Description
of Registrant's Securities to be Registered
27
Item
12.
Indemnification
of Directors and Officers
31
Item
13.
Financial
Statements and Supplementary Data
31
Item
14.
Changes
in and Disagreements with Accountants on Accounting
and
Financial Disclosure
31
Item
15.
Financial
Statements and Exhibits
31
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FORWARD-LOOKING
STATEMENTS
Certain
statements in this Registration Statement on Form 10 (“Registration
Statement”) and the documents Ridgewood Energy T Fund, LLC (the “Fund”) has
incorporated by reference into this Registration, other than purely historical
information, including estimates, projections, statements relating to the Fund’s
business plans, strategies, objectives and expected operating results, and
the
assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934
(the “Exchange Act”). These forward-looking statements generally are identified
by the words “believe,”“project,”“expect,”“anticipate,”“estimate,”“intend,”“strategy,”“plan,”“target,”“pursue,”“may,”“will likely result,” and similar
expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. A detailed
discussion of these and other risks and uncertainties that could cause actual
results and events to differ materially from such forward-looking statements
is
included in Item 1A. “Risk Factors” of this Registration Statement. The
Fund undertakes no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
AVAILABLE
INFORMATION
The
Fund’s shares will be registered under Section 12(g) of the Exchange Act. The
Fund will therefore comply with, among other things, the periodic reporting
requirements of Section 13(a) of the Act. As a result, the Fund will prepare
and
file annual reports with the United States Securities and Exchange Commission
(“SEC”) on Form 10-K, quarterly
reports on Form 10-Q and, from time to time, current reports on Form
8-K.
Moreover, the Manager maintains a website at http://www.ridgewoodenergy.com
that
contains important information about the Manager, including biographies of
key
management personnel, as well as information about the oil and natural gas
investments made by the Fund and the other investment programs managed by the
Manager. Such information includes, without limitation, a map of the Gulf of
Mexico that provides the location of every well and project managed by the
Manager along with information as to whether the project is exploratory, in
completion or producing. This information is publicly available (i.e., not
password protected) and is updated regularly.
REPORTS
TO SHAREHOLDERS
The
Fund
does not anticipate providing annual reports to shareholders but will make
available upon request copies of the Fund's periodic reports to the SEC on
Form
10-K and on Form 10-Q.
WHERE
YOU CAN GET MORE INFORMATION
The
Fund
will file annual, quarterly and current reports and certain other information
with the SEC. Persons may read and copy any documents the Fund files at the
SEC’s public reference room at 100 F Street, NE, Washington D.C. 20549. You may
obtain information on the operation at the public reference room by calling
the
SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov. A copy of any such
filings will be provided free of charge to any shareholder upon written request
to the Fund at its business address 947 Linwood Avenue, Ridgewood, New Jersey07450, ATTN: General Counsel.
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ITEM
1. BUSINESS
Overview
Ridgewood
Energy T Fund, LLC (the "Fund"), (an exploratory stage enterprise) is a Delaware
limited liability company and was formed on April 12, 2006 to acquire interests
primarily in oil and natural gas projects located in the U.S. waters of the
Gulf
of Mexico. Ridgewood Energy Corporation ("Ridgewood Energy" or the “Manager”), a
Delaware corporation, is the Manager. As the Manager, Ridgewood Energy has
direct and exclusive control over the management and control of Fund operations.
The Fund is engaged in the acquisition, development and production of oil and
natural gas projects in the Gulf of Mexico. To date, the Fund has focused
primarily on acquiring oil and natural gas projects in the shallow waters of
the
Gulf of Mexico in locations with access to existing gathering and processing
infrastructure or where such infrastructure can be constructed economically
and
efficiently.
The
Fund
initiated its private placement offering on June 15, 2006, selling whole and
fractional shares of membership interests primarily at $150 thousand per share.
There is no public market for these shares and one is not likely to develop.
In
addition, the shares are subject to severe restrictions on transfer and resale
and cannot be transferred or resold except in accordance with the Fund's LLC
operating agreement and applicable federal and state securities laws. The
offering was terminated on October 31, 2006. The Fund raised approximately
$144.6 million. After payment of approximately $23.5 million in offering fees,
commissions and investment fees, the Fund had approximately $121.1 million
for
investments and operating expenses. As of April 16, 2007, the Fund had 1,658
shareholders.
Manager
Ridgewood
Energy was founded in 1982 by Robert E. Swanson. As the Manager, Ridgewood
Energy has direct and exclusive control over the management of the Fund's
operations. With respect to project investment, Ridgewood Energy locates
potential projects, conducts appropriate due diligence and negotiates and
completes the transactions in which the investments are made. This includes
not
only review of existing title documents, reserve information, and other
technical specifications regarding a project, but also the review and
preparation of participation agreements and other agreements relating to an
investment.
In
addition, Ridgewood Energy performs (or arranges for the performance of) the
management and administrative services required for Fund operations. Among
other
services, Ridgewood Energy administers the accounts and handles relations with
the shareholders, including tax and other financial information. In addition,
Ridgewood Energy provides the Fund with office space, equipment and facilities
and other services necessary for its operation. Finally, Ridgewood Energy
manages and conducts the Fund's relations with custodians, depositories,
accountants, attorneys, brokers-dealers, corporate fiduciaries, insurers, banks
and others, as required.
The
Fund
is required to pay all other expenses it incurs, including expenses of preparing
and printing periodic reports for shareholders and the SEC, commission fees,
taxes, outside legal, accounting and consulting fees, litigation expenses and
other expenses, if any, properly payable by us. The Fund is required to
reimburse the Manager for all such Fund expenses paid by them.
As
compensation for their management services, the Manager is entitled to (i)
an
annual Management Fee, payable monthly, equal to 2.5% of the total capital
contributions made by the Fund’s shareholders and (ii) a 15% interest in the
cash distributions made to the Fund’s shareholders. The Manager received from
the Fund for its management services $1.6 million for the period April 12,2006
(Inception) through December 31, 2006. There have been no cash distributions
to
shareholders paid through December 31, 2006. Effective January 1, 2007, the
Manager has changed its policy regarding the annual management fee. Commencing
in January 2007, the management fee payable will be equal to 2.5% of the total
shareholder capital contributions, net of cumulative dry-hole expenses incurred
by the Fund. For the Fund, the management fee will be reduced by $68 thousand
per month, based upon dry-hole expenses of $32.6 million through December 31,2006.
Business
Strategy
The
Fund’s primary investment objective is to generate cash flow from the
acquisition, exploration, production and sale of crude oil and natural gas
from
oil and natural gas projects. The Fund has invested and participates in
exploration and production projects located in the waters of the Gulf of Mexico
offshore Louisiana on the Outer Continental Shelf (“OCS”). These activities are
governed by the Outer Continental Shelf Lands Act (“OCSLA”) enacted
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in
1953
and administered by the Mineral Management Services (“MMS”). The Fund generally
looks to invest in projects that have been proposed by larger independent oil
and natural gas companies seeking to minimize their risks by selling a portion
of their interest in a project. These investments may require the Fund to pay
a
disproportionate part of the drilling costs on the exploratory well of a project
than its ownership interest would otherwise require. This is called a promote
and is common in the oil and natural gas exploration industry. In addition,
notwithstanding the sale of an interest to the Fund, the seller may retain
a
right for some period of time to payments from sales of oil and natural gas
production from a well or project. This is called an overriding interest which
is also common in this industry. Notwithstanding any such promote or overriding
interest, the Fund has tried to invest in projects that it believes contain
sufficient commercial quantities of oil or natural gas and which are near (i)
existing oil or natural gas gathering and processing infrastructure and (ii)
developed markets where the Fund can sell its oil or natural gas.
The
Fund
tries to focus on projects that have significant reserve potential and which
are
projected to have the shortest time period from investment to first production.
The Fund does not operate these projects, and although it has a vote, it is
not
in control of the schedule pursuant to which its projects are developed and
completed. Moreover, when performing due diligence with respect to a project,
the Fund must rely on the independent reservoir engineers who are hired and
paid, in most cases, by the operator. The Fund does engage certain consultants
to examine and review such reserve estimates and seismic information on its
behalf.
Manager’s
Investment Committee and Investment Criteria
The
New
Jersey office has four executives on the investment committee, three of whom
have been working together at Ridgewood Energy for 20 years. The Houston office,
which opened in 2003, has five executives on the investment committee who
provide operational, scientific and technical oil and gas expertise. In
considering projects, the Manager and investment committee investigates each
such project against a list of factors that it believes will result in the
selection of those projects that have the highest probability of success. These
factors, in no particular order, include, but are not limited to, the following
(i) targeting projects that have or are expected to have operators with
significant resources and experience in oil and gas exploration; (ii) targeting
projects that have or are expected to have partners that also have significant
resources and experience in oil and gas exploration; (iii) technical quality
of
the project including its geology, seismic profile, locational trends, and
whether the project has potential for multiple prospects; (iv) oil or gas
reserve potential; (v) whether and the extent to which the operator participates
as a working interest owner in the project; (vi) economic factors, such as
potential revenues from the project, the rate of return, and estimated time
to
first production; (vii) risk factors associated with exploration, as more fully
described in this filing; (viii) existence of drilling rigs, platforms and
other
infrastructure, at or nearby the Project; (ix) proposed drilling schedule;
(x)
terms of the proposed transaction, including contractual restrictions and
obligations and lease term; and (xi) overall cost of the project.
Properties
The
following table is a summary of the Fund’s investments detailing the actual
dollars spent in millions on each project. The total spent on dry-holes
represents the total amount spent on each project through December 31, 2006
and
subsequently written off. Copies of the Fund's participation agreements are
attached hereto as exhibits.
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4
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Off-shore
Location
in
Drilling
Total
Spent
Working
Gulf
of
Risk
(b)
12/31/2006
Lease
Block
Interest
Operator
Mexico
(in
thousands)
(in
thousands)
Status
Dry
holes (a)
Green
Canyon 246
41.7%
Woodside
Energy (USA) Inc.
Louisiana
$
6,894
$
24,215
Dry
- January 2007
West
Cameron 109
22.5%
Nexen
Petroleum Offshore U.S.A.
Louisiana
N/A
$
8,375
Dry
- December 2006
Current
Projects
West
Cameron 75
20.0%
El
Paso E&P Company, L.P.
Louisiana
$
9,625
$
-
Currently
drilling - results expected in June 2007
Eugene
Island 346/347
10.0%
Newfield
Exploration Company
Louisiana
$
3,600
$
-
Currently
drilling - results expected in June
2007
(a)
Dry-hole
costs represent wells that have been drilled but do not have commercially
productive oil
and/or natural gas reservoirs and have been plugged and
abandoned.
(b)
Drilling
risk represents the estimated projected dry-hole costs, leasehold
costs or
sunk costs including promote
for project participation per AFE's adjusted for current operating
conditions (i.e.
projected costs overruns, increased drilling rates,
etc).
Working
Interest in Oil and Natural Gas Leases
Existing
projects, and future projects, if any, are expected to be located in the waters
of the Gulf of Mexico offshore from Texas, Louisiana and Alabama on the OCS.
The
OCSLA, which was enacted in 1953, governs certain activities with respect to
working interests and the exploration of oil and natural gas in the
OCS.
Under
OCSLA, the United States federal government has jurisdiction over oil and
natural gas exploration and development on the OCS. As a result, the United
States Secretary of the Interior is empowered to sell exploration, development
and production leases of a defined submerged area of the OCS, or a block,
through a competitive bidding process. Such activity is conducted by the MMS,
an
agency of the United States Department of Interior. As part of the leasing
activity and as required by the OCSLA, the leases auctioned include specified
lease terms such as the length of the lease, the amount of royalty to be paid,
lease cancellation and suspension, and, to a degree, the planned activities
of
exploration and production to be conducted by the lessee. In addition, the
OCSLA
grants the Secretary of the Interior continuing oversight and approval authority
over exploration plans throughout the term of the lease.
The
winning bidder(s) at the lease sale, or the lessee(s), are given a lease by
the
MMS that grants such lessee(s) the exclusive right to conduct oil and natural
gas exploration and production activities within a specific lease block, or
working interest. Leases in the OCS are generally issued for a primary lease
term of 5, 8 or 10 years depending on the water depth of the lease block. The
5-year lease term is for blocks in water depths generally less than 400 meters,
8 years for depths between 400 meters to 800 meters and 10 years for depths
in
excess of 800 meters. During this primary lease term, except in limited
circumstances, lessees are not subject to any particular requirements to conduct
exploratory or development activities. However, once a lessee drills a well
and
begins production, the lease term is extended for the duration of commercial
production.
The
lessee of a particular block, for the term of the lease, has the right to drill
and develop exploratory wells and conduct other activities throughout the block.
If the initial well on the block is successful, a lessee (or third-party
operator for a project) may conduct additional geological studies and may
determine to drill additional or development wells. If a development well is
to
be drilled in the block, each lessee owning working interests in the block
must
be offered the opportunity to participate in, and cover the costs of, the
development well up to that particular lessee's working interest ownership
percentage.
