cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities, the carrying amounts approximate fair value due to the short-term nature or maturity of the instruments. For the 8.25% Senior Notes, the fair value is estimated based on quoted prices in a market that is not an active market, which are Level 2 inputs within the fair value hierarchy. The carrying value of the revolving credit facility approximates its fair value because the interest rate is variable and reflective of market rates, which are Level 2 inputs within the fair value hierarchy. As described in Note 7 — Long Term Debt, the filing of the Bankruptcy Petitions constituted an event of default under the Promissory Note payable to EGC and accelerated the indebtedness thereunder. The treatment of the Promissory Note will be determined in accordance with the Plan. Due to the uncertainty related to the future treatment of the Promissory Note, it is considered impracticable to determine the fair value of the Promissory Note as of March 31, 2016.

Our commodity derivative instruments consisted of financially settled crude oil and natural gas swaps and three way collars. We estimated the fair values of these instruments based on published forward commodity price curves, market volatility and contract terms as of the date of the estimate. The discount rate used in the discounted cash flow projections was based on published LIBOR rates. The fair values of commodity derivative instruments in an asset position included a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position included a measure of our own nonperformance risk, each based on the current published issuer-weighted corporate default rates. See Note 8 — Derivative Financial Instruments.

During the three and nine months ended March 31, 2016, we did not have any transfers from or to Level 3. The following table sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis.

		March 31, 2016				June 30, 2015
		(in thousands)
Assets
Derivative financial instruments
Current		$	—			$	888
Total derivative financial instruments subject to enforceable netting agreement			—				888
Gross amounts offset in consolidated balance sheets			—				—
Net amounts presented in consolidated balance sheets		$	—			$	888
Liabilities
Derivative financial instruments
Current		$	—			$	1,057
Total derivative financial instruments subject to enforceable netting agreement			—				1,057
Gross amounts offset in consolidated balance sheets			—				—
Net amounts presented in consolidated balance sheets		$	—			$	1,057

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 9 — Fair Value Measurements  – (continued)

The following table sets forth the outstanding and estimated fair values of our debt instruments which are classified as Level 2 financial instruments.

		March 31, 2016								June 30, 2015
		(In thousands)
		Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
8.25% senior notes		$	213,677			$	10,684			$	539,459			$	306,000
8.25% senior notes due to EGC			266,567				13,328				—				—
Revolving credit EPL sub-facility			99,412				99,412				150,000				150,000
Total		$	579,656			$	123,424			$	689,459			$	456,000

The 8.25% Senior Notes contain an option to redeem up to 35% of the aggregate principal amount of the notes outstanding with the net cash proceeds of certain equity offerings. This option is considered an embedded derivative and is classified as a Level 3 financial instrument for which the estimated fair value at March 31, 2016 and June 30, 2015 was not material.

Note 10 — Income Taxes

We are a (U.S.) Delaware company and, as a result of the Merger, a direct subsidiary of EGC. We are a member of a consolidated group of corporations for U.S. federal income tax purposes where Energy XXI, Inc., (the “U.S. Parent”) is the U.S. parent entity. Energy XXI indirectly owns 100% of U.S. Parent, but is not a member of the U.S. consolidated group. We operate through our various subsidiaries in the United States as they apply to our current ownership structure. Pursuant to the Restructuring Support Agreement (“RSA”) discussed in Note 1 — Organization and Chapter 11 Proceedings — Bankruptcy Proceedings and Restructuring Support Agreement (“Note 1”), we along with Energy XXI, the U.S. Parent, and other affiliates filed bankruptcy and liquidation petitions in the United States and Bermuda, as applicable, on April 14, 2016. These filings generally had no immediate effect on the Company’s income tax year or income tax reporting requirements, but will likely have future effects as discussed below. ASC Topic 740, Income Taxes, provides that the income tax amounts presented in the separate financial statements of a subsidiary entity that is a member of a consolidated group should be based upon a reasonable allocation of the income tax amounts of that group. We allocate income tax expense/benefit and deferred tax items between affiliates as if each affiliate prepared a separate U.S. income tax return for the reporting period. We have recorded no income tax-related intercompany balances with affiliates.

We estimate the annual effective tax rate for the current fiscal year and apply it to interim periods. Currently, our estimated annual effective tax/(benefit) rate is zero. Our actual effective tax/(benefit) rate for the three and nine months ended March 31, 2016 was also zero. The variance from the U.S. statutory rate of 35% is primarily due to continued recorded and forecast losses that, based on present circumstances, will not result in us recording a current income tax benefit. Rather, all increases in net deferred tax assets (primarily related to net operating loss (“NOL”) carryovers net of deferred tax liability from oil and natural gas properties’ net book carrying values exceeding their corresponding tax bases) will be completely offset by increases in valuation allowances. As required by ASC Topic 740-270, Income Taxes: Interim Reporting, we forecast our tax position for the year, and may not record an additional tax benefit in an interim period unless we believe that we would be allowed to record a net deferred tax asset at the end of the year. At this time, we do not have such a belief (due to a preponderance of negative evidence as to future realizability) and accordingly reflect a current deferred tax benefit of zero. We continue to evaluate the need for the valuation allowance based on current and expected earnings and other factors, and adjust it accordingly.

We have historically paid no significant U.S. cash income tax (either directly to the IRS or states or through intercompany tax-sharing arrangements) due to the election to expense intangible drilling costs and

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 10 — Income Taxes  – (continued)

the presence of our net operating loss carryforwards (“NOLs”). Section 61(a)(12) of the Internal Revenue Code of 1986, as amended (“IRC”) generally provides, in pertinent part, that income from the discharge of indebtedness (“CODI”) is treated as ordinary income subject to current taxation. The Company has completed several purchases of indebtedness in the past two quarters at less than the issued amount of the indebtedness, which constitutes CODI. The U.S. Alternative Minimum Tax (“AMT”) only allows offset of 90% of AMT income by NOL carryovers (with certain limited exceptions for 2009 and 2010 generated NOLs), with the balance of income being taxed at 20%. IRC section 108(a)(1) provides that CODI may be excluded from taxable income of a debtor if the discharge occurred: (i) while the debtor was subject to a Title 11 (or similar) proceeding (such as a Chapter 11 filing), or (ii) while insolvent. The significance of exclusion treatment is that an NOL carryforward is not required to shield excluded CODI. If NOLs were used to offset CODI (or other taxable income), the Company would be subject to a current cash AMT payment due to the 90% limitation in NOL usage against this tax. We believe, more likely than not, that prior to the bankruptcy filing, the Company was, for income tax purposes, insolvent as defined in IRC section 108(a)(1)(B) at the times of significant indebtedness repurchases and thus the exclusion applies to significant indebtedness repurchases that constitute CODI. As such, we presently do not expect to make any cash AMT payments during this fiscal year. If any such AMT payments were required, we believe that, under present circumstances, we would not be able to record a net deferred tax asset for these payments, even though they result in a Minimum Tax Credit usable against future regular income tax with no expiration period. Thus, we believe that any current-year cash AMT payments would have a negative impact on earnings. We revise our ongoing estimated AMT obligation each quarter during the year and revise our expected income tax rate and cash tax payment disclosure accordingly.

