Venoco 10-Q 2005
Washington, D.C. 20549
Amendment No. 1
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the quarterly period ended June 30, 2005
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
Commission File Number: 333-123711
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (303) 626-8300
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required 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 report(s), 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
As of June 30, 2005, there were 32,692,500 shares of the issuers common stock, par value $0.01 per share, issued and outstanding.
This Amendment to the Quarterly Report of Venoco, Inc. (the Company) on Form 10-Q/A for the quarterly period ended June 30, 2005 is being filed in order to reflect the restatement of the Companys previously issued quarterly condensed consolidated financial statements for the three months ended June 30, 2005, (the Original Filing) as discussed in Note 2 to the condensed consolidated financial statements included in Item 1.
For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A amends and restates only Part I of the Original Filing and amends and restates that Part solely as a result of, and to reflect, the Restatement, and to add Note 9 to the condensed consolidated financial statements regarding stock option issuances. Part I has not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events other than the stock split effected on November 8, 2005 and described in Note 1 to the condensed consolidated financial statements. Certain information, including forward-looking statements in the Original Filing regarding anticipated production and capital expenditures, have been superceded by disclosures made by the Company since the date of the Original Filing, including in the Companys current report on Form 8-K dated November 17, 2005. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2, and 32, respectively.
See notes to condensed consolidated financial statements
VENOCO, INC. AND SUBSIDIARIES
See notes to condensed consolidated financial statements
VENOCO, INC. AND SUBSIDIARIES
See notes to condensed consolidated financial statements.
VENOCO, INC. AND SUBSIDIARIES
See notes to condensed consolidated financial statements.
Interim Financial StatementsThe accompanying condensed consolidated financial statements of Venoco Inc. for the three and six months ended June 30, 2005 and 2004 are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Companys financial position at June 30, 2005, the results of operations for the three and six months ended June 30, 2005 and 2004 and cash flows for the six months ended June 30, 2005 and 2004. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, these financial statements should be read in conjunction with the Companys audited 2004 financial statements contained in its Registration Statement on Form S-4/1A (Registration No. 333-123711) as filed with the Securities and Exchange Commission on April 20, 2005. The results for interim periods are not necessarily indicative of annual results.
Stock SplitAll common share amounts in the accompanying financial statements have been adjusted for the 1,000- for-one reverse stock split effected on February 10, 2005 and a one-for -7,500 stock split approved by the board of directors of the Company on October 13, 2005 and effected on November 8, 2005.
New Company BasisDuring 2004, the Companys CEO, Tim Marquez, increased his ownership in the Company from 41% to 100%. As a result of a transaction that closed on July 12, 2004, Mr. Marquez purchased 53% of the common shares (2,468 common shares) of the Company from two of the Companys former officers and their respective affiliates. On December 22, 2004, the Company merged with a corporation the sole stockholder of which was a trust controlled by Mr. Marquez. This merger had the effect of giving Mr. Marquez the remaining 6% of the Companys common stock.
As a result of Mr. Marquez obtaining control of over 95% of the common stock of the Company on December 22, 2004, SEC Staff Accounting Bulletin No. 54 requires the acquisition by Mr. Marquez to be pushed-down, meaning the post-transaction condensed consolidated balance sheet and the condensed consolidated statements of operations and cash flows of the Company reflect a new basis of accounting (successor basis). The pre-transaction condensed consolidated statements of operations and cash flows are presented on the historical basis (predecessor basis).
Common Control MergerOn March 21, 2005 the Company completed the acquisition of Marquez Energy, LLC, a Colorado limited liability company (Marquez Energy) majority-owned and controlled by Timothy Marquez, the Companys CEO and sole shareholder. Due to the common control aspects of the transaction, the financial statements of Marquez Energy have been combined with the consolidated financial statements of the Company and its subsidiaries in a manner similar to a pooling-of-interests, since the date that common control was achieved. Therefore, the Companys financial statements since July 12, 2004 were restated to include Marquez Energys financial results.