Generally,
working interests in an offshore gas lease under the OCSLA pay a 16.67% royalty
to the MMS. Therefore, the net revenue interest of the holders of 100% of the
working interest in the projects in which the Fund will invest is approximately
83.33% of the total revenue of the project, and, is further reduced by any
other
royalty burdens that apply to a lease block. However, as described below, the
MMS has adopted royalty relief for existing OCS leases for those who drill
deep
oil and natural gas projects.
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Mineral
Management Services Deep Natural Gas Royalty Incentive
On
January 26, 2004, the MMS promulgated a rule providing incentives for companies
to increase deep oil and natural gas production in the Gulf of Mexico (the
"Royalty Relief Rule"). Under the Royalty Relief Rule, lessees will be eligible
for royalty relief on their existing leases if they drill and perforate wells
for new and deeper reserves at depths greater than 15,000 feet subsea. In
addition, an even larger royalty relief would be available for wells drilled
and
perforated deeper than 18,000 feet subsea. It should be noted that the Royalty
Relief Rule does not extend to deep waters of the Gulf of Mexico off the
continental shelf nor does it apply if the price of natural gas exceeds $9.91
Million British Thermal Units (“mmbtu”). The Royalty Relief Rule is limited to
leases in a water depth less than 656 feet, or 200 meters. With respect to
the
Fund's projects that are currently drilling, the Fund will determine once
completed if the project will be able to claim relief under the Royalty Relief
Rule.
Oil
and Natural Gas Agreements
None
of
the Fund's projects are producing and therefore no definitive arrangements
have
been made for the sale or transportation of oil and natural gas that may be
produced from the Fund's projects. The Manager believes however, that it is
likely that oil and natural gas from the Fund’s other projects will have access
to pipeline transportation and can be marketed in a similar fashion. All of
the
Fund’s current projects are near existing transportation infrastructure and
pipelines. As mentioned above in Manager’s Investment Committee and Investment
Criteria, as part of the Manager’s review of a potential project, access to
existing transportation infrastructure is an extremely important factor as
the
existence of such infrastructure enables production from a successful well
to
get to market quickly.
Operator
The
projects in which the Fund has invested are operated and controlled by
unaffiliated third-party entities acting as operators. The operator is
responsible for drilling, administration and production activities for leases
jointly owned by working interest owners and acts on behalf of all working
interest owners under the terms of the applicable offshore operating agreements.
In certain circumstances, operators will enter into agreements with independent
third-party subcontractors and suppliers to provide the various services
required for operating leases. Currently, the Fund's projects are operated
by El
Paso E&P Company, L.P. and Newfield Exploration
Company.
Because
the Fund does not operate any of the projects in which it has acquired an
interest, shareholders must not only bear the risk that the Manager will be
able
to select suitable projects, but also that, once selected, such projects will
be
managed prudently, efficiently and fairly by the operators.
Insurance
The
Manager has obtained hazard, property, general liability and other insurance
in
commercially reasonable amounts to cover the projects, as well as general
liability and similar coverage for its business operations. However, there
is no
assurance that such insurance will be adequate to protect the Fund from material
losses related to the projects. In addition, the Manager's past practice has
been to obtain insurance as a package that is intended to cover most, if not
all, of the funds under its management. While the Manager believes it has
obtained adequate insurance in accordance with customary industry practices,
the
possibility exists, depending on the extent of the incident, insurance coverage
may not be sufficient to cover all losses. In addition, depending on the extent,
nature and payment of any claims to the Fund's affiliates, yearly insurance
limits may become exhausted and be insufficient to cover a claim made by the
Fund in that year.
Salvage
Fund
As
to
projects in which the Fund owns a working interest, the Fund deposits in a
separate interest-bearing account, or a salvage fund, which is in the nature
of
a sinking fund, money to help provide for the Fund’s proportionate share of the
cost of anticipated salvage value of dismantling production platforms and
facilities, plugging and abandoning the projects, and removing the platforms,
facilities and projects in respect of each of such projects after their useful
life, in accordance with applicable federal and state laws and regulations.
There is no assurance that the salvage fund will have sufficient assets to
meet
these requirements and any unfunded expenses, and the Fund may be liable for
such expenses. In 2006, the Fund deposited approximately $1 million from capital
contributions into a salvage fund which the Fund estimates to be sufficient
to
meet the Fund’s potential requirements. If management later determines the
deposit and earned interest is not enough to cover the Fund’s proportionate
share of expense, the Fund will deposit payments from operating income to make
up any differences. Any portion of a salvage fund that remains after the Fund
pays its share of the actual salvage cost will be distributed to the
shareholders. There are no legal restrictions on the withdrawal of the salvage
fund.
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6
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Seasonality
Generally,
the Fund's business operations are not subject to seasonal fluctuations in
the
demand for oil and natural gas that would result in more of the Fund's oil
and
natural gas being sold, or likely to be sold, during one or more particular
months or seasons. Once a project is drilled and reserves of oil and natural
gas
are determined to exist, the operator of the project extracts such reserves
throughout the year. Oil and natural gas, once extracted, can be sold at any
time during the year.
However,
the Fund's drilling, production and transportation operations are subject to
seasonal risks, such as hurricanes, that may affect the Fund’s ability to bring
such oil or natural gas to the market and, consequently, affect the price for
such oil and natural gas. The National Hurricane Center defines hurricane season
in the Atlantic Region, Caribbean, and Gulf of Mexico to be from June 1 through
November 30. During hurricane season, the number and intensity of and resulting
damage from hurricanes in the Gulf of Mexico region could affect the gathering
and processing infrastructure, drilling platforms or the availability or price
of repair or replacement equipment. As a result, these factors may affect the
supply and, consequently, the price of oil and natural gas resulting in an
increase in price if supplies are reduced. However, even if commodity prices
increase because of weather related shortages, the Fund may not be in a position
to take immediate advantage of any such price increase if, as a result of such
weather related incident, damage occurred to its projects, the gathering
infrastructure or in the transportation network.
The
Manager has had past experiences which indicate the typical interruption in
operations resulting from a hurricane that does not result in significant damage
may be approximately three to seven days. The Manager has experienced the range
of possible interruptions in operations due to hurricanes from as little as
no
damage and insignificant or no interruptions to significant damage and extended
interruptions. However, it is of course impossible to predict whether and to
what extent hurricanes and damage may occur and to what projects.
Customers
The
Fund's existing projects have not yet been developed to the point where reserves
of oil and natural gas have been discovered or extracted. As a result, the
Fund
has not yet contracted with third parties to sell such oil and natural gas
and
therefore has no customers or any one customer upon which it depends for more
than ten percent (10%) of the Fund’s revenues.
Competition
Strong
competition exists in the acquisition of oil and natural gas leases and in
all
sectors of the oil and natural gas exploration and production industry. Although
the Fund does not compete for the acquisition of working interests from the
MMS,
it does compete with other companies for the acquisition of percentage ownership
interests in oil and natural gas working interests in the secondary
market.
In
many
instances, the Fund competes for projects with large independent oil and natural
gas producers who generally have significantly greater access to capital
resources, have a larger staff, and more experience in oil and natural gas
exploration and production than the Fund. As a result, these larger companies
are in a position that they could outbid the Fund for a project. However,
because these companies are so large and have such significant resources, they
tend to focus more on projects that are larger, have greater reserve potential,
but cost significantly more to explore and develop. These larger projects
increasingly tend to be projects in the deepwater areas of the Gulf of Mexico
and the North Sea off the coast of Great Britain. However, the focus of these
companies on larger projects does not necessarily mean that they will not
investigate and/or acquire smaller projects in shallow waters for which the
Fund
competes. Many of these larger companies have participated in the auctions
for
lease blocks directly from the U.S. Government. In such cases, these companies
obtain from the U.S. Government 100% of the leasehold of a particular lease
block in the Gulf of Mexico. In order to obtain even more resources to invest
in
other larger and more expensive projects, they diversify current holdings,
including projects they own in the shallow waters of the Gulf of Mexico, by
selling off percentage interests in these lease blocks. As a result, very good
projects in the shallow waters of the Gulf of Mexico become available. The
Fund,
therefore, has opportunities to acquire interests in these smaller, yet
economically attractive projects.
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7
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Employees
The
Fund
has no employees as the Manager operates and manages the Fund.
Offices
The
Manager’s business offices are located at 947 Linwood Avenue, Ridgewood, NJ07450, and its phone number is 800-942-5550. The Manager also leases additional
office space at 11700 Old Katy Road, Houston, TX77079.
Regulations
Oil
and
natural gas exploration, development and production activities are subject
to
extensive federal and state laws and regulations. Regulations governing
exploration and development activities require, among other things, the Fund’s
operators to obtain permits to drill projects and to meet bonding, insurance
and
environmental requirements in order to drill, own or operate projects. In
addition, the location of projects, the method of drilling and casing projects,
the restoration of properties upon which projects are drilled and the plugging
and abandoning of projects are also subject to regulations.
Outer
Continental Shelf Lands Act
The
Fund’s projects are located in the offshore waters of the Gulf of Mexico on the
OCS. The Fund’s operations and activities, therefore, are governed by, among
other things, the OCSLA.
Under
OCSLA, the United States federal government has jurisdiction over oil and
natural gas development on the OCS. As a result, the United States Secretary
of
the Interior is empowered to sell exploration, development and production leases
of a defined submerged area of the OCS, or a block, through a competitive
bidding process. Such activity is conducted by the MMS, an agency of the United
States Department of Interior. The MMS administers federal offshore leases
pursuant to regulations promulgated under the OCSLA. Lessees must obtain MMS
approval for exploration, development and production plans prior to the
commencement of offshore operations. In addition, approvals and permits are
required from other agencies such as the U.S. Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency. Offshore operations are
subject to numerous regulatory requirements, including stringent engineering
and
construction specifications related to offshore production facilities and
pipelines and safety-related regulations concerning the design and operating
procedures of these facilities and pipelines. MMS regulations also restrict
the
flaring or venting of production and proposed regulations would prohibit the
flaring of liquid hydrocarbons and oil without prior authorization.
The
MMS
has also imposed regulations governing the plugging and abandonment of wells
located offshore and the installation and removal of all production facilities.
Under certain circumstances, the MMS may require operations on federal leases
to
be suspended or terminated. Any such suspension or termination could adversely
affect the Fund’s operations and interests.
The
MMS
conducts auctions for lease blocks of submerged areas offshore. As part of
the
leasing activity and as required by the OCSLA, the leases auctioned include
specified lease terms such as the length of the lease, the amount of royalty
to
be paid, lease cancellation and suspension, and, to a degree, the planned
activities of exploration and production to be conducted by the lessee. In
addition, the OCSLA grants the Secretary of the Interior continuing oversight
and approval authority over exploration plans throughout the term of the
lease.
Sales
and Transportation of Natural Gas/Oil
The
Fund
expects to sell its proportionate share of oil and natural gas to the market
and
to receive market prices from such sales. These sales are not currently subject
to regulation by any federal or state agency. However, in order for it to make
such sales the Fund is dependent upon unaffiliated pipeline companies whose
rates, terms and conditions of transport are subject to regulation by the
Federal Energy Regulatory Commission ("FERC"). The rates, terms and conditions
are regulated by FERC pursuant to a variety of statutes including the OSCLA,
the
Natural Gas Policy Act and the Energy Policy Act of 1992. Generally, depending
on certain factors, pipelines can charge rates that are either market-based
or
cost-of-service. In some circumstances, rates can be agreed upon pursuant to
settlement. Thus, the rates that pipelines charge us, although regulated, are
beyond the Fund’s control. Nevertheless, such rates would apply uniformly to all
transporters on that pipeline and, as a result, the impact to the Fund of any
changes in such rates, terms or conditions would not impact its operations
differently in any material way than the impact upon other oil or natural gas
producers and marketers.
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Environmental
Matters and Regulation
The
Fund’s operations are subject to pervasive environmental laws and regulations
governing the discharge of materials into the air and water and the protection
of aquatic species and habitats. However, although it shares the liability
along
with its other working interest owners for any environmental damage, most of
the
activities to which these environmental laws and regulations apply are conducted
by the operator on the Fund’s behalf. Nevertheless, environmental laws and
regulations to which its operations are subject may require the Fund, or the
operator, to acquire permits to commence drilling operations, restrict or
prohibit the release of certain materials or substances into the environment,
impose the installation of certain environmental control devices, require
certain remedial measures to prevent pollution and other discharges such as
the
plugging of abandoned projects and, finally, impose in some instances severe
penalties, fines and liabilities for the environmental damage that is caused
by
the Fund’s projects.
Some
of
the environmental laws that apply to oil and natural gas exploration and
production are:
The
Oil Pollution Act.
The Oil
Pollution Act ("OPA") amends Section 311 of the Federal Water Pollution Act
(the
“Clean Water Act”) and was enacted in response to the numerous tanker spills,
including the Exxon Valdez that occurred in the 1980s. Among other things,
the
OPA clarifies the federal response authority to and increases penalties for
spills. The OPA establishes a new liability regime for oil pollution incidents
in the aquatic environment. Essentially, the OPA provides that a responsible
party for a vessel or facility from which oil is discharged or which poses
a
substantial threat of a discharge could be liable for certain specified damages
resulting from a discharge of oil, including clean-up and remediation, loss
of
subsistence use of natural resources, real or personal property damages, as
well
as certain public and private damages. A responsible party includes a lessee
of
an offshore facility.