In accordance with IRC section 382, certain transfers of our equity, equity of our parent, or issuances of equity in connection with our restructuring, may impair our ability to utilize our U.S. federal income tax NOL carryforwards and the tax basis of property (“Tax Attributes”) to offset future taxable income. A corporation is generally permitted to deduct from taxable income (or offset resulting income tax, in the case of credits) in any year NOLs carried forward from prior years, as well as certain depletion, depreciation and amortization (“DD&A”) cost recovery deductions relating to the recovery of its tax basis in properties post-discharge. The Bankruptcy Court has entered an interim order that places certain limitations on trading in Energy XXI’s equity during the pendency of the Chapter 11 cases. Additional limitations pursuant to IRC section 382 can apply based upon the enterprise value of the Company upon exit, and many of these factors are based upon market elements and the results of negotiations that are forthcoming and are beyond the control of the Company. Despite these precautions, we can provide no assurances that these tax law limitations, market factors, or results of negotiations will prevent an “ownership change” or otherwise inhibit our ability to utilize our NOL or other Tax Attribute carryforwards as a result of our reorganization, due to IRC section 382 ownership change limitations. Additionally, Tax Attribute reduction resulting from CODI exclusion is generally required irrespective of the application of IRC section 382 to changes in ownership of the Company. As such, we expect that our Tax Attributes available for use after emergence from bankruptcy will be significantly limited.

Note 11 — Related Party Transactions

On June 3, 2014, we entered an intercompany services and cost allocation agreement with Energy XXI Services, LLC (“Energy Services”), an affiliate of the Company. Services provided by Energy Services include management, legal, accounting, tax, corporate secretarial, human resources, employee benefit administration, office space and other furniture and equipment management, and other support services. Cost of these services for the three and nine months ended March 31, 2016 was approximately $11.0 million and $29.2 million, respectively, of which approximately $9.2 million and $24.2 million, respectively, is included in general and administrative expense. Cost of these services for the three and nine months ended March 31, 2015 was approximately $14.0 and $23.8 million, respectively, of which approximately $10.4 million and $19.5 million, respectively, is included in general and administrative expense.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 11 — Related Party Transactions  – (continued)

During the three months ended March 31, 2016, EGC purchased $266.6 million in aggregate principal amount of the 8.25% Senior Notes in open market transactions at a total price of approximately $11.4 million, including accrued interest of $10.4 million. EGC continues to hold those securities.

On March 12, 2015, in connection with EGC’s issuance of the Second Lien Notes, we entered into the Promissory Note payable to EGC with a face value of $325 million. The Promissory Note bears interest at an annual rate of 10%, has a maturity date of October 9, 2018, and is secured by a second priority lien on certain of our assets that secure the obligations under the First Lien Credit Agreement. For the three and nine months ended March 31, 2016, interest expense on the Promissory Note amounted to approximately $8.5 million and $25.1 million, respectively. For the three and nine months ended March 31, 2015, interest expense on the Promissory Note amounted to $1.6 million. At March 31, 2016 and June 30, 2015, accrued liabilities on the consolidated balance sheets include interest payable on the Promissory Note payable to EGC of approximately $34.9 million and $9.8 million, respectively.

On April 14, 2016, the Debtors filed the Bankruptcy Petitions, which constituted an event of default under the Promissory Note and accelerated the indebtedness thereunder. The treatment of the Promissory Note will be determined in accordance with the Plan. See Note 7 — Indebtedness for more information regarding the Promissory Note.

Note 12 — Commitments and Contingencies

Litigation.  We are involved in various legal proceedings and claims, which arise in the ordinary course of our business. As described below, most of our pending legal proceedings have been stayed by virtue of filing the Bankruptcy Petitions on April 14, 2016. We do not believe the ultimate resolution of any such actions will have a material effect on our consolidated financial position, results of operations or cash flows. For more information regarding the Chapter 11 proceedings, see Note 1 — Organization and Chapter 11 Proceedings.

Performance Bonds.  As of March 31, 2016, we had $185.2 million of performance bonds outstanding relating to assets in the Gulf of Mexico. As a lessee and operator of oil and natural gas leases on the federal Outer Continental Shelf (“OCS”), approximately $63.0 million of our performance bonds are lease and/or area bonds issued to the BOEM that the BOEM has access to and assure our commitment to comply with the terms and conditions of those leases. We also maintain approximately $122.2 million in performance bonds issued not to the BOEM but rather to predecessor third party assignors including certain state regulatory bodies of certain of the wells and facilities on these leases pursuant to a contractual commitment made by us to those third parties at the time of assignment with respect to the eventual decommissioning of those wells and facilities. In April 2015, we received letters from the BOEM stating that certain of our subsidiaries no longer qualify for waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging and abandonment liabilities. The letters notified us that certain of our subsidiaries must provide approximately $566.5 million in supplemental financial assurance and/or bonding for our offshore oil and gas leases, rights-of-way, and rights-of-use and easements. In June 2015 and December 2015, following discussions with the BOEM, we provided $54.7 million and $8.9 million, respectively, of supplemental bonds issued to the BOEM (which is reflected in the $63.0 million in lease and/or area bonds discussed above). On June 30, 2015, we sold the East Bay field, and as a result, the $566.5 million of requested supplemental financial assurance and/or bonding required by the BOEM in April 2015 was reduced by approximately $178 million.