The Company has restated its consolidated financial statements for the quarters ended March 31, 2005 and June 30, 2005 for the items discussed below. These items resulted in no adjustments to net income in the quarter ended June 30, 2005. The adjustments reduced net income by $42 thousand for the six month period ended June 30, 2005. They also resulted in balance sheet adjustments at June 30, 2005
which decreased total assets by $0.4 million, decreased total liabilities by $3.6 million and increased total stockholders equity by $3.2 million.
Subsequent to the issuance of the Companys condensed consolidated financial statements for the three months ended March 31, 2005, the Company determined that it should have recognized a deferred tax asset related to the difference between the financial accounting and income tax basis of the assets acquired and liabilities assumed in connection with the common control merger with Marquez Energy LLC on March 21, 2005 and that it should have recognized a minority interest in Marquez Energy which existed prior to the acquisition of Marquez Energy by the Company. As a result, the accompanying condensed consolidated financial statements as of June 30, 2005 and December 31, 2004 and for the three and six months months ended June 30, 2005 have been restated from the amounts previously reported to record a deferred tax asset and to recognize a minority interest in Marquez Energy which existed prior to the consummation of the acquisition.
A summary of the significant effects of the restatement on the Companys consolidated balance sheet as of December 31, 2004 and June 30, 2005 and the Companys consolidated statements of income for the three and six month periods ended June 30, 2005 is as follows (in thousands):
The guarantor financial information presented in Note 13 which is presented in order to isolate the financial information of those subsidiaries which are not guarantors of our 8.75% senior notes as described in Note 6 has also been revised. The financial information of those subsidiaries which are not guarantors of the 8.75% senior notes did not materially change.
On March 21, 2005, the Company completed the acquisition of Marquez Energy. The transaction added proved reserves of approximately 2.0 MMBOE as of December 31, 2004, based on a reserve report prepared by Netherland, Sewell and Associates, Inc. (NSAI). The purchase price for the membership interests in Marquez Energy was $16.6 million. The purchase price was based on the members equity on Marquez Energys unaudited December 31, 2004 balance sheet as adjusted to reflect the value of its oil and natural gas properties (as determined by NSAI as of December 31, 2004) and certain other adjustments. For the purpose of calculating the purchase price, the following values were assigned to Marquez Energys proved reserves: (i) $1.75/Mcfe for its proved developed producing reserves, (ii) $1.00/Mcfe for its proved developed non-producing reserves and (iii) $0.75/Mcfe for its proved undeveloped reserves. NSAI or another nationally recognized engineering firm will conduct supplemental evaluations of the Marquez Energy properties as of year-end 2005 and 2006. In the event those evaluations attribute proved reserves to the Marquez Energy properties as of December 31, 2004 in excess of those reflected in NSAIs initial report, additional payments will be made to the former holders of interests in Marquez Energy pursuant to the same formula, subject to a maximum aggregate price, including debt assumption, of $25 million. The Company had paid a deposit of $2 million to the members of Marquez Energy as of December 31, 2004 and on March 21, 2005 paid the remaining $14.6 million to the members of Marquez Energy and $3.2 million to Bank of Oklahoma to repay the existing debt. Because this entity was owned by the Companys CEO and sole shareholder, the assets and liabilities on a net basis were recorded at their historical cost. The amount of the purchase price in excess of the historical cost has been charged directly against equity. As discussed in Note 1, for financial reporting purposes the acquisition was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests.
In February 2005, the Company entered into a purchase and sale agreement to sell its interest in the Big Mineral Creek field (BMC), located in Grayson County, Texas. The sales price was $45 million, subject to adjustments that, among other things, gave economic effect to the transaction as of February 1, 2005. The closing of the transaction occurred on March 31, 2005. As of December 31, 2004 the field had proved reserves of approximately 3.4 MMBOE, according to a report by NSAI.