The
OPA
also requires a responsible party to submit proof of its financial
responsibility to cover environmental cleanup and restoration costs that could
be incurred in connection with an oil spill. Under the OPA, parties responsible
for offshore facilities must provide financial assurance of at least $35 million
to address oil spills and associated damages. In certain limited circumstances,
that amount may be increased to $150 million. As indicated earlier, the Fund
has
not been required to make any such showing to the MMS as the operator is
responsible for such compliance. However, notwithstanding the operator's
responsibility for compliance, in the event of an oil spill, the Fund, along
with the operator and other working interest owners, could be liable under
the
OPA for the resulting environmental damage.
Federal
Water Pollution Act/Clean Water Act.
Generally, the Federal Water Pollution Act/Clean Water Act imposes liability
for
the unauthorized discharge of petroleum products into the surface and coastal
U.S. waters except in strict conformance with discharge permits issued by the
federal (or state if applicable) agency. Regulations governing water discharges
also impose other requirements, such as the obligation to prepare spill response
plans. Again, the Fund’s operators are responsible for compliance with the Clean
Water Act although the Fund may be liable for any failure of the operator to
do
so.
Federal
Clean Air Act.
The
Federal Clean Air Act restricts the emission of certain air pollutants. Prior
to
constructing new facilities, permits may be required before work can commence
and existing facilities may be required to incur additional capital costs to
add
equipment to ensure and maintain compliance. As a result, the Fund’s operations
may be required to incur additional costs to comply with the Clean Air
Act.
Other
Environmental Laws.
In
addition to the above, the Fund’s operations may be subject to the Resource
Conservation and Recovery Act,
which
regulates the generation, transportation, treatment, storage, disposal and
cleanup of certain hazardous wastes, as well as the Comprehensive
Environmental Response, Compensation and Liability Act
which
imposes joint and several liability without regard to fault or legality of
conduct on classes of persons who are considered responsible for the release
of
a hazardous substance into the environment.
The
above
represents a brief outline of the major environmental laws that may apply to
the
Fund’s operations. The Fund believes that its operators are in compliance with
each of these environmental laws and the regulations promulgated there
under.
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Potential
Tax Benefits
The
following discussion is a summary of the primary tax benefits of ownership
of a
membership interest in the Fund and does not include all possible tax benefits
or other tax implications of such ownership.
Deduction
of Intangible Drilling and Development Costs
Section
263(c) of the Internal Revenue Code of 1986, as amended (the “Code”) authorizes
an election by the Fund to deduct as expenses intangible drilling and
development costs incurred in connection with oil and natural gas properties
at
the time such costs are incurred in accordance with the Fund's method of
accounting, provided that the costs are not more than would be incurred in
an
arm's length transaction with an unrelated drilling contractor. Such costs
include, for example, amounts paid for labor, fuel, wages, repairs, supplies
and
hauling necessary to the drilling of the project and preparation of the project
for production. Generally, this election applies to items that in themselves
do
not have salvage value. Alternatively, each Fund shareholder may elect to
capitalize their share of the intangible drilling and development costs and
amortize them ratably over a 60-month period.
The
Fund
may enter into “carried interest” arrangements whereby the Fund would purchase
interests in certain leases and agree to pay a disproportionate part of the
costs of drilling the first project thereon. In such situations, the party
who
is paying more than their share of costs of drilling may not deduct all such
costs as intangible drilling and development costs unless their percentage
of
ownership of the lease is not reduced before they have recovered from the first
production of the project an amount equal to the cost they incurred in drilling,
completing, equipping and operating the project. The Fund may not have this
right in certain of the transactions of this type in which it may engage. If
circumstances permit, however, the Fund will adopt the position that all of
the
intangible drilling and development costs incurred are deductible (even though
such costs may be disproportionate to its ownership of the lease) on the basis
that such arrangements constitute partnerships for federal income tax purposes
and that the excess intangible drilling and development costs are specifically
allocable to the Fund. There can be no assurance that this position would
prevail against challenge by the Internal Revenue Service (“IRS”).
In
the
case of a shareholder who constitutes an integrated oil company, 30% of the
amount otherwise allowable as a deduction for intangible drilling costs under
Section 263(c) must be capitalized and deducted ratably over a 60-month period
beginning with the month the costs are paid or incurred. This provision does
not
apply to nonproductive projects. For this purpose, an integrated oil company
is
generally defined as an individual or entity with retail sales of oil and
natural gas aggregating more than $5 million and refining more than 50,000
barrels per day for the taxable year.
To
the
extent that drilling and development services were performed for the Fund in
2006, amounts incurred pursuant to bona fide arm's-length drilling contracts
and
constituting intangible drilling and development costs were deductible by the
Fund in 2006. To the extent that such services are performed in 2007, however,
the Fund will only be allowed to deduct for the year 2007 amounts that
are:
·
incurred
pursuant to bona fide arm's-length drilling contracts which provide
for
absolute noncontingent liability for payment,
and
·
attributable
to wells spud within 90 days after December 31,2006.
Sections
461(h)(1) and 461(i)(2) of the Code provide, in relevant part:
...in
determining whether an amount has been incurred with respect to any item during
any taxable year, the all events tests shall not be treated as met any earlier
than when economic performance with respect to such item occurs.
*
*
*
...economic
performance with respect to the act of drilling an oil or natural gas well
shall
be treated as having occurred within a taxable year if drilling of the well
commences before the close of the 90th day after the close of a taxable
year.
The
clear
implication of these provisions is that an amount incurred during a taxable
year
for drilling or completion services which could otherwise be accrued for federal
tax purposes will not be disqualified as a deduction merely because the services
are performed during the subsequent taxable year (provided that the services
commence within the first 90 days of such subsequent year).
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Consequently,
intangible drilling and development costs meeting the above criteria were
deducted by the Fund in 2006 even though a portion of such costs are
attributable to services performed during 2007.
Each
shareholder, however, may deduct their share of amounts paid in 2006 for
services performed in 2007 only to the extent of their cash basis in the Fund
as
of the end of 2006. For this purpose, a taxpayer's cash basis in a tax shelter
which is taxable as a partnership (such as the Fund) is the taxpayer's basis
in
the Fund determined without regard to any amount borrowed by the taxpayer with
respect to the Fund which (a) is arranged by the Fund or by any person who
participated in the organization, sale or management of the Fund (or any person
related to such person within the meaning of Section 461(b)(3)(c)) of the Code,
or (b) is secured by any asset of the Fund. Inasmuch as cash basis excludes
borrowing arranged by an extremely broad group of persons who could be related
to a person who participated in the organization, sale or management of the
Fund, it is not possible to express an opinion as to whether each shareholder
of
the Fund will be allowed to deduct their allocable share of any prepaid drilling
expenses to the extent that they exceed their actual cash investment in the
Fund.
Depletion
Deductions
Subject
to the limitations discussed hereafter, the shareholders will be entitled to
deduct, as allowances for depletion under Section 611 of the Code, their share
of percentage or cost depletion, whichever is greater, for each oil and natural
gas producing project owned by the Fund.
Cost
depletion is computed by dividing the basis of the project by the estimated
recoverable reserves to obtain a unit cost, then multiplying the unit cost
by
the number of units sold in the current year. Cost depletion cannot exceed
the
adjusted basis of the project to which it relates. Thus, cost depletion
deductions are limited to the capitalized cost of the project, while percentage
depletion may be taken as long as the project is producing income. The depletion
allowance for oil and natural gas production will be computed separately by
each
shareholder and not by the Fund. The Fund will allocate to each shareholder
their proportionate share of production and the adjusted basis of each Fund
project. Each shareholder must keep records of their share of the adjusted
basis
and any depletion taken on the project and use their adjusted basis in the
computation of gain or loss on the disposition of the project by the
Fund.
Percentage
depletion with respect to production of oil and natural gas is available only
to
those qualifying for the independent producer's exemption, and is limited to
an
average of 1,000 barrels per day of domestic oil production or 6,000,000 cubic
feet per day of domestic natural gas production. The applicable rate of
percentage depletion on production under the independent producer exemption
is
15% of gross income from oil and natural gas sales. The depletion deduction
under the independent producer exemption may not exceed 65% of the taxpayer's
taxable income for the year, computed without regard to certain deductions.
Any
percentage depletion not allowed as a deduction due to the 65% of adjusted
taxable income limitation may be carried over to subsequent years subject to
the
same annual limitation. For a shareholder that is a trust, the 65% limitation
shall be computed without deduction for distributions to beneficiaries during
the taxable year.
The
determination of whether a shareholder will qualify for the independent producer
exemption will be made at the shareholder level. A shareholder who qualifies
for
the exemption, but whose average daily production exceeds the maximum number
of
barrels on which percentage depletion can be computed for that year, will have
to allocate their exemption proportionately among all of the properties in
which
they have an interest, including those owned by the Fund. In the event
percentage depletion is not available, the shareholder would be entitled to
utilize cost depletion as discussed above.
The
independent producer exemption is not available to a taxpayer who refines more
than 50,000 barrels of oil on any one day in a taxable year or who directly
or
through a related person sells oil or natural gas or any product derived
therefrom (i) through a retail outlet operated by them or a related person
or
(ii) to any person who occupies a retail outlet which is owned and controlled
by
the taxpayer or a related person. In general, a related person is defined by
Section 613A of the Code as a corporation, partnership, estate, or trust in
which the taxpayer has a 5% or greater interest. For the purpose of applying
this provision: (a) bulk sales of oil or oil and natural gas to commercial
or
industrial users are excluded from the definition of retail sales; (b) if the
taxpayer or a related person does not export any domestic oil or natural gas
production during the taxable year or the immediately preceding year, retail
sales outside the U.S. are not deemed to be disqualifying sales; and (c) if
the
taxpayer's combined receipts from disqualifying sales do not exceed $5.0 million
for the taxable year of all retail outlets taken into account for the purpose
of
applying this restriction, such taxpayer will not be deemed a
retailer.
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Depreciation
Costs
of
equipment, such as casing, tubing, tanks, pumping units, pipelines, production
platforms and other types of tangible property and equipment generally cannot
be
deducted currently, but may be eligible for accelerated cost recovery. All
or
part of the depreciation claimed may be subsequently recaptured upon disposition
of the property by the Fund or of a share by any shareholder.
In
addition, the Code provides for certain uniform capitalization rules which
could
result in the capitalization rather than deduction of Fund management fee and
administration costs.
ITEM
1A. RISK FACTORS
In
addition to the other information set forth elsewhere in this report, you should
carefully consider the following factors when evaluating the
Fund:
RISKS
INHERENT IN THE FUND’S BUSINESS
The
Fund’s exploration and production activities are subject to risks that it cannot
control and it may have insufficient insurance to cover these risks. To the
extent the fund is not covered by insurance, it could incur losses and
liabilities which could reduce revenues, increase costs or eliminate dollars
available for future exploration and development
projects.
Costs
of
drilling, completing and operating projects are often uncertain and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors including:
·
Fires,
explosions, blowouts and cratering
·
Equipment
failures, casing collapse, pipe and cement
failures
·
Marine
risks such as capsizing or
collisions
·
Adverse
weather conditions, including
hurricanes
·
Shortages
or delays in the delivery of
equipment
·
Acts
of terrorism
·
Environmental
hazards
·
Pipeline
ruptures and discharge of toxic
gases
Many
of
the above-mentioned risks could result in damage to life and / or property,
or
cause sustained interruption of production.
Insurance
to cover certain of these risks may be prohibitively expensive or unavailable,
particularly with respect to acts of terrorism. Additionally, insurance coverage
may not be sufficient to cover certain catastrophic events. The Fund could
be
liable for costs in excess of its insurance coverage.
In
addition, it is significantly less costly for insurance to be acquired and
maintained by the Manager as a package that covers all of the oil and natural
gas projects under its management. The majority of these projects are owned
by
other entities that are likewise managed by Ridgewood Energy. As a result,
given
insurance limits, if significant damage occurs to other projects owned by other
investment vehicles managed by the Manager in any given year, the amount of
insurance available to cover any damage to the Fund's projects could be
significantly reduced.
The
Fund’s investment activities may result in unsuccessful
projects.
There
is
always significant risk that a project will not have commercially productive
oil
or natural gas reservoirs. In other words, the well may be a dry-hole. The
successful acquisition of producing properties requires assessment of reserves,
seismic and other engineering information, future commodity prices, operating
costs and potential environmental liabilities. The Fund’s assessment of these
factors may not be successful.
The
Fund has already experienced dry-holes and further dry-holes will adversely
impact the Fund’s profitability and returns.
The
Fund
has already had two dry holes. Cumulative dry-hole costs to the Fund for the
period April 12, 2006 (Inception) through December 31, 2006 totaled
approximately $32.6 million. Given that the Fund’s capital is limited to the
amount it raised (less various fees) in the offering of its shares, the
aforementioned dry-holes, and every other dry-hole that the Fund may experience,
has the effect of reducing the limited capital available for investment. In
addition, because dry-holes reduce the capital available for additional
investment, a significant number of dry-holes will reduce the returns of the
Fund because the remaining capital, even if invested in successful wells, may
not generate enough cash for investors to see significant or positive returns
on
their investments.