In October 2015, we received information from the BOEM indicating that we could receive additional demands of supplemental financial assurance for amounts in addition to the $566.5 million initially sought by the BOEM in April 2015, primarily relating to certain properties that were no longer exempt from supplemental bonding as a result of co-lessees losing their exemptions. However, we believe that a substantial

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 12 — Commitments and Contingencies  – (continued)

portion of the additional supplemental financial assurance and/or bonding that could be sought by the BOEM may relate to circumstances that could eventually be removed from our responsibility (in terms of providing added assurance or bonding), including, for example, lease interests of co-lessees, leases that have since been divested by us, and leases where we are not the permitted operator and no drilling of wells has occurred. We would expect that most, if not all, of our co-lessees with the remaining working interest in such lease interests will provide their share of the bonding.

Since we received the additional information from the BOEM in October 2015, we have had a series of discussions and exchanges of information with the BOEM on long-term financial assurance planning, culminating in the BOEM’s agreement to, and execution of, our long-term plan approved and executed by the BOEM on February 25, 2016 (the “Long-Term Plan”). As required by our Long-Term Plan, we must perform, among other things, the following activities: (1) use our best commercial efforts to have the BOEM included as an additional obligee under our third-party bonds by July 1, 2016; (2) provide additional financial assurance as may be required under the applicable BOEM requirements with respect to any of our pending or future plans or activities for offshore leasing, exploration or development, including any permitting or assignment associated with such plans or activities (but excluding certain internal restructuring assignments or transfers between us and our subsidiaries or our affiliates); (3) with respect to certain of our operated properties with active non-waived co-lessees, make diligent efforts to negotiate with our co-lessees to achieve full financial assurance for certain of such offshore facility interests by submitting a plan for these properties by July 1, 2016; (4) work with the third-party operators of our non-operated interests to address our proportionate share of any supplemental bond demands on these non-operated properties; and (5) work with BOEM and our insurers to potentially receive credit for our energy insurance package. If we are unable to provide sufficient financial assurance to BOEM under this plan, after July 1, 2016, BOEM may assess additional supplemental financial assurance and/or bonding requirements on us, which could negatively impact our operations, financial condition and liquidity. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, it is anticipated that the Company will continue to perform its obligations under the Long-Term Plan during the pendency of the Chapter 11 Cases and in connection with the consummation of its restructuring.

The BOEM may also bolster its financial assurance requirements mandated by rule for all companies operating in federal waters. The cost of compliance with our existing supplemental bonding requirements, including the directives and other correspondence issued by the BOEM in April 2015 and thereafter, as reflected in the Long-Term Plan, any other future BOEM directives, or any other changes to the BOEM’s current supplemental bonding requirements or supplemental bonding regulations applicable to us or our subsidiaries’ properties could materially and adversely affect our financial condition, cash flows, and results of operations. In addition, we may be required to provide cash collateral or letters of credit to support the issuance of such bonds or other surety. Such letters of credit would likely be issued under our Revolving Credit EPL Sub-Facility and would reduce the amount of borrowings available under such facility in the amount of any such letter of credit obligations.

We can provide no assurance that we can continue to obtain bonds or other surety in all cases or that we will have sufficient availability under our Revolving Credit EPL Sub-Facility to support such supplemental bonding requirements. If we are unable to obtain the additional required bonds or assurances as requested, the BOEM may require any of our operations on federal leases to be suspended, cancelled or otherwise impose monetary penalties, and one or more of such actions could have a material effect on our business, prospects, results of operations, financial condition, and liquidity.

Other.  We maintain restricted escrow funds as required by certain contractual arrangements. At March 31, 2016, our restricted cash included $30 million related to the First Lien Credit Agreement and approximately $6.0 million in a trust for future plugging, abandonment and other decommissioning costs related to the East Bay field, which will be transferred to the buyer of our interests in that field.

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EPL OIL & GAS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 12 — Commitments and Contingencies  – (continued)

We and our oil and gas joint interest owners are subject to periodic audits of the joint interest accounts for leases in which we participate and/or operate. As a result of these joint interest audits, amounts payable or receivable by us for costs incurred or revenue distributed by the operator or by us on a lease may be adjusted, resulting in adjustments to our net costs or revenues and the related cash flows. When they occur, these adjustments are recorded in the current period, which generally is one or more years after the related cost or revenue was incurred or recognized by the joint account. We do not believe any such adjustments will be material.

Effect of Automatic Stay.  As described in Note 1 — Organization and Chapter 11 Proceedings, the Debtors filed voluntary petitions for relief under the Bankruptcy Code on April 14, 2016 (the “Petition Date”) in the Bankruptcy Court. Each of the Debtors continues to operate its business and manage its property as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases, pursuant to Section 362(a) of the Bankruptcy Code, automatically enjoined, or stayed, among other things, the continuation of most judicial or administrative proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under regulatory powers. Thus, the automatic stay may have no effect on certain matters described above.

Note 13 — Supplemental Condensed Consolidating Financial Information

In connection with issuing the 8.25% Senior Notes described in Note 7 — Long Term Debt, all of our existing direct and indirect domestic subsidiaries (other than immaterial subsidiaries) each of which is 100% owned by EPL (the “Guarantor Subsidiaries”), jointly and severally guaranteed the payment obligations under our 8.25% Senior Notes. The guarantees are full and unconditional, as those terms are used in Rule 3-10 of Regulation S-X, except that a Guarantor Subsidiary can be automatically released and relieved of its obligations under certain customary circumstances contained in the 2011 Indenture. So long as other applicable provisions of the indenture are adhered to, these customary circumstances include: when a Guarantor Subsidiary is declared “unrestricted” for covenant purposes, when the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, or when the Guarantor Subsidiary is sold or sells all of its assets. The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of operations and cash flow information for EPL (Parent Company Only) and for the Guarantor Subsidiaries. We have not presented separate financial statements and other disclosures concerning the Guarantor Subsidiaries, or for any individual Guarantor Subsidiary, because management has determined that such information is not material to investors.

The supplemental condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include all disclosures included in annual financial statements. The principal eliminating entries eliminate investments in subsidiaries and intercompany balances.