In order to facilitate a possible like-kind exchange of the Companys BMC property under Section 1031 of the Internal Revenue Code, the proceeds of the sale were deposited with a qualified intermediary. In addition, the equity interests in Marquez Energy are currently being held by an independent entity acting on behalf of the Company to allow a portion of the Marquez Energy properties to be potentially used as replacement properties to the BMC property. The Company has and will at all times continue to maintain beneficial ownership of the interests, and will assume direct ownership of them within 180 days of the closing. The purpose of this structure is to give the Company the option of effecting a like-kind exchange of the BMC property pursuant to Section 1031 and thereby deferring a portion of the taxes payable with respect to the sale of the BMC property. The Company has identified and is pursuing acquisition opportunities which qualify as replacement properties. The Company has not recorded a gain on the sale of the BMC property, but has applied the sales proceeds of $44.6 million to reduce the capitalized cost of oil and natural gas properties and has recorded the cash received as Cash Restricted for Investment in Oil and Natural Gas Properties on the condensed consolidated balance sheet at June 30, 2005. In the event the Company does not acquire qualified replacement properties prior to September 27, 2005 it will not be able to utilize the like kind exchange provisions of Section 1031, in which case it may incur an income tax liability on the gain on the sale of the BMC property of up to approximately $15.2 million, and the $44.6 million sales proceeds recorded as Cash Restricted for Investment in Oil and Natural Gas Properties would be transferred to the cash account and be available
for capital expenditures, the acquisition of long-term assets, and, subject to certain limitations pursuant to the covenants of its senior notes, for general corporate purposes.
In February 2004, the Company sold its interest in the North and South Afton, California, gas properties for a net sales price of approximately $1.5 million. In accordance with its accounting policies, the Company did not recognize any gain or loss on the transaction, but applied the net sales proceeds to reduce the capitalized cost of its oil and gas properties.
In March 2004, the Company sold its subsidiary, Venoco Patagonia, Ltd., a Bermuda corporation, for $0.2 million. The $0.2 million sales price was comprised of cash of $0.1 million and payment of liabilities of $0.1 million.
5. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into derivative contracts, primarily collars, swaps and option contracts, to hedge future crude oil and natural gas production in order to mitigate the risk of market price fluctuations. The objective of the Companys hedging activities and the use of derivative financial instruments is to achieve more predictable cash flows. While the use of these derivative instruments limits the downside risk of adverse price movements, they also limit future revenues from favorable price movements. The use of derivatives also involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts.
In order to qualify for hedge accounting, the relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. The Company measures effectiveness on a quarterly basis. Hedge accounting is discontinued prospectively when a hedge instrument is no longer considered highly effective.
All derivative instruments are recorded on the balance sheet at fair value. Fair value is generally determined based on the difference between the fixed contract price and the underlying market price at the determination date, and/or confirmed by the counterparty. Changes in the fair value of the effective portion of the cash flow hedges are recorded as a component of accumulated other comprehensive income (loss), which is later transferred to the income statement as a component of commodity derivative income (loss) when the hedged transaction occurs. Changes in the fair value of derivatives which do not qualify as a hedge or are not designated as a hedge, as well as the ineffective portion of hedge derivatives, are recorded in commodity derivative income (loss) on the income statement. The Company determines hedge ineffectiveness based on changes during the period in the price differentials between the index price of the derivative contracts (which uses a New York Mercantile Exchange (NYMEX) index in the case of oil hedges, and NYMEX and PG&E Citygate in the case of natural gas hedges) and the contract price for the point of sale for the cash flow that is being hedged. Hedge ineffectiveness occurs only if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change in the expected future cash flows on the hedged transaction. Ineffectiveness is recorded in earnings to the extent the cumulative changes in fair value of the actual derivative exceed the cumulative changes in fair value of the hypothetical derivative.
The components of commodity derivative losses in the condensed consolidated income statements are as follows (in thousands):
The estimated fair values of derivatives included in the consolidated balance sheets at June 30, 2005 and December 31, 2004 are summarized below. The increase in the net derivative liability from December 31, 2004 to June 30, 2005 is primarily attributable to the effect of rising oil and natural gas prices, partially offset by cash settlements of derivatives during the period (in thousands):
As of June 30, 2005, an unrealized derivative fair value loss of $17.5 million ($10.6 million after tax), related to cash flow hedges, was recorded in accumulated other comprehensive loss. Based on June 30, 2005 mark-to-market prices, the Company expects to reclassify as decreases to earnings $9.7 million ($5.8 million after tax) from accumulated other comprehensive loss during the next twelve months. The actual reclassification to earnings will be based on mark-to-market prices at the contract settlement date.