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The
actual costs to drill a well, or dry-hole costs, can materially exceed estimates
due to cost overruns. In such event, the risks associated with the well
increase.
When
the
Fund invests in a particular project the operator will generally provide what
is
referred to as an “AFE” or “authorization for expenditures”. The AFE’s for a
particular project generally represent the dry-hole costs associated with that
project and not the development costs should the project be successful. Dry-hole
costs are generally an estimate made by the Operator after considering numerous
factors, such as water depth, drilling depth, seismic information, and equipment
costs and availability. Notwithstanding the Operator’s best estimates of
drilling cost, the actual drilling of the well may result in cost overruns
that
materially increase the costs of drilling the project. The cost overruns can
occur for any number of reasons including but not limited to, weather delays,
equipment unavailability, pressure or irregularities in formations and other
risks identified herein. The Fund has little choice but to pay these costs
overruns or potentially lose its right to participate in the well by going
“non-consent”. Significant cost overruns will increase the risk associated with
the project as additional Fund capital that would otherwise be used for other
projects is being allocated to cover the overruns.
The
Fund’s reserve estimates are inherently uncertain and may be inaccurate and if
so, may adversely affect the Fund’s revenue and
profitability.
Once
reserves are proved, there are many uncertainties inherent in estimating
quantities of proved reserves and in projecting future rates of production
and
timing of development expenditures, including many factors beyond the Fund’s
control. Estimates of reserves by necessity are projections based on engineering
and geological data, including but not limited to volumetrics, reservoir size,
reservoir characteristics, the projection of future rates of production and
the
timing of future expenditures. The accuracy of any reserve estimate is a
function of the amount and quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates of different
engineers normally vary and may not be accurate. Development of the Fund’s
reserves may not occur as scheduled and the actual results may not be as
estimated.
In
addition, results of drilling, testing and production subsequent to the date
of
an estimate may justify revision of such reserve and cost estimate upward or
downward. Accordingly, reserve estimates are often different, sometimes
materially, from the quantities ultimately recovered. The Manager reviews the
reserve estimates provided by the operators of projects in which the Fund
participates and may retain independent reserve engineers to review such reserve
estimates and/or conduct an independent review, as appropriate. Future
performance that deviates significantly from reserve estimates could have a
material effect (positive or negative) on the Fund’s operations, business and
prospects, as well as on the amounts of such reserves.
Moreover,
the Fund's estimated or proved oil and natural gas reserves and the estimated
future net revenues from such reserves will be based upon various assumptions,
including available geological, geophysical, engineering and production data.
The process also requires certain economic assumptions such as oil and natural
gas prices, drilling and operating expenses, capital expenditures, and
availability of funds. As a result, the Fund is required to make assumptions
and
judgments, all of which can be wrong or inaccurate. Thus, these estimates are
inherently imprecise and the quality and reliability of this information can
vary, perhaps significantly, from actual results.
The
prices that the Fund may receive for its oil or natural gas are highly volatile
and unpredictable and may not be sufficient to generate enough cash flow to
make
distributions to investors.
When
oil
and natural gas production begins, the Fund's revenue, profitability and cash
flow are highly dependent on the prices of oil and natural gas. Historically,
the markets for crude oil and natural gas have been extremely volatile, and
they
are likely to continue to be volatile in the future. This volatility is caused
by numerous factors and market conditions. Therefore, it is impossible to
predict the future price of crude oil and natural gas with any certainty.
Low
commodity prices could have an adverse affect on the Fund’s future profitability
and, in such an event, the Fund may be required by accounting rules to write
down the carrying value of the Fund’s projects.
The
Fund
has not engaged in any price risk management programs or hedges to date and
does
not anticipate engaging in those types of transactions in the
future.
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The
Fund may be required to take writedowns if natural gas and oil prices decline,
which may adversely affect the Fund’s profitability.
The
Fund
may be required under successful efforts accounting rules to write down the
carrying value of its properties if natural gas and oil prices decline or if
the
Fund has substantial downward adjustments to its estimated proved reserves,
increases in the Fund’s estimates of development costs or deterioration in the
Fund’s exploration results.
The
Fund
utilizes the successful efforts method of accounting for natural gas and oil
exploration and development activities. If the net book value of its natural
gas
and oil properties exceeds its undiscounted cash flows, GAAP requires the Fund
to impair or “writedown” the book value of its natural gas and oil properties.
Depending on the magnitude of any future impairment, a writedown could
significantly reduce the Fund’s income, or produce a loss. As impairment
computations involve the oil and gas market price on the last day of
the quarter, it is impossible to predict the timing and magnitude of any future
impairment. To the extent the Fund’s finding and development costs continue to
increase as the Fund expects, the Fund will become more susceptible to
impairments in low price environments.
The
unavailability and cost of needed equipment may adversely affect the Fund’s
profitability and operations.
As
a
result of the increase in oil and natural gas prices, drilling activity in
the
Gulf of Mexico has increased significantly. Drilling rigs and other equipment
have become harder to obtain and more costly to acquire, especially if weather
occurrences, such as hurricanes, occur with frequency in the Gulf of Mexico.
These circumstances could have a negative impact on the Fund's
operations.
The
Fund has a limited amount of capital available to invest and therefore has
limited ability to invest in many more projects. Further, each unsuccessful
project erodes the Fund’s limited capital.
The
capital raised by the Fund in its private placement is more than likely all
the
capital it will be able to obtain for investments in projects. Given its
structure, obtaining traditional financing from public markets is unlikely
and
it is not practical to assume the Fund can raise additional funds through a
supplemental offering or through debt financing. As a result, it has little,
if
any, ability to grow its business beyond its current projects or through
investing its available cash in new projects. In any event, the number of
projects in which the Fund can invest will naturally be limited and each
unsuccessful project the Fund experiences, if any, will not only reduce its
ability to generate revenue, but also exhaust its limited supply of
capital.
The
Fund may incur costs to comply with the many environmental and other
governmental regulations that apply to its operations, which may adversely
impact its ability to generate cash flow for
distributions.
The
oil
and natural gas industry, in general, and offshore activities, in particular,
are subject to numerous governmental laws and regulations which may affect
the
ongoing and future operational decisions and financial results of the Fund.
United States legislation affecting the oil and natural gas industry is under
constant review for amendment and expansion. Also, numerous departments and
agencies, both federal and state, are authorized by statute to issue and have
issued rules and regulations which, among other things, require permits for
the
drilling of projects, impose construction, abandonment and remediation
requirements, prevent the waste of natural gas and liquid hydrocarbons through
restrictions on flaring, require drilling bonds and regulate environmental
and
safety matters. Additionally, governmental regulations may also impact the
demand for oil and natural gas, which could adversely affect the price at which
oil and natural gas is sold. The regulatory burden on the oil and natural gas
industry increases its cost of doing business and, subsequently, affects its
profitability. Finally, as additional legislation or amendments may be enacted
in the future, the Fund is unable to predict the ultimate cost of
compliance.
The
Fund relies on third parties to operate, manage and maintain its projects over
which it has limited control. Therefore, decisions may be made by these third
parties that adversely affect the Fund or its
operations.
Neither
the Fund nor the Manager currently own or have any plans to acquire drilling
or
production equipment nor does the Fund or Manager maintain a staff of technical
employees required for on-site drilling operations. Therefore, the Fund must
rely on unrelated third party operators to oversee and/or perform all drilling,
completion and ongoing maintenance and production activities for the projects
in
which it participates. For example, lack of operating control could lead to
higher operating costs, drilling delays, increased rig costs or labor issues.
As
such, the Fund has little or no control over the day-to-day operations of these
projects. However, the Fund has acquired and will continue to seek projects,
to
the extent of its available capital, in which the operators have significant
resources, are experienced in offshore operations and have a long term presence
and track record of success in the Gulf of Mexico.
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14
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The
Fund owns projects jointly with other companies over whom it has no control
and
who may influence the manner in which the project is
operated.
The
Fund
participates in projects as a working interest owner along with other unrelated
third party entities, including the operator. While the Manager may monitor
and
participate in decisions affecting exploration and development of the leases
or
projects in which the Fund participates, other decisions with respect to lease
exploration and development activities may be controlled by the other
participants and could be unfavorable to the Fund. Finally, the Fund could
be
held liable for the joint activity obligations or tortuous actions of the
operator or other working interest owners. If the Fund’s co-participants fail to
pay their portion of the drilling and completion or ongoing maintenance costs,
the project may lack sufficient funds to perform such work. As a result, the
Fund, as well as the remaining working interest owners, may be required to
pay
such additional sums in order to complete drilling or development of the
project.
The
Fund faces competition from larger entities with greater capital resources
that
could limit the number and availability of economically attractive
projects.
As
an
independent oil and natural gas producer, the Fund faces competition in all
aspects of its business. Many of its competitors are large, well-established
companies that have significantly larger staffs and have greater capital
resources. These companies may be able to pay more for a project or sustain
losses for a longer period of time than the Fund.
The
Fund maintains a salvage fund that may be insufficient to cover such salvage
costs, in which event the Fund could be liable for any
excess.
The
Fund
has created a salvage fund to cover certain anticipated salvage costs associated
with its projects. The salvage fund may not have sufficient assets to meet
salvage costs and thus the Fund may be liable for its proportionate share of
the
unfunded expenses if in excess of the salvage fund.
The
Fund’s projects and operations are located exclusively in the Gulf of Mexico and
are subject to interruptions and damage from hurricanes that could adversely
affect the Fund’s cash flow due to such exclusivity.
The
Fund
has invested in projects exclusively within the Gulf of Mexico and any future
investments by the Fund in projects will likewise be located in the Gulf of
Mexico. As a result of such exclusivity in location, the Fund is particularly
susceptible to hurricane risks in that the impact to the Fund’s operations of a
severe storm or storms could be more pronounced and severe (depending on the
storm, its path, and resulting damage) because the Fund does not have projects
in other areas of the globe to offset such damage. If, for example, the Fund
had
projects in areas not affected by hurricanes those projects could still operate
and generate cash flow during the interruptions in operations in the Gulf of
Mexico. As it is, a hurricane, or series of hurricanes in a season, has the
potential of interrupting all of the Fund’s operations, at least for some period
of time, if all of the Fund’s projects were affected. In such event, the Fund
would not have sufficient cash flow to make distributions to investors and,
additionally and as disclosed earlier, insurance may not be sufficient to cover
all of the damages caused by the hurricanes.
The
Fund’s internal control over financial reporting could be adversely affected by
material weaknesses in the Fund’s internal controls.
Investors
should be aware that the Fund cannot guarantee that material weaknesses will
not
develop or be identified. Any material weaknesses identified
could
harm the Fund’s operating results, cause the Fund to fail to meet its reporting
obligations or result in material misstatements in its financial statements.
Any
such failure also could affect the ability of management to certify that the
Fund’s internal controls are effective when it provides an assessment of the
Fund’s internal control over financial reporting.
RISKS
RELATED TO THE NATURE OF THE FUND’S SHARES
The
Fund’s shares have severe restrictions on transferability and liquidity and
shareholders are required to hold the shares for a long period of
time.
The
Fund's shares are illiquid investments. There is currently no market for these
shares. Because there will be a limited number of persons who purchase shares
and because there are significant restrictions on the transferability of such
shares under the limited liability company agreement (“LLC agreement”) and under
applicable federal and state securities laws, it is expected that no public
market will develop. Moreover, neither the Fund nor the Manager will provide
any
market for the shares. Shareholders are generally prohibited from selling or
transferring their shares except in the circumstances permitted under the LLC
agreement and applicable law, and all such sales or transfers require the Fund's
consent, which it may withhold at its sole discretion. Accordingly, shareholders
have no assurance that an investment can be transferred and must be prepared
to
bear the economic risk of the investment indefinitely.
Shareholders
are not permitted to participate in the Fund’s management or operations and must
rely exclusively on the Manager.
Shareholders
have no right, power or authority to participate in the Fund’s management or
decision making or in the management of the Fund’s projects. The Manager has the
exclusive right to manage, control and operate the Fund’s affairs and business
and to make all decisions relating to its operation.
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The
Fund’s assets are illiquid and therefore, cash flow for distributions, if any,
must come from operations and not from dispositions of
assets.
The
Fund's interest in projects is illiquid. It does not anticipate selling any
interests in the projects, or any part thereof. Even if it elected to sell,
it
is likely that there will be little or no market for these assets. However,
if
the Fund were to attempt to sell any such interest, a successful sale would
depend upon, among other things, the operating history and prospects for the
project or interest being sold, proven oil and natural gas reserves, the number
of potential purchasers and the economics of any bids made by them and the
current economics of the oil and natural gas market. In addition, any such
sale
may result in adverse tax consequences to the shareholders. The Manager has
full
discretion to determine whether any project, or any partial interest, should
be
sold. Consequently, shareholders will depend on the Manager for the decision
to
sell all or a portion of a project, or retain it, for the benefit of the
shareholders.
The
Fund indemnifies its officers, as well as the Manager and its employees, for
certain actions taken on its behalf and therefore fund assets may be used to
reimburse such officers.