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Balance Sheet
As of March 31, 2016
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	—			$	—			$	—			$	—
Trade accounts receivable – net			34,808				—				—				34,808
Intercompany receivables			33,757				174,150				(207,907	)			—
Restricted cash			6,027				—				—				6,027
Prepaid expenses			2,146				—				—				2,146
Total current assets			76,738				174,150				(207,907	)			42,981
Property and equipment, net			387,372				2,567				—				389,939
Restricted cash			30,030				—				—				30,030
Investment in affiliates			130,705				—				(130,705	)			—
Other assets and debt issuance costs, net of accumulated amortization			608				—				—				608
Total assets		$	625,453			$	176,717			$	(338,612	)		$	463,558
LIABILITIES AND STOCKHOLDER’S DEFICIT
Current liabilities:
Accounts payable		$	16,867			$	—			$	—			$	16,867
Due to EGC			315,894				—				—				315,894
Intercompany payables			161,895				46,012				(207,907	)			—
Accrued liabilities			71,942				—				—				71,942
Asset retirement obligations			35,366				—				—				35,366
Promissory note payable to EGC			325,000				—				—				325,000
Current maturities of long-term debt due to EGC			266,567				—				—				266,567
Current maturities of long-term debt			313,089				—				—				313,089
Total current liabilities			1,506,620				46,012				(207,907	)			1,344,725
Asset retirement obligations			199,318				—				—				199,318
Total liabilities			1,705,938				46,012				(207,907	)			1,544,043
Stockholder’s equity (deficit):
Preferred stock			—				—				—				—
Common stock			—				—				—				—
Additional paid-in capital			1,599,341				85,479				(85,479	)			1,599,341
Retained earnings (accumulated deficit)			(2,679,826	)			45,226				(45,226	)			(2,679,826	)
Total stockholder’s equity (deficit)			(1,080,485	)			130,705				(130,705	)			(1,080,485	)
Total liabilities and stockholder’s equity (deficit)		$	625,453			$	176,717			$	(338,612	)		$	463,558

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Balance Sheet
As of June 30, 2015
(AUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
ASSETS
Current assets:
Cash and cash equivalents		$	217			$	—			$	—			$	217
Trade accounts receivable – net			71,406				—				(83	)			71,323
Intercompany receivables			—				128,170				(128,170	)			—
Derivative financial instruments			888				—				—				888
Restricted cash			6,024				—				—				6,024
Prepaid expenses			1,831				—				—				1,831
Total current assets			80,366				128,170				(128,253	)			80,283
Property and equipment, net			1,412,076				2,949				—				1,415,025
Investment in affiliates			130,705				—				(130,705	)			—
Other assets and debt issuance costs, net of accumulated amortization			1,039				—				—				1,039
Total assets		$	1,624,186			$	131,119			$	(258,958	)		$	1,496,347
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	24,217			$	414			$	(83	)		$	24,548
Due to EGC			170,728				—				—				170,728
Intercompany payables			128,170				—				(128,170	)			—
Accrued liabilities			95,981				—				—				95,981
Asset retirement obligations			38,056				—				—				38,056
Derivative financial instruments			1,057				—				—				1,057
Current maturities of long-term debt			3,364				—				—				3,364
Total current liabilities			461,573				414				(128,253	)			333,734
Long-term debt			689,459				—				—				689,459
Promissory note payable to EGC			325,000				—				—				325,000
Asset retirement obligations			202,306				—				—				202,306
Total liabilities			1,678,338				414				(128,253	)			1,550,499
Stockholder’s equity (deficit):
Preferred stock			—				—				—				—
Common stock			—				—				—				—
Additional paid-in capital			1,599,341				85,479				(85,479	)			1,599,341
Retained earnings (accumulated deficit)			(1,653,493	)			45,226				(45,226	)			(1,653,493	)
Total stockholder’s equity (deficit)			(54,152	)			130,705				(130,705	)			(54,152	)
Total liabilities and stockholder’s equity (deficit)		$	1,624,186			$	131,119			$	(258,958	)		$	1,496,347

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 31, 2016
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenues
Oil sales		$	37,869			$	—			$	—			$	37,869
Natural gas sales			7,579				—				—				7,579
Total revenues			45,448				—				—				45,448
Costs and expenses
Lease operating			33,053				—				—				33,053
Transportation			425				—				—				425
Depreciation, depletion and amortization			28,487				—				—				28,487
Accretion of asset retirement obligations			5,866				—				—				5,866
Impairment of oil and natural gas properties			115,625				—				—				115,625
General and administrative			9,572				—				—				9,572
Taxes, other than on earnings			36				—				—				36
Total costs and expenses			193,064				—				—				193,064
Operating loss			(147,616	)			—				—				(147,616	)
Other income (expense):
Other income, net			24				—				—				24
Interest (expense) income, net, including debt premium amortization			359				—				—				359
Total other income, net			383				—				—				383
Loss before income taxes			(147,233	)			—				—				(147,233	)
Income tax expense			—				—				—				—
Net loss		$	(147,233	)		$	—			$	—			$	(147,233	)

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended March 31, 2015
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenues
Oil sales		$	66,419			$	8,132			$	—			$	74,551
Natural gas sales			10,816				56				—				10,872
Loss on derivative instruments			(2,213	)			—				—				(2,213	)
Total revenues			75,022				8,188				—				83,210
Costs and expenses
Lease operating			49,552				19				—				49,571
Transportation			544				(1	)			—				543
Depreciation, depletion and amortization			68,314				5,035				—				73,349
Accretion of asset retirement obligations			4,328				1,181				—				5,509
Impairment of oil and natural gas properties			404,254				—				—				404,254
General and administrative			11,998				—				—				11,998
Taxes, other than on earnings			2,193				864				—				3,057
Other			(3	)			—				—				(3	)
Total costs and expenses			541,180				7,098				—				548,278
Operating loss			(466,158	)			1,090				—				(465,068	)
Other income (expense):
Other income, net			6				—				—				6
Interest expense			(12,558	)			—				—				(12,558	)
Income from equity investments			716				—				(716	)			—
Total other expense, net			(11,836	)			—				(716	)			(12,552	)
Income (loss) before income taxes			(477,994	)			1,090				(716	)			(477,620	)
Income tax expense (benefit)			(182,361	)			374				—				(181,987	)
Net income (loss)		$	(295,633	)		$	716			$	(716	)		$	(295,633	)

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 31, 2016
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenues
Oil sales		$	165,649			$	—			$	—			$	165,649
Natural gas sales			28,453				—				—				28,453
Gain on derivative instruments			3,684				—				—				3,684
Total revenues			197,786				—				—				197,786
Costs and expenses
Lease operating			90,095				—				—				90,095
Transportation			1,812				—				—				1,812
Depreciation, depletion and amortization			148,480				—				—				148,480
Accretion of asset retirement obligations			18,924				—				—				18,924
Impairment of oil and natural gas properties			928,475				—				—				928,475
General and administrative			27,494				—				—				27,494
Taxes, other than on earnings			(860	)			—				—				(860	)
Total costs and expenses			1,214,420				—				—				1,214,420
Operating loss			(1,016,634	)			—				—				(1,016,634	)
Other income (expense):
Other income, net			2,429				—				—				2,429
Gain on early extinguishment of debt			21,269				—				—				21,269
Interest (expense) income, net, including debt premium amortization			(33,397	)			—				—				(33,397	)
Total other expense, net			(9,699	)			—				—				(9,699	)
Loss before income taxes			(1,026,333	)			—				—				(1,026,333	)
Income tax expense			—				—				—				—
Net loss		$	(1,026,333	)		$	—			$	—			$	(1,026,333	)