Crude Oil AgreementsAs of June 30, 2005, the Company has entered into option, swap and collar agreements to receive average minimum and maximum New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) prices as summarized below. Location and quality differentials attributable to the Companys properties are not included in the following prices. The agreements provide for monthly settlement based on the differential between the agreement price and the actual NYMEX crude oil price.
Natural Gas AgreementsAs of June 30, 2005, the Company has entered into option, swap and collar agreements to receive average minimum and maximum PG&E Citygate prices as follows:
As of June 30, 2005 the Company has entered into a forward sales contract with a gas purchaser under which it is obligated for physical delivery of specified volumes of gas with a floor price. As this contract provides for physical delivery of the gas it is not considered a derivative because it has been designated as a normal sale and the transaction will be recorded in the financial statements when the associated delivery occurs. The Company has contracted for 2,000 MCF per day at a floor price of $4.85 per MCF for the period July 1, 2005 to September 30, 2006.
Long-term debt consists of the following (in thousands):
On December 20, 2004, the Company sold $150 million in 8.75% senior notes (the notes). The notes were issued at 99.362% of par to yield 8.80% to maturity due December 2011. Interest on the notes is due each June 15 and December 15 beginning June 15, 2005. The notes are senior unsecured obligations and contain covenants that, among other things, limit the Companys ability to make investments, incur additional debt or issue preferred stock, create liens and sell assets.
Proceeds from the sale of the notes were used to repay existing borrowings of $98.7 million against the Companys $102 million Senior Secured Facility (the Senior Facility) obtained in November 2004. The Company also obtained in December 2004 an amended and restated revolving credit agreement with an initial borrowing base of $50 million and no associated term loan facility (restated Credit Agreement). The borrowing base under the restated Credit Agreement was reduced to $40 million on March 31, 2005 due to the sale of BMC. The restated Credit Agreement contains a number of restrictive covenants with regard to leverage and current ratios and other terms customary in a credit facility secured by oil and natural gas properties. At June 30, 2005, there were $15 million of borrowings against the restated Credit Agreement. At June 30, 2005, the average interest rate on the revolving loans was 5.63 percent. As of June 30, 2005, the Company was in compliance with all of its financial covenants.
At December 31, 2004, Marquez Energy, now consolidated with the Company had a $5.0 million revolving credit facility with the Bank of Oklahoma. Interest accrued at the JP Morgan Chase Bank prime rate plus 1 percent. The agreement was collateralized by the Companys oil and gas properties and was guaranteed by the Companys principal shareholder and president. The credit agreement also contained certain net worth, leverage and ratio requirements and limited the payment of distributions. At December 31, 2004, the Company had approximately $4.7 million of outstanding borrowings under this credit facility. The Company repaid the outstanding borrowings on March 21, 2005 of $3.2 million on the credit facility.
In addition, on December 9, 2004, the Company purchased an office building in Carpinteria, California secured by a 5.79% $10 million promissory note due January 1, 2015. The promissory note provides for a monthly payment of $58,612 beginning February 1, 2005 and continuing through December 1, 2014. The balance of unpaid principal and all accrued but unpaid interest is due and payable on January 1, 2015.
Comprehensive income (loss) includes net income and certain items recorded directly to Stockholders Equity and classified as Accumulated Other Comprehensive Income (OCI). The following table reflects comprehensive income for the three and six month periods ended June 30, 2005 and 2004.