The
LLC
agreement provides that the Fund's officers and agents, the Manager, the
affiliates of the Manager and their respective directors, officers and agents
when acting on behalf of the Manager or its affiliates on the Fund's behalf,
will be indemnified and held harmless by the shareholders from any and all
claims rising out of the Fund's management, except for claims arising out of
bad
faith, gross negligence or willful misconduct or a breach of the LLC agreement.
Therefore, the Fund may have difficulty sustaining an action against the
Manager, or its affiliates and their officers based on breach of fiduciary
responsibility or other obligations to the shareholders.
The
Manager will receive a management fee regardless of the Fund’s profitability
and, additionally, cash distributions.
In
addition to its annual management fee, the Manager will receive 15% of the
Fund’s cash distributions to shareholders although the Manager has not
contributed any cash to the Fund. Accordingly, shareholders contribute all
of
the cash utilized for the Fund's investments and activities. If the Fund's
projects are unsuccessful, the shareholders lose 100% of their investment while
the Manager, not having contributed any capital, will lose nothing.
Inherent
in these fee arrangements is the possibility of conflicts between the Fund's
interests and the best interests of the Manager. The Manager may have incentive
to act in its best interests rather than in the Fund’s best interest by taking
actions designed to increase its fees but with significant risk to the Fund.
Any
such conflict of interests will be addressed by the Manager as described in
the
risk factor below headed “Because
the Manager manages many other oil and natural gas funds, it may have conflicts
of interest in its management of the Fund’s operations”.
None
of
the compensation to be received by the Manager has been derived as a result
of
arm's length negotiations.
Under
Delaware law, shareholders have limited access to information and therefore,
the
Fund and Manager can restrict certain information, including shareholder
information, making communications with other shareholders difficult. As a
result, the information you receive about the Fund and its activities will
be
limited to what the Manager chooses to provide.
Delaware
law permits Delaware limited liability companies to restrict access to certain
information provided that such restricted access is set forth in the LLC
agreement. The Fund's LLC agreement contains provisions that limit shareholder
access to certain sensitive or confidential information such as trade secrets,
agreements or confidential or proprietary information. Moreover, shareholder
access to information regarding other shareholders is likewise limited and
the
Fund may refuse to give shareholder information, such as name and address of
other shareholders, which could make it difficult for a shareholder to contact
other shareholders. Nevertheless, shareholders do have access to tax, other
financial information or any other reasonable information regarding Fund
operations.
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16
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Cash
distributions are not guaranteed and may be less than anticipated or
estimated.
Distributions
depend primarily on available cash from oil and natural gas operations. At
times, distributions may be delayed to repay the principal and interest on
fund
borrowings, if any, or to fund other costs, although the Fund does not
anticipate such borrowings. The Fund's taxable income will be taxable to the
shareholders in the year earned, even if cash is not distributed.
Because
the Manager manages many other oil and natural gas funds, it may have conflicts
of interest in its management of the Fund’s
operations.
The
Fund
is organized as a Delaware limited liability company and the Manager intends
to
qualify the Fund as a partnership for federal tax purposes. The principal tax
risks to shareholders are that:
·
The
Fund may recognize income taxable to the shareholders but may not
distribute enough cash to cover the income taxes on the Fund's taxable
income.
·
The
allocation of Fund items of income, gain, loss, and deduction may
not be
recognized for federal income tax
purposes.
·
All
or a portion of the Fund's expenses could be considered either investment
expenses (which would be deductible by a shareholder only to the
extent
the aggregate of such expenses exceeded 2% of such shareholder's
adjusted
gross income) or as nondeductible items that must be
capitalized.
·
All
or a substantial portion of the Fund's income could be deemed to
constitute unrelated business taxable income, such that tax-exempt
shareholders could be subject to tax on their respective portions
of such
income.
·
If
any Fund income is deemed to be unrelated business taxable income,
a
shareholder that is a charitable remainder trust could have all of
its
income from any source deemed to be
taxable.
·
All
or a portion of the losses, if any, allocated to the shareholders
will be
passive losses and thus deductible by the shareholder only to the
extent
of passive income.
·
The
shareholders could have capital losses in excess of the amount that
is
allowable as a deduction in a particular
year.
Although
the Fund has obtained an opinion of counsel regarding the matters described
in
the preceding paragraph, it will not obtain a ruling from the IRS as to any
aspect of the Fund's tax status. The tax consequences of investing in the Fund
could be altered at any time by legislative, judicial, or administrative
action.
If
the IRS audits the Fund, it could require investors to amend or adjust their
tax
returns of result in an audit of their tax.
The
IRS
may audit the Fund's tax returns. Any audit issues will be resolved at the
Fund
level by the Manager. If adjustments are made by the IRS, corresponding
adjustments will be required to be made to the federal income tax returns of
the
shareholders, which may require payment of additional taxes, interest, and
penalties. An audit of the Fund's tax return may result in the examination
and
audit of a shareholder's return that otherwise might not have occurred, and
such
audit may result in adjustments to items in the shareholder's return that are
unrelated to the Fund operations. Each shareholder bears the expenses associated
with an audit of that shareholder's return.
In
the
event that an audit of the Fund by the IRS results in adjustments to the tax
liability of a shareholder, such shareholder will be subject to interest on
the
underpayment and may be subject to substantial penalties. In addition, a number
of substantial penalties could potentially
be asserted by the IRS on any such deficiencies.
The
tax
treatment of the Fund can not be guaranteed for the life of the Fund. Changes
in
law or regulations may adversely affect any such tax treatment.
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17
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Deductions,
credits or other tax consequences may not be available to shareholders.
Legislative or administrative changes or court decisions could be forthcoming
which would significantly change the statements herein. In some instances,
these
changes could have substantial effect on the tax aspects of the Fund. Any future
legislative changes may or may not be retroactive with respect to transactions
prior to the effective date of such changes. Bills have been introduced in
Congress in the past and may be introduced in the future which, if enacted,
would adversely affect some of the tax consequences of the Fund.
ITEM
2. FINANCIAL INFORMATION
A.
SELECTED FINANCIAL DATA.
The
following table summarizes certain selected financial data at December 31,2006
and for the period April 12, 2006 (Inception) through December 31, 2006, and
is
derived from the audited financial statements included herein. Although the
date
of formation of the Fund is April 12, 2006, the Fund did not begin business
activities until June 15, 2006 when it began its private offering of shares.
The
information summarized below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the
Fund's audited Financial Statements and related Notes.
B.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
of the Fund’s Business
The
Fund
(an exploratory stage enterprise) is an independent oil and natural gas
producer. The Fund’s primary investment objective is to generate cash flow for
distribution to the Fund’s shareholders through participation in oil and natural
gas exploration and development projects in the Gulf of Mexico. The Fund began
its operations by offering its shares in a private offering on June 15, 2006.
As
a result of such offering, it raised approximately $144.6 million through the
sale of 972.1054 shares of LLC membership interests. After the payment of
approximately $23.5 million in offering fees, commissions and investment fees
to
Ridgewood Energy Corporation, affiliates, and broker-dealers, the Fund retained
approximately $121.1 million available for investment. Investment fees represent
a one time fee of 4.5% of initial capital contributions. The fee is payable
for
the service of investigating and evaluating investment opportunities and
effecting transactions. Since inception in April 2006, the Fund has acquired
an
interest in two offshore projects in the Gulf of Mexico. The Fund was notified
by its operators that both of its projects had resulted in dry-holes. See also
Item 1. “Business”.
The
Manager performs certain duties on the Fund’s behalf including the evaluation of
potential projects for investment and ongoing administrative and advisory
services associated with these projects. The Fund does not currently, nor is
there any plan, to operate any project in which the Fund participates. The
Manager enters into operating agreements with third-party operators for the
management of all exploration, development and producing operations, as
appropriate. As compensation for the above duties, the Manager is paid a onetime
investment fee (4.5%) for the evaluation of projects on the Fund’s behalf and an
annual management fee (2.5%), payable monthly, for ongoing administrative and
advisory duties as well as reimbursement of expenses. The Manager also
participates in cash distributions. See also Item 1. "Business".
Subsequent
Events
Management
Fee
Effective
January 1, 2007, the Manager has changed its policy regarding the annual
management fee. Commencing in January 2007, the management fee payable will
be
equal to 2.5% of the total shareholder capital contributions, net of cumulative
dry-hole expenses incurred by the Fund. For the Fund, the management fee will
be
reduced by $68 thousand per month, based upon dry-hole expenses of $32.6 million
through December 31, 2006.
Green
Canyon 246
On
January 24, 2007, the Fund was informed by its operator, Woodside, that the
exploratory well being drilled by Woodside in the Green Canyon 246 lease block
did not have commercially productive quantities of either oil or natural gas
and
had therefore been deemed an unsuccessful well or dry-hole. The Fund owns a
41.7% working interest in Green Canyon 246. Dry-hole
costs related to Green Canyon 246, including plug and abandonment expenses,
incurred by the Fund for the period April 12, 2006 (Inception) through December31, 2006 were approximately $24.2 million. The Fund incurred additional dry-hole
costs related to Green Canyon 246 of $6.9 million during 2007.
Critical
Accounting Estimates
The
discussion and analysis of the Fund’s financial condition and results of
operations are based upon its consolidated financial statements, which have
been
prepared in conformity with U.S. generally accepted accounting principles,
or
GAAP. In preparing these financial statements, the Fund is required to make
certain estimates, judgments and assumptions. These estimates, judgments and
assumptions affect the reported amounts of the Fund’s assets and liabilities,
including the disclosure of contingent assets and liabilities, at the date
of
the financial statements and the reported amounts of the Fund’s revenues and
expenses during the periods presented. The Fund evaluates these estimates and
assumptions on an ongoing basis. The Fund bases its estimates and assumptions
on
historical experience and on various other factors that the Fund believes to
be
reasonable at the time the estimates and assumptions are made. However, future
events and their effects cannot be predicted with absolute certainty. Therefore,
the determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from these estimates and assumptions under different
circumstances or conditions, and such differences may be material to the
financial statements. See Note 2 - Summary of Significant Accounting
Policies of Item 15. contained in this Form 10 for a discussion of the Fund’s
significant accounting policies.
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19
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Accounting
for Exploration and Development Costs
Exploration
and production activities are accounted for using the successful efforts method.
Costs of acquiring unproved and proved oil and gas leasehold acreage, including
lease bonuses, brokers’ fees and other related costs, are capitalized. Annual
lease rentals, exploration expenses and exploratory dry-hole costs are expensed
as incurred. Costs of drilling and equipping productive wells, including
development dry holes, and related production facilities are
capitalized.
The
costs
of exploratory wells that find oil and gas reserves are capitalized pending
determination of whether proved reserves have been found. Exploratory drilling
costs remain capitalized after drilling is completed if (1) the well has
found a sufficient quantity of reserves to justify completion as a producing
well and (2) sufficient progress is being made in assessing the reserves
and the economic and operating viability of the project. If either of those
criteria is not met, or if there is substantial doubt about the economic or
operational viability of the project, the capitalized well costs are charged
to
expense. Indicators of sufficient progress in assessing reserves and the
economic and operating viability of a project include: commitment of project
personnel, active negotiations for sales contracts with customers, negotiations
with governments, operators and contractors and firm plans for additional
drilling and other factors.
Proved
Reserves
The
Fund’s reserves are fully engineered on an annual basis by independent petroleum
engineers. The Fund’s estimates of proved reserves are based on the quantities
of natural gas and oil which geological and engineering data demonstrate, with
reasonable certainty, to be recoverable in future years from known reservoirs
under existing economic and operating conditions. However, there are numerous
uncertainties inherent in estimating quantities of proved reserves and in
projecting future revenues, rates of production and timing of development
expenditures, including many factors beyond the Fund’s control. The estimation
process is very complex and relies on assumptions and subjective interpretations
of available geologic, geophysical, engineering and production data and the
accuracy of reserve estimates is a function of the quality and quantity of
available data, engineering and geological interpretation, and judgment. In
addition, as a result of volatility and changing market conditions, commodity
prices and future development costs will change from period to period, causing
estimates of proved reserves to change, as well as causing estimates of future
net revenues to change. For the period April 12, 2006 (Inception) through
December 31, 2006, the Fund did not have any proved reserves. Estimates of
proved reserves are key components of the Fund’s most significant financial
estimates involving the Fund’s rate for recording depreciation, depletion and
amortization.
Unproved
Properties
Unproved
properties is comprised of capital costs incurred for undeveloped acreage,
wells
and production facilities in progress, wells pending determination and related
capitalized interest. These costs are initially excluded from the depletion
base
until the outcome of the project has been determined, or generally, until it
is
known whether proved reserves will or will not be assigned to the property.
The
Fund assesses all items in its unproved
property balance on an ongoing basis for possible impairment or reduction in
value. The Fund has no unproved properties at December 31, 2006.
Asset
Retirement Obligations
For
oil
and natural gas properties, there are obligations to perform removal and
remediation activities when the properties are retired. When a project reaches
drilling depth and is determined to be either proved or dry, a liability is
recognized for the fair value of legally required asset retirement obligations
once it can be reasonably estimated. The Fund capitalizes the associated asset
retirement costs as part of the carrying amount of the long-lived assets. Plug
and abandonment costs associated with unsuccessful projects are expensed as
dry-hole costs.