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Statement of Operations
Nine Months Ended March 31, 2015
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Revenues
Oil sales		$	316,204			$	37,491			$	—			$	353,695
Natural gas sales			37,170				204				—				37,374
Gain on derivative instruments			41,906				—				—				41,906
Total revenues			395,280				37,695				—				432,975
Costs and expenses
Lease operating			152,170				9,005				—				161,175
Transportation			2,316				1				—				2,317
Depreciation, depletion and amortization			218,701				16,940				—				235,641
Accretion of asset retirement obligations			14,580				3,208				—				17,788
Impairment of oil and natural gas properties			1,094,566				—				—				1,094,566
Goodwill impairment			329,293				—				—				329,293
General and administrative			26,850				—				—				26,850
Taxes, other than on earnings			2,792				4,737				—				7,529
Other			18				—				—				18
Total costs and expenses			1,841,286				33,891				—				1,875,177
Operating income (loss)			(1,446,006	)			3,804				—				(1,442,202	)
Other income (expense):
Other income, net			10				—				—				10
Interest expense			(34,406	)			—				—				(34,406	)
Income from equity investments			2,427				—				(2,427	)			—
Total other expense, net			(31,969	)			—				(2,427	)			(34,396	)
Income (loss) before income taxes			(1,477,975	)			3,804				(2,427	)			(1,476,598	)
Income tax expense (benefit)			(421,374	)			1,377				—				(419,997	)
Net income (loss)		$	(1,056,601	)		$	2,427			$	(2,427	)		$	(1,056,601	)

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 31, 2016
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Net cash used in operating activities		$	(32,537	)		$	—			$	—			$	(32,537	)
Cash flows used in investing activities:
Capital expenditures			(18,488	)			—				—				(18,488	)
Net cash used in investing activities			(18,488	)			—				—				(18,488	)
Cash flows provided by (used in) financing activities:
Payments on long-term debt			(3,395	)			—				—				(3,395	)
Cash restricted under revolving credit facility related to property sold			(30,030	)			—				—				(30,030	)
Advances from EGC			84,573				—				—				84,573
Debt issuance costs and other			(340	)			—				—				(340	)
Net cash provided by financing activities			50,808				—				—				50,808
Net decrease in cash and cash equivalents			(217	)			—				—				(217	)
Cash and cash equivalents at beginning of period			217				—				—				217
Cash and cash equivalents at end of period		$	—			$	—			$	—			$	—

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EPL OIL & GAS, INC.
 
Supplemental Condensed Consolidating Statement of Cash Flows
Nine Months Ended March 31, 2015
(UNAUDITED)

		Parent Company Only				Guarantor Subsidiaries				Eliminations				Consolidated
		(In thousands)
Net cash provided by operating activities		$	83,979			$	6,365			$	—			$	90,344
Cash flows used in investing activities:
Property acquisitions			(350	)			—				—				(350	)
Capital expenditures			(265,131	)			(6,365	)			—				(271,496	)
Other property and equipment additions			(58	)			—				—				(58	)
Net cash used in investing activities			(265,539	)			(6,365	)			—				(271,904	)
Cash flows provided by financing activities:
Payments on long-term debt			(325,000	)			—				—				(325,000	)
Proceeds from intercompany promissory note			325,000				—				—				325,000
Advances from EGC			177,832				—				—				177,832
Deferred financing costs and other			(1,778	)			—				—				(1,778	)
Net cash provided by financing activities			176,054				—				—				176,054
Net decrease in cash and cash equivalents			(5,506	)			—				—				(5,506	)
Cash and cash equivalents at beginning of period			5,601				—				—				5,601
Cash and cash equivalents at end of period		$	95			$	—			$	—			$	95

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Statements we make in this quarterly report on Form 10-Q (the “Quarterly Report”) which express a belief, expectation or intention, as well as those that are not historical fact, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Item 1A. Risk Factors” included in our 2015 Annual Report and elsewhere in this Quarterly Report.

Overview

EPL Oil & Gas, Inc. (“we,” “our,” “us,” “the Company” or “EPL”) was incorporated as a Delaware corporation on January 29, 1998 and is a wholly-owned subsidiary of Energy XXI Gulf Coast, Inc. (“EGC”), a Delaware corporation and indirect wholly-owned subsidiary of Energy XXI Ltd, an exempted company under the laws of Bermuda (“Energy XXI”). We operate as an independent oil and natural gas exploration and production company with current operations concentrated in the U.S. Gulf of Mexico shelf (“GoM shelf”) focusing on state and federal waters offshore Louisiana, which we consider our core area.

On June 3, 2014, Energy XXI, EGC, Clyde Merger Sub, Inc., a wholly-owned subsidiary of EGC (“Merger Sub”), and EPL, completed the transactions contemplated by the Agreement and Plan of Merger, dated as of March 12, 2014 (as amended, the “Merger Agreement”), by and among Energy XXI, EGC, Merger Sub, and EPL, pursuant to which Merger Sub was merged with and into EPL with EPL continuing as the surviving corporation (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, the issued and outstanding shares of EPL common stock were converted, in the aggregate, into the merger consideration consisting of approximately 65% in cash and 35% in shares of Energy XXI common stock.

As a result of the Merger, the future strategy of EPL is determined by Energy XXI’s Board of Directors. For the nine months ended March 31, 2016, our capital expenditures totaled approximately $97 million. Our current capital expenditures are allocated to development activities, which are geared toward the improvement of existing production and the performance of necessary plugging, abandonment and other decommissioning activities.