Beverly Hills Litigation
Six lawsuits have been filed against the Company and certain other energy companies in Los Angeles County Superior Court by persons who attended Beverly Hills High School or who are citizens of Beverly Hills/Century City or visitors to that area from the time period running from the 1930s to date. There are approximately 1,000 plaintiffs (including plaintiffs in two related lawsuits in which the Company has not been named) who claim to be suffering from various forms of cancer or some other illnesses, fear they may suffer from such maladies in the future, or are related in some manner to persons who have suffered from cancer or other illnesses. Plaintiffs allege that exposure to substances in the air, soil and water which derive from either oil field or other operations in the area are the cause of the cancers and other maladies. The Company has owned an oil and gas facility adjacent to the school since 1995. For the majority of the plaintiffs, their alleged exposures occurred before the Company owned the facility. It is anticipated that
additional plaintiffs may be added to the litigation over time. All cases have been consolidated before one judge. The judge has ordered that all of the cases be stayed except for an initial trial group consisting of twelve representative plaintiffs. Discovery relating to the initial trial group is ongoing, with a trial set for March 2006. Management believes that the claims made in the suits are without merit and the Company intends to defend against the claims vigorously. However, the Company cannot predict, at this time, the outcome of the suits. The Company also has defense and indemnity obligations to certain other defendants in the actions. The Company cannot predict the cost of defense and indemnity obligations, if any, at the present time.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 5, Accounting for Contingencies, the Company has not accrued for a loss contingency relating to the Beverly Hills litigation because it believes that, although unfavorable outcomes in the proceedings may be reasonably possible, they are not considered by management to be probable or reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, and if insurance coverage is determined to not be applicable, their impact on the Companys results of operations, financial position and/or liquidity could be material.
Litigation by former directors and former preferred stockholders
In December 2004, a lawsuit was filed against the Company by two of its former directors and the former preferred shareholders. The claim is for indemnification of attorneys fees and expenses incurred in defending the former directors in litigation filed by the former CEO in connection with the termination of his employment from Venoco. Fees incurred in the defense total approximately $1,000,000. On July 28, 2005 the Company entered into a settlement agreement with the former directors and the former preferred shareholder and settled the litigation for amounts which did not differ materially from the amount previously accrued.
Former Chief Operating Officer (COO) Litigation
In December 2004, a former COO of the Company filed a lawsuit against the Company and its CEO in Santa Barbara County Superior Court, claiming that the Company breached his employment agreement and wrongfully failed to pay him wages due, primarily in connection with stock bonuses. The Company believes that he was entitled to approximately 45,000 shares (approximately 7,000 of which were previously issued) and that the Company has the right to repurchase those shares at net book value as of January 1, 2004 ($.53/share). The former COO is alleging that he is entitled to a cash bonus of approximately $24,000 plus interest and approximately 68,700 shares in total. The Company believes that the plaintiffs contentions are without merit. In August 2005, the Company and the former COO agreed to settle the lawsuit for amounts accrued as of June 30, 2005 in the financial statements. The Company expects that the lawsuits will be dismissed.
During 2005, the Company entered into non-qualified stock option agreements with certain employees and officers of the Company other than Mr. Marquez. Total options granted in 2005 through June 30, 2005 were 3,556,161 at a weighted average exercise price of $6.47 ($6.00 to $8.67). The options vest over a four year period, with 20% vesting on the grant date and 20% vesting on each subsequent anniversary of the grant date. The non-qualified stock option agreements provide that all options will become immediately vested following a change in control of the Company. The agreements provide that all options will become immediately vested if the Company terminates the option holders employment unless the termination is for specific types of misconduct. The Company has previously recorded stock compensation pursuant to the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, whereby no compensation was recognized for these stock option rewards. Had compensation
expense for the options granted to our employees and officers been determined based on the fair value at the grant date for the options, consistent with the provisions of SFAS No. 123R, the Companys net income (loss) for the three and six months ended June 30, 2005 and 2004 would have been increased to the pro forma amounts listed below:
On June 1, 2004 an agreement was reached between certain shareholders of the Company that ultimately resulted in the acquisition of 53.5% of the outstanding common shares in the Company in a transaction that closed on July 12, 2004. The terms of the transaction were contained in a private agreement among Timothy Marquez and the selling shareholders (the securities purchase agreement). On June 2, 2004 Timothy Marquez was elected Chairman of the Board and CEO of the Company and the selling shareholders resigned from the Board of Directors.
On January 3, 2005, a dividend of $35 million was paid to a trust controlled by the Companys sole shareholder and CEO from the proceeds of the senior notes.
The Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations as of January 1, 2003. Under SFAS No. 143, liabilities are accreted to their present value each period and the capitalized asset retirement costs are depleted over the productive life of the related assets. Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cashflows are recognized as an increase or decrease in the asset retirement obligation (ARO) and the related capitalized asset retirement costs.