Impairment
of Long-Lived Assets
The
Fund
reviews long-lived assets, including oil and gas fields, for impairment whenever
events or changes in circumstances indicate that the carrying amounts may not
be
recovered. Long-lived assets are tested based on identifiable cash flows (the
field level for oil and gas assets) and are largely independent of the cash
flows of other assets and liabilities. If the carrying amounts of the long-lived
assets are not expected to be recovered by undiscounted future net cash flow
estimates, the assets are impaired and an impairment loss is recorded.
The
amount
of impairment is based on the estimated fair value of the assets determined
by
discounting anticipated future net cash flows.
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20
-
In
the
case of oil and gas fields, the present value of future net cash flows is based
on management’s best estimate of future prices, which is determined with
reference to recent historical prices and published forward prices, applied
to
projected production volumes of individual fields and discounted at a rate
commensurate with the risks involved. The projected production volumes represent
reserves, including probable reserves, expected to be produced based on a
stipulated amount of capital expenditures. The production volumes, prices and
timing of production are consistent with internal projections and other
externally reported information. Oil and gas prices used for determining asset
impairments will generally differ from those used in the standardized measure
of
discounted future net cash flows, since the standardized measure requires the
use of actual prices on the last day of the year.
Results
of Operations
The
following review of operations for the period April 12, 2006 (Inception) through
December 31, 2006 should be read in conjunction with the Fund’s financial
statements and the notes thereto. The
following table summarizes the Fund’s results of operations (in thousands,
except per share data):
Operating
Revenues.From
inception of the Fund in April 2006 through December 31, 2006, the Fund has
not
recorded any operating revenues and is considered an exploratory stage
enterprise.
Operating
and Other Expenses
Dry-hole
costs.Dry-hole
costs are those costs incurred to drill and develop a well that is ultimately
found to be incapable of producing either oil or natural gas in sufficient
quantities to justify completion of the well. The
following table summarizes dry-hole costs inclusive of plug and abandonment
costs for the period April 12, 2006 (Inception) through December 31, 2006.
Investment
Fee.
The
Manager is paid a one time investment fee. The fee is payable for the service
of
investigating and evaluating investment opportunities and affecting transactions
when the capital contributions are made. Investment fees incurred and paid
during the period April 12, 2006 (Inception) through December 31, 2006 were
$6.5
million.
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21
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Management
Fee.
The
Manager receives an annual management fee, payable monthly, of 2.5% of total
capital contributions. Management fees are charged to cover expenses associated
with overhead incurred by the Manager for its on-going management,
administrative and advisory services. Such overhead expenses include but are
not
limited to rent, payroll and benefits for employees of the Manager, and other
administrative costs. Management fees incurred and paid for the period April12,2006 (Inception) through December 31, 2006 totaled approximately $1.6 million.
General
and Administrative Expenses. Accounting,
legal, fiduciary fees and insurance expenses represent costs specifically
identifiable or allocable to the Fund. Accounting and legal fees represent
annual audit and tax preparation fees, quarterly reviews and filing fees of
the
Fund. Fiduciary fees represent bank fees associated with the management of
the
Fund’s short-term investment portfolio in US Treasury Notes. Insurance expense
represents premiums related to well control insurance and directors and officers
liability policy, and are allocated by the Manager to the Fund based on capital
raised by the Fund to total capital raised by all oil and natural gas funds
managed by the Manager.
The
following table summarizes general and administrative expenses for the period
April 12, 2006 (Inception) through December 31, 2006.
Interest
income is comprised of interest earned on money market accounts and short-term
investments in US Treasury Notes. Interest income for the period April 12,2006
(Inception) through December 31, 2006 was $2.0 million.
Capital
Resources and Liquidity
Operating
Cash Flows
Cash
flow
used in operating activities for the period April 12, 2006 (Inception) through
December 31, 2006 was $7.0 million, primarily related to payments for investment
fees, management fees and general and administrative expenses of $6.5 million,
$1.6 million and $0.5 million, respectively, offset by interest income received
of $1.5 million.
Investing
Cash Flows
Cash
flow
used in investing activities for the period April 12, 2006 (Inception) through
December 31, 2006 was approximately $57.1 million. The
Fund
made investments in marketable securities of $51.0 million, inclusive of salvage
fund. Additionally, the Fund made
capital
expenditures of $6.1 million
for oil and natural gas properties during 2006 which were determined to be
unsuccessful, or dry-holes.
Financing
Cash Flows
Cash
flow
provided by financing activities for the period April 12, 2006 (Inception)
through December 31, 2006 was approximately $127.6 million, primarily related
to
cash receipts of $144.5 million obtained from the Fund’s private offering,
offset by $17.0 million of payments for syndication costs. At December 31,2006,
there were outstanding subscription receivables of $123 thousand and $69
thousand of syndication costs payable.
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22
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Estimated
Capital Expenditures
The
Fund
has entered into multiple offshore operating agreements for the drilling and
development of its investment properties. The estimated capital expenditures
associated with these agreements can vary depending on the stage of development
on a property-by-property basis. As of December 31, 2006, such estimated capital
expenditures to be spent totaled approximately $39.9 million, all of which
is
expected to be paid out of unspent capital contributions within the next 12
months.
The
table
below presents exploration and development capital expenditures from inception
as well as estimated budgeted amounts for future periods. Remaining unspent
development capital will be reallocated to one or more new unspecified
projects.
The
Fund’s primary short-term liquidity needs are to fund
its 2007
operations, including management fees and capital expenditures, with existing
cash on-hand and income earned from its short-term investments and cash and
cash
equivalents. The
Manager is entitled to receive an annual management fee from the Fund regardless
of whether the Fund is profitable in that year. The annual fee, payable monthly,
is equal to 2.5% of total capital contributed by shareholders. Effective January1, 2007, the Manager has changed its policy regarding the annual management
fee.
Commencing in January 2007, the management fee payable will be equal to 2.5%
of
the total shareholder capital contributions, net of cumulative dry-hole expenses
incurred by the Fund. For the Fund, the management fee will be reduced by $68
thousand per month based upon dry-hole expenses of $32.6 million through
December 31, 2006.
On
a
long-term basis, until one of the Fund’s projects begins producing, all or a
portion of the management fee is paid generally from the interest or dividend
income generated by the Fund’s development capital that has not been spent,
although the management fee can be paid out of capital contributions. Such
interest and/or dividend income is more than enough to cover Fund expenses,
including the management fee. Generally, it can take anywhere from 18 to 24
months to bring a project to production. Once a well is on production, the
management fee and fund expenses are paid from operating income. Over time,
as a
well produces, the Fund may recover some or the entire management fee that
may
have been paid out of capital contributions.
Distributions,
if any, are funded from cash flow from operations, and the frequency and amount
are within the Manager’s discretion subject to available cash from operations,
reserve requirements and Fund operations.
The
capital raised by the Fund in its private placement is more than likely all
the
capital it will be able to obtain for investments in projects. The number of
projects in which the Fund can invest will naturally be limited and each
unsuccessful project the Fund experiences, if any, will not only reduce its
ability to generate revenue, but also exhaust its limited supply of
capital.
Typically for the Fund, the Manager seeks an investment portfolio that combines
high and low risk exploratory projects.
When
the
Manager makes a decision for participation in a particular project, it assumes
that the well will be successful and allocates enough capital to budget for
the
completion of that well and the additional development wells that are
anticipated to be drilled. If the exploratory well is deemed a dry-hole or
if it
is un-economical, the capital allocated to the completion of that well and
to
the development of additional wells is then reallocated to a new project or
used
to make additional investments.
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23
-
Off-Balance
Sheet Arrangements
The
Fund
had no off-balance sheet arrangements as of December 31, 2006 and does not
anticipate the use of such arrangements in the future.
Contractual
Obligations
The
Fund
enters into operating agreements with operators. On behalf of the Fund, an
operator enters into various contractual commitments pertaining to exploration,
development and production activities. The Fund does not discuss or negotiate
any such contracts. No contractual obligations exist at December 31,2006.
C.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Projects
drilled may not have commercially productive oil and natural gas reservoirs.
In
such an event, the Funds' revenue, future results of operations and financial
condition would be adversely impacted.
The
Fund
does not have or use, any derivative instruments nor does it have any plans
to
enter into such derivative arrangements. The Fund will generally invest cash
in
high-quality credit instruments consisting primarily of money market funds,
bankers acceptance notes and government agency securities with maturities of
six
months or less. The Fund does not expect any material loss from cash equivalents
and therefore believes its potential interest rate exposure is not material.
The
Fund has no plan to conduct any international activities and therefore believes
it is not subject to foreign currency risk.
The
principal market risks to which the Fund is exposed that may adversely impact
the Fund's results of operations and financial position are changes in oil
and
natural gas prices.
Low
commodity prices could have an adverse affect on the Fund’s future profitability
and, in such an event the Fund may be required by accounting rules to write
down
the carrying value of the Fund’s projects. Revenue to the Fund will be sensitive
to changes in price to be received for oil and natural gas production.
Prevailing market prices fluctuate in response to many factors that are outside
of the Fund's control such as the supply and demand for oil and natural gas.
Availability of alternative fuels as well as seasonal risks such as hurricanes
can also impact the supply and demand.
High
oil
and natural gas prices have resulted in a strong demand for and a tight supply
of drilling rigs necessary to drill new projects. The increased cost in daily
rig rates could have a negative impact on the return to shareholders in the
Fund. The shortage of drilling rigs could delay the application of capital
to
such projects and thus delay revenue from operations.
ITEM
3. PROPERTIES
The
information regarding the Fund’s properties that is contained in Item 1.
Business of this Registration Statement on Form 10 is incorporated herein by
reference.
ITEM
4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth information with respect to beneficial ownership
of
the shares as of December 31, 2006 (no person owns more than 5% of the shares)
by:
·
each
executive officer (there are no directors);
and
·
all
of the executive officers as a
group.
Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities. Except as indicated
by footnote, and subject to applicable community property laws, the persons
named in the table below have sole voting and investment power with respect
to
all shares shown as beneficially owned by them. Percentage of beneficial
ownership is based on 972.1054 shares outstanding at December 31, 2006. Other
than as indicated below, no officer and director owns any of the Fund's
shares.
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24
-
Name of beneficial owner
Number of
shares
Percent
Robert
E. Swanson (1), President and Chief
Executive
Officer
0.6667
*
Executive officers as a group
(1)
0.6667
*
*
Represents less than one percent.
(1)
Includes shares owned by the spouse of Mr. Swanson or one of his
Trusts.
ITEM
5. DIRECTORS AND EXECUTIVE OFFICERS
The
Fund
has engaged Ridgewood Energy as Manager. Ridgewood Energy was founded in 1982
and, as Manager, has very broad authority, including the election of executive
officers.
Executive
officers of Ridgewood Energy and the Fund and their ages at December 31, 2006
are as follows:
Name,
Age and Position with Registrant
Officer
Since
Robert
E. Swanson, 59
President
and Chief Executive Officer
1982
W.
Greg Tabor, 46
Executive
Vice President and
Director
of Business Development
2004
Robert
L. Gold, 47
Executive
Vice President
1987
Kathleen
P. McSherry, 41
Senior
Vice President and
Chief
Financial Officer
2000
Daniel
V. Gulino, 46
Senior
Vice President and General Counsel
2003
Adrien
Doherty, 54
2006
Executive
Vice President
Set
forth
below is the name of, and certain biographical information regarding the
executive officers of Ridgewood Energy and the Fund:
Robert
E. Swanson
has
served as the President, Chief Executive Officer, sole director, and sole
stockholder of Ridgewood Energy since its inception. Mr. Swanson is also the
controlling member of Ridgewood Power and Ridgewood Capital, affiliates of
Ridgewood Energy. Mr. Swanson has been President and registered principal of
Ridgewood Securities and has served as the Chairman of the Board of Ridgewood
Capital since its organization in 1998. Mr. Swanson is a member of the New
York
State and New Jersey State Bars, the Association of the Bar of the City of
New
York and the New York State Bar Association. He is a graduate of Amherst College
and Fordham University Law School.
Greg
Tabor
has
served as the Executive Vice President and Director of Business Development
for
Ridgewood Energy since January 2004. Mr. Tabor was senior business development
manager for El Paso Production Company from December 2001 to December 2003.
From
April 2000 to December 2001, Mr. Tabor was Vice President, Business Development
for Madison Energy Advisors. Mr. Tabor is a graduate of the University of
Houston.
Robert
L. Gold
has
served as the Executive Vice President of Ridgewood Energy since 1987. Mr.
Gold
is also Executive Vice President of Ridgewood Power. Mr Gold has also served
as
the President and Chief Executive Officer of Ridgewood Capital since its
inception in 1998. Mr. Gold is a member of the New York State Bar. He is a
graduate of Colgate University and New York University School of
Law.
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25
-
Kathleen
P. McSherry
has
served as the Senior Vice President and Chief Financial Officer of Ridgewood
Energy since 2000. Ms. McSherry has been employed by Ridgewood Energy since
1987, first as the Assistant Controller and then as the Controller before being
promoted to Chief Financial Officer in 2000. Ms. McSherry also serves as Vice
President of Systems and Administration of Ridgewood Power. Ms. McSherry holds
a
Bachelor of Science degree in Accounting.