As a result of continued decreases in commodity prices and our substantial debt burden, we continued throughout the third quarter of fiscal 2016 to work with our financial and legal advisors to analyze a variety of solutions to reduce our overall financial leverage, while maintaining primary focus on preserving liquidity. As part of this process, we engaged in discussions with certain of our debtholders and other stakeholders to develop and implement a comprehensive plan to restructure our balance sheet. As previously disclosed, as part of these ongoing discussions, on February 16, 2016, we elected to enter into the 30-day grace period under the terms of the indenture governing our outstanding 8.25% Senior Notes due February 2018 (the “8.25% Senior Notes”) to extend the timeline for making the cash interest payment to March 17, 2016. During the three months ended March 31, 2016, EGC also repurchased $266.6 million of our 8.25% Senior Notes in open market transactions at a total cost of approximately $11.4 million, including accrued interest of $10.4 million as described in Note 7 — Long Term Debt to Consolidated Financial Statements in this Quarterly Report, and continues to hold those securities. Contemporaneously with these initial restructuring discussions, on March 8, 2016, our board of directors appointed James R. Latimer, III as an additional independent member of our board of directors to ensure that the interests of our stakeholders would be appropriately considered and protected. Mr. Latimer, as the sole member of an independent Special Committee established by our board of directors, was and continues to be tasked with reviewing and evaluating, in connection with any potential restructuring transaction, the treatment of the 8.25% Senior Notes, the treatment of the Promissory Note, and any matters on which an actual conflict exists between us and any of the other Debtors. Mr. Latimer, through the Company, engaged the law firm of Porter Hedges LLP to assist him in carrying out these duties.

On March 15, 2016, as part of our ongoing discussions with certain of our debtholders, EGC elected to make the deferred interest payment on the 8.25% Senior Notes, while electing not to make the interest payments due on its Second Lien Notes and on its 6.875% Senior Notes due 2024, commencing a new 30-day grace period. During the new 30-day grace period, we and EGC continued discussions with an ad hoc

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committee of certain holders (the “Second Lien Noteholders”) of the Second Lien Notes and a steering committee of lenders (the “Lenders”) under the Revolving Credit Facility regarding a potential restructuring. On April 11, 2016, we and EGC entered into the Restructuring Support Agreement (as defined below) with certain of the Second Lien Noteholders. Pursuant to the Restructuring Support Agreement, we expect to eliminate substantially all of our prepetition indebtedness other than indebtedness under the Revolving Credit Facility, resulting in a significantly deleveraged capital structure.

Bankruptcy Proceedings and Restructuring Support Agreement

On April 14, 2016, the Company, Energy XXI, EGC and certain other subsidiaries of Energy XXI (excluding Energy XXI GIGS Services, LLC, which leases a subsea pipeline gathering system located in the shallow Gulf of Mexico shelf and storage and onshore processing facilities on Grand Isle, Louisiana) listed on Schedule 1 of the Restructuring Support Agreement (as defined below) (together with the Company, Energy XXI and EGC, the “Debtors”) filed voluntary petitions for reorganization (the petitions collectively, the “Bankruptcy Petitions”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 (“Chapter 11”) of the United States Bankruptcy Code (the “Bankruptcy Code”). The Debtors’ Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being administered under the caption “In re: Energy XXI Ltd, et al., Case No. 16-31928.” The Debtors will continue to operate their businesses and manage their assets as debtors-in-possession under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Concurrently with the filing of the Bankruptcy Petitions, Energy XXI filed a winding-up petition commencing an official liquidation proceeding under the laws of Bermuda before the Supreme Court of Bermuda. On April 15, 2016, John C. McKenna was appointed as provisional liquidator by the Supreme Court of Bermuda.

Prior to filing the Bankruptcy Petitions, on April 11, 2016, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with certain holders (the “Second Lien Noteholders”) of EGC’s Second Lien Notes, providing that the Second Lien Noteholders party thereto will support a restructuring of the Debtors, subject to the terms and conditions of the Restructuring Support Agreement. The restructuring transactions contemplated by the Restructuring Support Agreement will be effectuated through a joint prearranged plan of reorganization (as may be amended, restated, supplemented, or otherwise modified from time to time, the “Plan”). The Plan will represent a settlement of various issues, controversies, and disputes.

The Restructuring Support Agreement provides, among other things, that:

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Milestones

The Restructuring Support Agreement also contains the following proposed milestones (the “Milestones”) for progress in the Chapter 11 proceedings:

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The Majority Restructuring Support Parties have the right, but not the obligation, to terminate their obligations under the Restructuring Support Agreement upon the failure of the Debtors to meet any of the Milestones set forth above unless (i) such failure is the direct result of any act, omission, or delay on the part of any Restructuring Support Parties in violation of its obligations under the Restructuring Support Agreement or (ii) such Milestone is extended with the express prior written consent of the Majority Restructuring Support Parties.

Reorganization Process

On the Petition Date, the Bankruptcy Court issued certain additional interim and final orders with respect to the Debtors’ first-day motions and other operating motions that allow the Debtors to operate their businesses in the ordinary course. The first-day motions provided for, among other things, the payment of certain pre-petition employee and retiree expenses and benefits, the use of the Debtors’ existing cash management system, the payment of certain pre-petition amounts to certain critical vendors, the ability to pay certain pre-petition taxes and regulatory fees, and the payment of certain pre-petition claims owed on account of insurance policies and programs. With respect to those first-day motions for which only interim approval has been granted, the Bankruptcy Court had scheduled final hearings on such motions for May 13, 2016, which have been subsequently rescheduled to May 19, 2016 at the request of the unsecured creditors’ committee.

Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors’ may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions, including approval of a majority of Majority Restructuring Support Parties in accordance with the Restructuring Support Agreement.

A Chapter 11 plan (including the Plan) determines the rights and satisfaction of claims and interests of various creditors and security holders and is subject to the ultimate outcome of negotiations and the Court’s decisions through the date on which a Chapter 11 plan (including the Plan) is confirmed. The Debtors

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currently expect that any proposed Chapter 11 plan (including the Plan), among other things, would provide mechanisms for settlement of the Debtors’ pre-petition obligations, changes to certain operational cost drivers, treatment of Energy XXI’s existing equity holders, potential income tax liabilities and certain corporate governance and administrative matters pertaining to the reorganized New Entity. Any proposed Chapter 11 plan will (and the Plan may) be subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Debtors’ creditors, including the Lenders under the Revolving Credit Facility and holders of the EGC Unsecured Notes Claims, EPL Unsecured Notes Claims, and EXXI Convertible Notes Claims, and other interested parties, and thereafter in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court. There can be no assurance that the Debtors will be able to secure approval for the Plan or any other Chapter 11 plan from the Bankruptcy Court or that any Chapter 11 plan will be accepted by the Debtors’ creditors.

