Fresh-Start Accounting

12 Months Ended

Dec. 31, 2016

NOTE C—FRESH-START ACCOUNTING

The Restructuring was accounted for as a purchase and was effective October 5, 2016. However, due to the immateriality of the five day activity period from October 1, 2016 through October 5, 2016, the Restructuring was treated for accounting purposes as effective September 30, 2016. The Restructuring resulted in a new basis of accounting and the Company qualified for and adopted fresh-start accounting in accordance with the provisions set forth in ASC 852 as (i) the Reorganization Value of the Company’s assets immediately prior to the date of confirmation was less than post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the merging entity. Refer to Note 2, “Reorganization,” for the terms of the Plan. Fresh-start accounting required the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy. The new entity is referred to as “Successor” or “Successor Company.” However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company. The Predecessor and Successor companies may lack comparability, as required in ASC Topic 205, Presentation of Financial Statements (ASC 205). ASC 205 states financial statements are required to be presented comparably from year to year, with any exceptions to comparability clearly disclosed. Therefore, “black-line” financial statements are presented to distinguish between the Predecessor and Successor Companies.

Adopting fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date. Upon the application of fresh-start accounting, the Company allocated the Reorganization Value (the fair value of the Successor Company’s total assets) to its individual assets based on their estimated fair values. The Reorganization Value is intended to represent the approximate amount a willing buyer would value the Company’s assets immediately after the reorganization.

Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company’s long-term debt, stockholders’ equity and working capital. The Enterprise Value was derived from a valuation using an asset-based methodology of proved reserve, undeveloped acreage, other long-term asset values and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh-start reporting date of September 30, 2016.

The Company’s principal assets are its oil and natural gas properties. For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves and discounted using a weighted average cost of capital rate of 10%. Weighted average commodity prices utilized in the determination of the fair value of oil and natural properties were $48.24 per barrel of oil, $2.54 per MMBtu of natural gas, after adjustment for transportation fees and regional price differentials.

Although the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgement.

The following table reconciles the Company’s Enterprise Value to the estimated fair value of the Successor’s common stock as of (in thousands):


	September 30, 2016
Enterprise Value	$	215,890
Plus: Cash		5,034
Less: Fair value of debt		(130,000	)

Fair Value of Successor common stock	$	90,924

The following table reconciles the Company’s Enterprise Value to its Reorganization Value as of September 30, 2016 (in thousands):


	September 30, 2016
Enterprise Value	$	215,890
Plus: Cash		5,034
Plus: Current liabilities		16,999
Plus: Noncurrent asset retirement obligation		33,632

Reorganization Value of Successor assets	$	271,555

Condensed Consolidated Balance Sheet

The following illustrates the effects on the Company’s consolidated balance sheet due to the reorganization and fresh-start accounting adjustments. The explanatory notes following the table below provide further details on the adjustments, including the Company’s assumptions and methods used to determine fair value for its assets and liabilities. Amounts included in the table below are rounded to thousands.


	As of September 30, 2016
	Predecessor Company			Reorganization Adjustments			Fresh-Start Adjustments			Successor Company
ASSETS
Current assets
Cash and cash equivalents	$	5,034		$	—		$	—		$	5,034
Accounts receivable		7,094			—			(521	)(6)		6,573
Other current assets		5,498			—			(759	)(6)		4,739
Derivative financial instruments		134			—			—			134

Total current assets		17,760			—			(1,280	)		16,480

Noncurrent Assets
Oil and gas properties		62,659			—			158,276	(6)(7)		220,935
Property and equipment		1,176			—			29,931	(6)(7)		31,107
Other assets		3,026			—			7	(6)		3,033

Total other assets		66,861			—			188,214			255,075

	$	84,621		$	—		$	186,934		$	271,555

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	15,116			—		$	1,883	(6)		16,999

Total current liabilities		15,116			—			1,883			16,999
Noncurrent liabilities
Other long-term liabilities		33,654			—			(22	)(8)		33,632
Long-term debt		—			130,000	(1)					130,000
Liabilities subject to compromise		509,306			(509,306	)(2)		—			—

Total liabilities		558,076			(379,306	)		1,861			180,631

Commitments and contingencies		—			—			—			—

Stockholders’ Equity (Deficit)
Predecessor preferred stock		128			(128	)(3)		—			—
Predecessor common stock		9			(9	)(3)		—			—
Predecessor additional paid-in capital		517,468			(517,468	)(3)					—
Successor common stock		—			100	(4)		—			100
Successor additional paid-in capital		—			90,824	(4)		—			90,824
Accumulated deficit		(991,060	)		805,987	(5)		185,073	(9)		—

Total stockholders’ equity (deficit)		(473,455	)		379,306			185,073			90,924

	$	84,621		$	—		$	186,934		$	271,555

Reorganization adjustments

1)	Reflects issuance of $130 million of debt from the Exit Credit Facility

2)	Liabilities subject to compromise were as follows (in thousands):


Accounts payable and accrued expenses	$	38,105
First Lien Credit Facility		230,532
Second Lien Credit Facility		71,617
Senior Notes		161,635
Convertible Debentures		(83	)
Other long-term liabilities		7,500

Gain on settlement of liabilities subject to compromise	$	509,306

3)	Reflects the cancellation of Predecessor equity as follows (in thousands):


Predecessor preferred stock	$	128
Predecessor common stock		9
Predecessor additional paid-in-capital		517,468

Cancellation of Predecessor Company equity	$	517,605

4)	Reflects the issuance of Successor equity as follows (in thousands):


Successor common stock	$	100
Successor additional paid-in-capital		90,824

Issuance of Successor equity	$	90,924

5)	Reflects the cumulative effect of the reorganization adjustments of $806 million.

Fresh-start accounting adjustments

In estimating the fair value of its oil and natural gas and other properties, the Company used a combination of the income and market approaches. For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10% for proved reserves. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $48.24 per barrel of oil and $2.54 per MMBtu of natural gas, after adjustment for transportation fees and regional price differentials. Amount reflects the reclassification of the Company’s gas pipeline cost from oil and gas properties into property and equipment. Other line item amounts reflects changes attributable to oil and gas operations.

For purposes of estimating the fair value of its gas pipeline, an income approach was used that estimated future cash flows associated with the assets over the remaining useful lives. The valuation included such inputs as estimated future production, gathering and compression revenues and operating expenses that were discounted at a weighted average cost of capital rate of 9.5%.

For purposes of estimating the fair value of the land, an appraisal was performed by an independent third party appraisal firm.

8)	Reflects the adjustment of asset retirement obligations to fair value using estimated plugging and abandonment costs as of September 30, 2016.

9)	Reflects the cumulative effect of fresh-start accounting adjustments.

WARREN RESOURCES INC 10-K