Daniel
V. Gulino
has
served as Senior Vice President and General Counsel of Ridgewood Energy since
August 2003. Mr. Gulino also serves as Senior Vice President and General Counsel
of Ridgewood Power Management, Ridgewood Power, and Ridgewood Capital and has
done so since 2000. Mr. Gulino is a member of the New Jersey State and
Pennsylvania State Bars. He is a graduate of Fairleigh Dickinson University
and
Rutgers School of Law.
Adrien
Doherty
has
served as Executive Vice President of Ridgewood Energy since 2006. Mr. Doherty
joined Ridgewood Energy after a thirty year career in investment banking, most
recently as Head of Barclay’s Capital’s oil and gas banking effort. Mr. Doherty
is a graduate of Amherst College and the Wharton Graduate Division of the
University of Pennsylvania.
Board
of Directors and Board Committees
The
Fund
does not have its own board of directors or any board committees. The Fund
relies upon the Manager to provide recommendations regarding dispositions and
financial disclosure. Officers of the Fund are not compensated by the Fund,
and
all compensation matters are addressed by the Manager, as described in Item
6 of
this Form 10. Because the Fund does not maintain a board of directors and
because officers of the Fund are compensated by the Manager, the Manager
believes that it is appropriate for the Fund to not have a nominating or
compensation committee.
ITEM
6. EXECUTIVE COMPENSATION
The
executive officers of the Fund do not receive compensation from the Fund. The
Manager, or its affiliates, compensates the officers without additional payments
by the Fund. See Item 7. “Certain Relationships and Related Transactions and
Director Independence” for more information regarding Manager compensation and
payments to affiliated entities.
Compensation
Discussion and Analysis
The
executive officers of the Fund, Mr. Swanson, Mr. Tabor, Mr. Gold, Ms. McSherry,
Mr. Gulino and Mr. Doherty, are employed by, and are executive officers of,
the
Manager, Ridgewood Energy, and provide managerial services to the Fund in
accordance with the terms of the Fund’s LLC operating agreement. The Fund does
not have any other executive officers. The Manager determines and pays the
compensation of these officers. Each of the executive officers of the Fund
also
serves as an executive officer of each of the other funds managed by the
Manager. Because the executive officers are employees of the Fund’s Manager and
provide managerial services to all of the funds managed by the Fund’s Manager in
the course of such employment, they do not receive additional compensation
for
providing managerial services to the Fund or to any one or more new funds
established by the Manager than they would otherwise receive from the Manager
if
they did not serve in such capacities for the Fund or any such other funds.
The
Manager is fully responsible for the payment of compensation to the executive
officers. The Fund does not pay any compensation to its executive officers
and
does not reimburse the Manager for the compensation paid to executive officers.
The Fund does, however, pay the Manager a management fee and the Manager may
determine to use a portion of the proceeds from the management fee to pay
compensation to executive officers of the Fund.
ITEM
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
In
connection with the sale of shares in 2006, Ridgewood Securities Corporation,
an
affiliate of the Manager, earned a placement fee and commissions totaling $1.5
million included in syndication costs. The Manager earned an investment fee
for
the services of investigating and evaluating projects for future investment
totaling $6.5 million.
The
Manager was paid $5.1 million to cover legal and syndication fees for the
organization, distribution and offering expenses.
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26
-
The
Manager receives an annual management fee, payable monthly, equal to 2.5% of
total capital contributions, for general and administrative and management
services supplied to us. For the period April 12, 2006 (Inception) through
December 31, 2006 the Manager was paid fees which totaled $1.6 million.
Effective January 1, 2007, the Manager has changed its policy regarding this
annual management fee. Commencing in January 2007, the management fee payable
will be equal to 2.5% of the total shareholder capital contributions, net of
cumulative dry-hole expenses incurred by the Fund. For the Fund, the management
fee will be reduced by $68 thousand per month based upon dry-hole expenses
of
$32.6 million through December 31, 2006. Additionally, when distributions are
made, the Manager is entitled to a portion of funds distributed to shareholders.
There have been no distributions for the period April 12, 2006 (Inception)
through December 31, 2006.
Profits
and losses are allocated in accordance with the LLC operating agreement. In
general, profits and losses in any year are allocated 85% to shareholders and
15% to the Manager. The primary exception to this treatment is that all items
of
expense, loss, deduction and credit attributable to the expenditure of
shareholders' capital contributions are allocated 99% to shareholders and 1%
to
the Manager.
ITEM
8. LEGAL PROCEEDINGS
None.
ITEM
9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There
is
currently no established public trading market for the shares of membership
interest of the Fund. The Fund is not currently offering or proposing to offer
any shares for sale to the public. There are no outstanding options or warrants
to purchase, or securities convertible into shares and the Fund does not have
any equity-based compensation plans. The shares are restricted as to resale.
Shareholders wishing to transfer shares should also consider the applicability
of state securities laws. The shares have not been registered under the
Securities Act or under any other similar law of any state (except for certain
registrations that do not permit free resale) in reliance upon what the Fund
believes to be exemptions from the registration requirements contained therein.
Because the shares have not been registered, they are restricted securities
as
defined in Rule 144 under the 1933 Act.
At
April16, 2007, there were 1,658 holders of Fund shares.
To
date,
the Fund has not declared or paid cash dividends to the Fund shareholders.
Ridgewood Energy Corporation, the Manager, may distribute dividends from
available cash from operations as defined in the Fund LLC operating
agreement.
ITEM
10. RECENT SALES OF UNREGISTERED SECURITIES
During
the period from June 15, 2006 until October 31, 2006, the Fund issued an
aggregate of 972.1054 shares for gross proceeds of $144.6 million. All sales
of
unregistered securities relied on Section 4(2) of the Securities Act and Rule
506 of Regulation D promulgated thereunder. All of the sales were made without
the use of an underwriter. All purchasers of shares represented and warranted
to
the Fund that they were accredited investors as defined in Rule 501(a) under
the
Securities Act and that the shares were being purchased for investment and
not
for resale.
From
the
amount raised, $17.0 million was disbursed for commissions and legal syndication
fees. Additionally, $6.5 million was paid as an investment fee to Ridgewood
Energy Corporation, the Manager, for the investigation and evaluation of
investment property prospects. Remaining funds are expected to be used for
exploration and development activities of oil and gas properties as well as
the
operation of the Fund.
ITEM
11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED
The
shares to be registered hereunder are shares of membership interest in the
Fund,
which is a limited liability company. The following is a summary of certain
provisions of the LLC operating agreement.
Control
of LLC Operations
The
powers vested in the Ridgewood Energy Corporation (the “Manager”), as manager of
the Fund, under the LLC Agreement are broad. The Manager has full, exclusive
and
complete discretion in the management and control of the affairs of the Fund
and
shareholders have no power to take part in the management of, or to bind, the
Fund.
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27
-
The
Fund’s officers are appointed by the Manager and may be removed by it at any
time. Additionally, the Manager may authorize any sale, lease, pledge or other
transfer of substantially all of a Fund’s assets without a vote of the
shareholders.
Amendments
and Voting Rights
The
Manager may amend the LLC Agreement without notice to or approval of the holders
of shares for the following purposes:
·
to
cure ambiguities or errors;
·
to
equitably resolve issues arising under the LLC Agreement so long
as
similarly situated shareholders are not treated materially
differently;
·
to
comply with law; to make other changes that will not materially and
adversely affect any shareholder’s interest;
·
to
maintain the federal income tax status of the Fund or any shareholder,
as
long as no shareholder’s liability is materially
increased.
Other
amendments to the LLC Agreement may be proposed either by the Manager or by
Fund
shareholders. A vote on the proposal may be made by either by calling a meeting
of the shareholders or by soliciting written consents. Proposed amendments
require the approval of shareholders who hold of record at least a majority
of
the total shares on the record date for the action, given at a meeting of
shareholders or by written consents. Any amendment requiring shareholder action
(other than an amendment to allow the Fund to be taxed other than as a
partnership) may not increase any shareholder’s liability, change the capital
contributions required of him or her or his or her rights in interest in the
Fund’s profits, losses, deductions, credits, revenues or distributions in more
than a de minimis matter, or change his or her rights on dissolution or any
voting rights without the shareholder’s consent. Any amendment that changes the
Manager’s management rights requires its consent. Generally, shareholders have
no right to vote on matters not involving an amendment to the LLC Agreement
or
the removal of the Manager. However, if any other matter does require a vote
of
shareholders, it must be approved by shareholders who own of record at least
a
majority of the total shares, or if a different vote is required by law, each
shareholder will have voting rights equal to his or her total shares for
purposes of determining the number of votes cast or not cast.
For
all
purposes, a majority of the shares is a majority of the issued and outstanding
shares, including those owned, if any, by the Manager or its affiliates. A
majority of the shares voted is insufficient if it is less than a majority
of
the outstanding shares.
The
consent of all holders of shares is required for dissolving or terminating
the
Fund, other than as provided by the LLC Agreement; or adding a new Manager
except as described below.
Participation
in Costs and Revenues
Available
cash determines what amounts in cash the Fund will be able to distribute in
cash
to shareholders. There are two types of available cash:
·
available
cash from dispositions is total cash received by the Fund from the
proceeds of the sale or other disposition of the Fund’s Property
(including items such as insurance proceeds, refinancing proceeds,
condemnation proceeds and other amounts received out of the ordinary
course of business), but excluding dispositions of temporary investments
of the Fund; and
·
available
cash from operations is all other available
cash.
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28
-
Available
Cash from Dispositions and Available Cash from Operations are defined in the
LLC
Agreement and are not defined by and are not the same as similar concepts under
generally accepted accounting principles.
There
is
no fixed requirement to distribute available cash. Instead, available cash
will
be distributed to shareholders to the extent, and at such times, as the Fund
believes is advisable. Once the amount and timing of a distribution is
determined, it shall be made to shareholders as described below.
Distributions
from Operations
At
various times during a calendar year, the Fund will determine whether there
is
enough available cash from operations for a distribution to shareholders. The
amount of available cash from operations determined to be available, if any,
will be distributed to the shareholders. At all times, the Manager will be
entitled to 15% and shareholders will be entitled to 85% of the available cash
from operations distributed.
Distributions
of Available Cash from Dispositions
Available
cash from dispositions that the Fund decides to distribute will be paid as
follows:
·
before
shareholders have received total distributions (including distributions
from available cash from operations and available cash from dispositions)
equal to their capital contributions, 99% of available cash from
dispositions will be distributed to shareholders and 1% to the Manager;
and
·
after
shareholders have received total distributions (including available
cash
from operations and available cash from dispositions) equal to their
capital contributions, 85% of available cash from dispositions will
be
distributed to shareholders and 15% to the
Manager.
General
Distribution Provisions
Distributions
to shareholders under the foregoing provisions will be apportioned among them
in
proportion to their ownership of shareholder shares. The Manager has the sole
discretion to determine the amount and frequency of any distributions. However,
distributions may not be made selectively to one shareholder or group of
shareholders, but must be made ratably to all shareholders entitled to that
type
of distribution at that time. The Manager in its discretion nevertheless may
credit select persons with a portion of its compensation from the Fund or
distributions otherwise payable to the Manager.
Return
of Capital Contributions
If
the
Fund for any reason at any time does not find it necessary or appropriate to
retain or expend all capital contributions, it may, in its sole discretion,
return any or all of such excess capital contributions ratably to shareholders.
A return of capital contributions is not treated as a distribution. The Fund
and
the Manager will not be required to return any fees deducted from the original
capital contribution or any costs and expenses incurred and paid by the Fund.
The shareholders will be notified of the source of the payment. Any such return
of capital will decrease the shareholders’ capital contributions.
Voluntary
Additional Capital Contributions and Supplemental Offering of
Shares
The
LLC
Agreement does not provide for any mandatory assessments of capital from
shareholders. This means that the Fund cannot require any shareholder to
contribute more money after such shareholder completes his subscription and
pays
his initial capital contributions.
If
voluntary additional capital contributions are requested by the Fund to fund
additional project activities, the Manager will do so through a supplemental
offering of shares in the Fund. The LLC Agreement provides the Manager with
discretion in determining the nature, scope, amount and terms of such
supplemental offering.
A
shareholder who elects to not participate in any supplemental offering of shares
and does not provide additional capital contributions for such additional
project activities will have no interest in such additional project activities,
but will retain his interest in the projects in which the Fund has already
invested. The failure of a shareholder to participate in a supplemental offering
may have a dilutive effect on such shareholder’s investment.
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29
-
Removal
of Manager
Shareholders
may propose the removal of the Manager, either by calling a meeting or
soliciting consents in accordance with the terms of the LLC Agreement. Removal
of the Manager requires the affirmative vote of shareholders who are holders
of
record of at least a majority of the total shareholder shares. Removal of a
Manager causes the Fund to terminate the Fund’s operations and dissolve the Fund
unless a majority of the shareholder shares elects to continue operations.
The
shareholders may replace the removed Manager or fill a vacancy by vote of
shareholders who hold of record a majority of the total shareholder
shares.