Under the priority rankings established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution or retain any property under a Chapter 11 plan (including the Plan). The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation of a Chapter 11 plan (including the Plan). No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. A Chapter 11 plan (including the Plan) could result in holders of certain liabilities and/or securities, including common stock, receiving no distribution on account of their interests. Because of such possibilities, there is significant uncertainty regarding the value of our liabilities and securities, including our common stock. At this time, there is no assurance we will be able to restructure as a going concern or successfully propose or implement a Chapter 11 plan (including the Plan).

For periods subsequent to filing the Bankruptcy Petitions, the Company will apply ASC 852, Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the Chapter 11 Cases will be recorded in a reorganization line item on the consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the bankruptcy reorganization process will be classified on the balance sheet in liabilities subject to compromise. These liabilities will be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

Going Concern Matters

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, although the Bankruptcy Petitions noted above and sustained depressed commodity prices raise substantial doubt about our ability to continue as a going concern. Accordingly, the financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded assets or to the amounts and classification of liabilities or any other adjustments that would be required should we be unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon, among other things, market conditions and our ability to improve profitability, meet certain conditions of the Restructuring Support Agreement as noted above and obtain confirmation of the Plan or another Chapter 11 plan by the Court and our ability to successfully implement the Plan or another Chapter 11 plan. As a result of the Bankruptcy Petitions, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in the Restructuring Support Agreement), for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Plan, or another Chapter 11 plan, could materially change the amounts and classifications of assets and liabilities reported in our consolidated financial statements.

We produce both oil and natural gas. Throughout this Quarterly Report, when we refer to “total production,” “total reserves,” “percentage of production,” “percentage of reserves,” or any similar term, we have converted our natural gas reserves or production into barrel of oil equivalents. For this purpose,

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six thousand cubic feet of natural gas is equal to one barrel of oil, which is based on the relative energy content of natural gas and oil. Natural gas liquids are aggregated with oil in this Quarterly Report.

Known Trends and Uncertainties

Commodity Price Volatility and Impact on our Results of Operations.  Prices for oil and natural gas historically have been volatile and are expected to continue to be volatile. Oil and natural gas prices declined significantly during fiscal year 2015 and the decline has continued into fiscal year 2016. The posted price per barrel for West Texas intermediate light sweet crude oil, or WTI, for the period from October 1, 2014 to March 31, 2016 ranged from a high of $91.01 to a low of $26.21, a decrease of 71.2%, and the NYMEX natural gas price per MMBtu for the period October 1, 2014 to March 31, 2016 ranged from a high of $4.49 to a low of $1.64, a decrease of 63.5%. As of March 31, 2016, the spot market price for WTI was $38.34. Oil prices remain depressed in 2016, with the price of WTI crude oil per barrel dropping below $27.00 in February 2016 for the first time in twelve years. Although oil prices have rebounded above $40.00 per barrel in April and May 2016, there is still significant volatility in commodity prices and these prices are still significantly lower than the industry has experienced in recent years. The recent declines in oil and natural gas prices have adversely affected our financial position and results of operations and the quantities of oil and natural gas reserves that we can economically produce.

Exploration and Production (“E&P”) Bankruptcies.  In the United States, several E&P companies with substantial debt filed for bankruptcy protection between July 2014 and March 2016. With the continued market instability, numerous E&P companies have been forced to stop drilling new wells — the core of an E&P company’s business — and cut capital expenditures, as it is not economically feasible to undertake capital intensive projects at current prices. Others have been forced to sell off assets at severe discounts, or even stop operations altogether. The Company along with the independent directors at EGC and EPL has determined that commencing Chapter 11 cases to implement the restructuring contemplated by the Restructuring Support Agreement will maximize value for its stakeholders.

Reserve Quantities.  A prolonged period of depressed commodity prices could have a significant impact on the value and volumetric quantities of our proved reserve portfolio, assuming no other changes in our development plans. At March 31, 2016, our total proved reserves were 33.3 MMBOE. The unweighted arithmetic average first-day-of-the-month prices used to determine our reserves as of June 30, 2015 were $73.88 per barrel of oil, $31.64 per barrel for NGLs and $3.11 per MMBtu for natural gas, which is significantly higher than current forward strip prices. At NYMEX forward strip pricing as of April 29, 2016, we estimate that our total proved reserve equivalent volumes as of March 31, 2016 would have been approximately 1% higher compared to the results obtained using SEC pricing. Our estimated reserves as of June 30, 2015 may be further adjusted as warranted based on any changes to our long range plan, expected capital availability and drilling cost environment. The Company’s proved reserves declined significantly compared to prior years and may decline in future years.

Due to the depressed commodity prices and our lack of capital resources to develop our properties, the Company believed that all of its proved undeveloped oil and gas reserves no longer qualified as being proved as of the period ended December 31, 2015. As a result, we removed all of our proved undeveloped oil and gas reserves from the proved category as of December 31, 2015. Almost all of the proved undeveloped reserves that were removed from the proved category as of December 31, 2015 are still economic at current prices, but were reclassed to the probable category because they are no longer expected to be drilled within five years of initial booking due to current constraints on ability to fund development drilling. In addition, as of December 31, 2015, we identified certain of our unevaluated properties totaling $314.4 million as being uneconomical and have transferred such amounts to the full cost pool, subject to amortization.

Ceiling Test Write-down.  During the nine months ended March 31, 2016, we recognized write-downs of our oil and natural gas properties totaling $928.5 million. The write-downs did not impact our cash flows from operating activities but did increase our net loss for the period and our stockholders’ deficit. Further ceiling test write-downs will be required if oil and natural gas prices remain low or decline further, unproved property values decrease, estimated proved reserve volumes are revised downward or the net capitalized cost of proved oil and gas properties otherwise exceeds the present value of estimated future net cash flows. Based on the average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month

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price for each month within the previous 12 months ending April 30, 2016, we presently expect to incur further impairment of $30 million to $40 million in the fourth fiscal quarter of 2016. If the current low commodity price environment or downward trend in oil prices continues, we will incur further impairments to our full cost pool in fiscal 2016 and beyond based on the average oil and natural gas price calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the previous 12-month period under the SEC pricing methodology.

Decreasing Service Costs.  We have also seen a significant and continuing reduction in rig rates and drilling costs, which should allow us to spend less capital drilling our development wells than in prior periods.