The Companys asset retirement obligations represent expected future costs associated with site reclamation, facilities dismantlement, and plugging and abandonment of wells. The following is a summary of the asset retirement obligation activity (in thousands):
Of the liability for asset retirement obligations balance at June 30, 2005, $0.2 million is classified as current and included in accrued liabilities in the accompanying consolidated balance sheet. The balance of ARO as of June 30, 2005 represents The Companys estimate of the present value of its aggregate asset retirement obligations as of that date. The discount rates used to calculate the present value varied depending on the estimated timing of the obligation, but typically ranged between 6% and 8%.
In December 2004 the Financial Accounting Standards Board (FASB) issued SFAS No.123R (revised 2004), Share-Based Payments which requires that the compensation relating to all stock-based awards, including stock options, be recognized in the financial statements. This pronouncement replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. In April 2005, the Securities and Exchange Commission postponed the required implementation date for this new statement to annual periods beginning after June 15, 2005. The Company currently plans to adopt SFAS No. 123R as of January 1, 2006. The Company has previously recorded stock compensation pursuant to the intrinsic value method under APB Opinion No. 25, wherby no compensation was recognized for most stock option awards. The Company expects that stock option grants will continue to be a significant part of employee compensation, and, therefore, SFAS No. 123R will have a significant impact on its financial statements. For the pro forma effect of recording compensation for all stock awards at fair value, using the Black-Sholes method, see Note 9 to our condensed consolidated financial statements. The Company has not yet completed its evaluation, but expects the adoption of SFAS No. 123R to have an effect on the financial statements similar to the pro forma effects. The Company is currently considering alternative valuation methods to determine the fair value of stock options granted after December 31, 2005.
SFAS No. 123R permits companies to adopt its requirements using either a modified prospective method, or a modified retrospective method. Under the modified prospective method, compensation expense is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123R for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the modified retrospective method, the requirements are the same as under the modified prospective method, but also permits entities to restate financial statements of previous periods, either for all periods presented or to the beginning of the fiscal year in which the statement is adopted, based on previous pro forma disclosures made in accordance with SFAS No. 123. The Company has not yet determined which of the methods it will use upon adoption.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. This Interpretation clarifies the definition and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143, Accounting for Asset Retirement Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are dependent on future events that may be outside the control of a company. FIN 47 states that a company must record a liability when incurred for conditional asset retirement obligations if the fair value of the obligation is reasonably estimable. This Interpretation is intended to provide more information about long-lived assets, more information about future cash outflows for these obligations and more consistent recognition of these liabilities. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not believe that its financial position, results of operations or cash flows will be impacted by this Interpretation.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 changes the requirements for the accounting and reporting of a change in accounting principle. APB Opinion No. 20 previously required that most voluntary changes in
an accounting principle be recognized by including the cumulative effect of the new accounting principle in net income of the period of the change. SFAS No. 154 now requires retrospective application of changes in an accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Statement is effective for fiscal years beginning after December 15, 2005. We do not expect the adoption of this statement will have a material impact on our financial statements.
In October 2005, the FASB issued FSP FAS No. 13-1, Accounting for Rental Costs Incurred during a Construction Period, which is effective for reporting periods beginning after December 15, 2005. This Position requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. We do not expect the adoption of FSP No. 13-1 to have an impact on our financial statements.
In connection with the issuance of the senior notes in December 2004, BMC, Ltd., Whittier Pipeline Corp. and 217 State Street, Inc. (Guarantors) have fully and unconditionally guaranteed, on a joint and several basis, the Companys obligations under the senior notes (the Guarantees). On March 31, 2005 Marquez Energy became a Guarantor of the notes. Each Guarantee is a general unsecured obligation of the Guarantor, senior in right of payment to all existing and future subordinated indebtedness of that Guarantor, pari passu in right of payment with any existing and future senior unsecured indebtedness of that Guarantor and effectively junior in right of payment to that Guarantors existing and future secured indebtedness, including its guarantee of indebtedness under the senior secured credit facility, to the extent of the value of the collateral securing that facility. All Guarantors are 100% owned by the Company.
The following is condensed consolidating financial information for the three and six months ended June 30, 2005 and 2004 and as of June 30, 2005 and December 31, 2004.
(As restated, See Note 2)