BOEM Supplemental Financial Assurance and/or Bonding Requirements.  As of March 31, 2016, we had $185.2 million of performance bonds outstanding. As a lessee and operator of oil and natural gas leases on the federal OCS, approximately $63.0 million of our performance bonds are lease and/or area bonds issued to the BOEM that the BOEM has access to and assure our commitment to comply with the terms and conditions of those leases. We also maintain approximately $122.2 million in performance bonds issued to predecessor third party assignors rather than to the BOEM, including certain state regulatory bodies of certain of the wells and facilities on these leases pursuant to a contractual commitment made by us to those third parties at the time of assignment with respect to the eventual decommissioning of those wells and facilities.

In April 2015, we received letters from the BOEM stating that certain of our subsidiaries no longer qualify for waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging and abandonment liabilities. The letters notified us that certain of our subsidiaries must provide approximately $566.5 million in supplemental financial assurance and/or bonding for their offshore oil and gas leases, rights-of-way, and rights-of-use and easements. In June 2015 and December 2015, we reached agreements with the BOEM with respect to which we provided $54.7 million and $8.9 million, respectively, of supplemental bonds issued to the BOEM (which is reflected in the $63.0 million in lease and/or area bonds discussed above). On June 30, 2015, we sold the East Bay field, and as a result, the $566.5 million of requested supplemental bonding was reduced by approximately $178 million.

In October 2015, we received information from the BOEM indicating that we could receive additional demands of supplemental financial assurance for amounts in addition to the $566.5 million initially sought by the BOEM in April 2015, primarily relating to certain properties that are no longer exempt from supplemental bonding as a result of co-lessees losing their exemptions. However, we believe a substantial portion of the additional supplemental financial assurance and/or bonding that could be sought by the BOEM may relate to circumstances that could eventually be removed from our responsibility (in terms of providing added assurance or bonding), including, for example, lease interests of co-lessees, leases that have since been divested by us, and leases where we are not the permitted operator and no drilling of wells has occurred. We would expect that most, if not all, of our co-lessees with the remaining working interest in such lease interests will provide their share of the bonding.

Since we received the additional information from the BOEM in October 2015, we have had a series of discussions and exchanges of information with the BOEM on long-term financial assurance planning, culminating most recently in the BOEM’s agreement to, and execution of, the Long-Term Plan on February 25, 2016. As required by this plan, we must perform, among other things, the following activities: (1) use our best commercial efforts to have the BOEM included as an additional obligee under our third-party bonds by July 1, 2016; (2) provide additional financial assurance as may be required under the applicable BOEM requirements with respect to any of our pending or future plans or activities for offshore leasing, exploration or development, including any permitting or assignment associated with such plans or activities (but excluding certain internal restructuring assignments or transfers between us and our subsidiaries or our affiliates); (3) with respect to certain of our operated properties with active non-waived co-lessees, make diligent efforts to negotiate with our co-lessees to achieve full financial assurance for certain of such offshore facility interests by submitting a plan for these properties by July 1, 2016; (4) work with the third-party operators of our non-operated interests to address our proportionate share of any supplemental bond demands on these non-operated properties; and (5) work with BOEM and our insurers to potentially receive credit for our energy insurance package. If we are unable to provide sufficient financial assurance to the BOEM under the Long-Term Plan, after July 1, 2016, BOEM may assess additional supplemental financial assurance and/or

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bonding requirements on us, which could negatively impact our operations, financial condition and liquidity. Pursuant to the Restructuring Support Agreement entered into on April 11, 2016, it is anticipated that the Company will continue to perform its obligations under the Long-Term Plan during the pendency of the Chapter 11 Cases and in connection with the consummation of its restructuring.

The BOEM may bolster of its financial assurance requirements mandated by rule for all companies operating in federal waters. The cost of compliance with our existing supplemental bonding requirements, including the directives issued by the BOEM in April 2015 and June 2015 as reflected in the Long-Term Plan, any other future BOEM directives, or any other changes to the BOEM’s current NTL supplemental bonding requirements or supplemental bonding regulations applicable to us or our subsidiaries’ properties could materially and adversely affect our financial condition, cash flows, and results of operations. In addition, we may be required to provide cash collateral or letters of credit to support the issuance of such bonds or other surety. Such letters of credit would likely be issued under our Revolving Credit Facility and would reduce the amount of borrowings available under such facility in the amount of any such letter of credit obligations.

We can provide no assurance that we can continue to obtain bonds or other surety in all cases or that we will have sufficient availability under our Revolving Credit EPL Sub-Facility to support such supplemental bonding requirements. If we are unable to obtain the additional required bonds or assurances as requested, the BOEM may require any of our operations on federal leases to be suspended or cancelled or otherwise impose monetary penalties, and one or more of such actions could have a material effect on our business, prospects, results of operations, financial condition, and liquidity.

Oil Spill Response Plan.  We maintain a Regional Oil Spill Response Plan (the “OSRP”) that defines our response requirements, procedures and remediation plans in the event we have an oil spill. Oil Spill Response Plans are approved by the Bureau of Safety and Environmental Enforcement (“BSEE”). The OSRP is reviewed at least annually, and updated as necessary, which updates also require BSEE approval. The OSRP specifications are consistent with the requirements set forth by the BSEE. Additionally, the OSRP is tested and drills are conducted annually at all levels of the Company.

We have contracted with a spill response management consultant to provide management expertise, personnel and equipment, under our supervision, in the event of an incident requiring a coordinated response. Additionally, we are a member of Clean Gulf Associates (“CGA”), a not-for-profit association of producing and pipeline companies operating in the Gulf of Mexico that has the appropriate equipment, including aircraft dispersant capabilities through its contract with Airborne Support Inc. and access to appropriate personnel to simultaneously respond to multiple spills. In the event of a spill, CGA mobilizes appropriate equipment and personnel to CGA members.

Hurricanes.  Since the majority of our production originates in the Gulf of Mexico, we are particularly vulnerable to the effects of hurricanes on production. Significant hurricane impacts could include reductions and/or deferrals of future oil and natural gas production and revenues, increased lease operating expenses for evacuations and repairs and possible acceleration of plugging and abandonment costs.

Results of Operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Our consolidated net loss for the three months ended March 31, 2016 was $147.2 million as compared to $295.6 million for the three months ended March 31, 2015. The decrease in the net loss was primarily due to lower impairment of oil and natural gas properties.

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Revenues

		Three Months Ended March 31,								Decrease				Percent Decrease
		2016				2015
		(In thousands)
Oil		$	37,869			$	74,551			$	(36,682	)			(49.2	)%
Natural gas			7,579				10,872