If
the
Manager is removed, resigns (other than voluntarily without cause) or is unable
to serve, it may elect to exchange its management rights and rights to
distributions, if any, for a series of cash payments from the Fund in amounts
equal to the amounts of distributions to which the Manager would otherwise
have
been entitled under the LLC Agreement in respect of investments made by the
Fund
prior to the date of any such removal, resignation or other incapacity. The
removed Manager would continue to receive its pro rata share of all allocations
to shareholders as provided in the LLC Agreement which are attributable to
any
shareholder shares owned by it.
Alternatively,
the removed Manager may elect to engage a qualified independent appraiser and
cause the Fund to engage another qualified independent appraiser (at the Fund’s
expense in each case) to value the Fund property as of the date of such removal,
resignation or other incapacity as if the property had been sold at its fair
market value so as to include all unrealized gains and losses. If the two
appraisers cannot agree on a value, they would appoint a third independent
appraiser (whose cost would be borne by the Fund) whose determination, made
on
the same basis, would be final and binding.
Based
on
the appraisal, the Fund would make allocations to the removed Manager’s capital
account of profits, losses and other items resulting from the appraisal as
of
the date of such removal, resignation or other incapacity as if the Fund’s
fiscal year had ended, solely for the purpose of determining the Manager’s
capital account. If the removed Manager has a positive capital account after
such allocation, the Fund would deliver a promissory note of the Fund to the
Manager, the principal amount of which would be equal to the Manager’s capital
account and which would bear interest at a rate per annum equal to the prime
rate in effect at Chase Manhattan Bank, N.A. on the date of removal, resignation
or other incapacity, with interest payable annually and unpaid principal payable
only from 25% of any available cash before any distributions thereof are made
to
the shareholders under the LLC Agreement.
If
the
capital account of the removed Manager has a negative balance after such
allocation, it would be obligated to contribute to the capital of the Fund
in
its sole discretion either cash in an amount equal to the negative balance
in
its capital account or a promissory note to the Fund in such principal amount
maturing five years after the date of such removal, resignation or other
incapacity, bearing interest at the rate specified above. If the removed Manager
chose to elect the appraisal alternative, its entire interest in the Fund would
be terminated other than the right to receive the promissory note and payments
thereunder as provided above.
Dissolution
of Fund
The
Fund
will dissolve and terminate its operations on the earliest to occur of (a)
December 31, 2040, (b) the sale of substantially all of the Fund’s Property, (c)
the removal, dissolution, resignation, insolvency, bankruptcy, death or other
legal incapacity or disqualification of the Manager, (d) the vote of either
all
shareholders or of the Manager and shareholders who own at least a majority
of
the shareholder shares of record or (e) any other event requiring dissolution
by
law. The Fund will wind up its business after dissolution unless (i) the Manager
and shareholders who own at least a majority of the shareholder shares of record
or (ii) if there is no Manager, shareholders who own at least a majority of
the
shareholder shares of record, elect to continue the Fund. The Manager (or in
the
absence thereof, a liquidating trustee chosen by the shareholders) will
liquidate the Fund’s assets if it is not continued.
Transferability
of Interests
No
shareholder may assign or transfer all or any part of his or her interest in
the
Fund and no transferee will be deemed a substituted shareholder or be entitled
to exercise or receive any of the rights, powers or benefits of a shareholder
other than the right to receive distributions attributable to the transferred
interest unless (i) such transferee has been approved and accepted by the Fund,
in its sole and absolute discretion, as a substituted shareholder, and (ii)
certain other requirements set forth in the Fund’s LLC Agreement (including
receipt of an opinion of counsel that the transfer does not have adverse effects
under the securities laws and the Investment Company Act of 1940) have been
satisfied.
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30
-
The
Manager may not resign except for cause (which cause does not include the fact
or determination that continued service would be unprofitable to it) and may
not
transfer its interest in the Fund except to pledge it as security for a loan
to
the Manager if the pledge does not reduce cash flow distributable to other
shareholders.
Liability
Assuming
compliance with the LLC Agreement and applicable formative and qualifying
requirements in Delaware and any other jurisdiction in which the Fund conducts
its business, a shareholder will not be personally liable under Delaware law
for
any obligations of the Fund, except to the extent of any unpaid capital
contributions, except for the amount of any wrongful distributions that render
the Fund insolvent and except for indemnification liabilities arising from
any
misrepresentation made by him or her to the Fund when purchasing
shares.
ITEM
12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The
Delaware Limited Liability Company Act permits a Delaware limited liability
company to indemnify and hold harmless any member or manager or other person
from and against any and all claims and demands whatsoever.
The
Fund's LLC operating agreement provides that each managing person (which
includes the Manager and the Fund's officers, agents, consultants and affiliates
and their directors, trustees, officers, agents and affiliates when acting
on
behalf of the Fund) will be indemnified and held harmless to the full extent
of
the Fund's assets (and to the maximum extent permitted by applicable law) from
any loss or damage incurred by the managing person, including any amounts paid
in settlement of any claims incurred in connection with the Fund or in
connection with claims by the Fund, in the right of the Fund or by or in right
of any shareholder, due to any act or omission performed or omitted by the
managing person, if the managing person, in good faith, determined that such
course of conduct was in the Fund's best interest and the course of conduct
did
not constitute bad faith, gross negligence or willful misconduct by such
managing person.
The
Fund's LLC operating agreement provides that the Fund will not indemnify any
managing person for liability imposed or expenses incurred in connection with
any claim arising out of an alleged violation of any federal or state securities
laws, unless the claim is successfully adjudicated on the merits in favor of
the
managing person, dismissed with prejudice on the merits, or subject to a court
approved settlement.
The
Manager has full and complete discretion to authorize indemnification of any
managing person consistent with the requirements of the LLC operating agreement
at any time, regardless of whether a claim is pending or threatened and
regardless of any conflict of interest between the Manager and the Fund that
may
arise in regard to the decision to indemnify a managing person.
ITEM
13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Item
15. “Financial Statements and Exhibits".
ITEM
14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
15. FINANCIAL STATEMENTS AND EXHIBITS
(a)
Index to Financial Statements
See
“Index to Financial Statements” set forth on page F-1.
-
31
-
(b)
Exhibits:
EXHIBIT
NUMBER
TITLE
OF EXHIBIT
3.1
Articles
of Formation of Ridgewood Energy T Fund, LLC dated April 12,2006.
3.2
Limited
Liability Company Agreement between Ridgewood Energy Corporation
and
Investors of Ridgewood Energy T Fund, LLC dated June 15,2006.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Manager of Ridgewood Energy T Fund, LLC:
We
have
audited the accompanying balance sheet of Ridgewood Energy T Fund, LLC (an
exploratory stage enterprise) (the “Fund”) as of December 31, 2006, and the
related statements of operations, change in members’ capital, and cash flows for
the period April 12, 2006 (Inception) through December 31, 2006. These financial
statements are the responsibility of the Fund’s management. Our responsibility
is to express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Fund is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in
the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, such financial statements present fairly, in all material respects,
the
financial position of Ridgewood Energy T Fund, LLC as of December 31, 2006,
and
the result of its operations and its cash flows for the period April 12, 2006
(Inception) through December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
Adjustments
to reconcile net loss to net cash used in
operating
activities
Dry-hole
costs
32,590
Interest
earned on marketable securities
(217
)
Changes
in assets and liabilities
Increase
in other current assets
(289
)
Increase
in accrued expenses payable
111
Increase
in due to affiliates
38
Net
cash used in operating activities
(7,024
)
Cash
flows from investing activities
Capital
expenditures for unsuccessful properties
(6,104
)
Salvage
fund investments
(1,005
)
Investment
in marketable securities
(50,001
)
Net
cash used in investing activities
(57,110
)
Cash
flows from financing activities
Contributions
from shareholders
144,481
Syndication
costs paid
(16,931
)
Net
cash provided by financing activities
127,550
Net
increase in cash and cash equivalents
63,416
Cash
and cash equivalents, beginning of period
-
Cash
and cash equivalents, end of period
$
63,416
Supplemental
schedule of non-cash investing activities
Accrual
for capital expenditures in oil and gas properties reclassified
to
dry-hole costs
$
26,486
Supplemental
schedule of non-cash financing activities
Subscriptions
receivable
$
123
Accrual
for syndication costs
$
69
The
accompanying notes are an integral part of these financial
statements.
F-6
RIDGEWOOD
ENERGY T FUND, LLC
(An
exploratory stage enterprise)
NOTES
TO AUDITED FINANCIAL STATEMENTS
1.
Organization and Purpose
The
Ridgewood Energy T Fund, LLC ("Fund") (an exploratory stage enterprise), a
Delaware limited liability company, was formed on April 12, 2006 and operates
pursuant to a limited liability company agreement ("Agreement") dated as of
June15, 2006 by and among Ridgewood Energy Corporation ("Manager"), and the
shareholders of the Fund. Although the date of formation is April 12, 2006,
the
Fund did not begin business activities until June 15, 2006 when it began its
private offering of shares.
The
Fund
was organized to acquire, drill, construct and develop oil and natural gas
properties located in the United States offshore waters of Texas, Louisiana
and
Alabama in the Gulf of Mexico. The Fund has devoted most of its efforts to
raising capital and oil and natural gas exploration activities. To date, the
Fund has not earned revenue from these operations and is considered in the
exploratory stage.
The
Manager performs (or arranges for the performance of) the management and
administrative services required for Fund operations. Such services include,
without limitation, the administration of shareholder accounts, shareholder
relations and the preparation, review and dissemination of tax and other
financial information. In addition, the Manager provides office space, equipment
and facilities and other services necessary for Fund operations. The Manager
also engages and manages the contractual relations with outside custodians,
depositories, accountants, attorneys, broker-dealers, corporate fiduciaries,
insurers, banks and others as required (Notes 2, 6 and 7).
2.
Summary of Significant Accounting Policies
Exploratory
Stage Enterprise
Management
uses various criteria to evaluate whether the Fund is an exploratory stage
enterprise, including but not limited to, the success of drilling, the timing,
significance, quality and flow of production and the results of reserve reports
obtained from experts. On a case by case basis, once a project begins
production, management performs diligent analysis at regular intervals utilizing
the various criteria noted above to determine the appropriate classification
of
the Fund as an exploratory stage entity. Based on such an analysis, management
has determined the Fund continues to be an exploratory stage enterprise.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, the Manager reviews its
estimates, including those related to amounts advanced to and billed by
operators, determination of proved reserves, impairment allowances and
environmental liabilities. Actual results may differ from those estimates.
Advances
to Operators for Working Interests and Expenditures
The
Fund’s acquisition of a working interest in a well or a project requires it to
make a payment to the seller for the Fund’s rights, title and interest. The Fund
is required to advance its share of estimated cash outlay for the succeeding
month’s operation. The Fund accounts for such payments as advances to operators
for working interests and expenditures. As drilling costs are incurred, the
advances are transferred to unproved properties.
Oil
and Natural Gas Properties
Investments
in oil and natural gas properties are operated by unaffiliated entities
("Operators") who are responsible for drilling, administering and producing
activities pursuant to the terms of the applicable Operating agreements with
working interest owners. The Fund's portion of exploration, drilling, operating
and capital equipment expenditures relating to the wells are advanced and billed
by Operators through authorization for expenditures.
F-7
The
successful efforts method of accounting for oil and gas producing activities
is
followed. Acquisition costs are capitalized when incurred. Other oil and natural
gas exploration costs, excluding the costs of drilling exploratory wells, are
charged to expense as incurred. The costs of drilling exploratory wells are
capitalized pending the determination of whether the wells have discovered
proved commercial reserves. If proved commercial reserves have not been found,
exploratory drilling costs are expensed to dry-hole expense. Costs to develop
proved reserves, including the costs of all development wells and related
facilities and equipment used in the production of natural crude oil and natural
gas, are capitalized. Expenditures for ongoing repairs and maintenance of
producing properties are expensed as incurred.
Upon
the
sale or retirement of a proved property (i.e. a producing well), the cost and
related accumulated depletion and amortization will be eliminated from the
property accounts, and the resultant gain or loss is recognized. On the sale
or
retirement of an unproved property, gain or loss on the sale is recognized.
It
is not the Manager’s intention to sell any of the Fund’s property interests.
Capitalized
acquisition costs of producing oil and natural gas properties after recognizing
estimated salvage values are depleted by the unit-of-production method.
As
of
December 31, 2006 amounts recorded in due to operators related to the
acquisition of unsuccessful oil and gas property was $26.5 million, which were
paid in 2007.
Revenue
Recognition and Production Receivable
Oil
and
natural gas sales are recognized when delivery is made by the Operator to the
purchaser and title is transferred (i.e., production has been delivered to
a
pipeline or transport vehicle). The Fund has not earned revenue from inception
to date.
The
volume of oil and natural gas sold on the Fund’s behalf may differ from the
volume of oil and natural gas the Fund is entitled to. The Fund will account
for
such oil and natural gas production imbalances by the entitlements method.
Under
the entitlements method, the Fund will recognize a receivable from other working
interest owners for volumes oversold by other working interest owners, and
a
payable to other working interest owners for volumes oversold by the Fund.
At
December 31, 2006, there were no oil or natural gas balancing arrangements
between the Fund and other working interest owners.
Syndication
Costs
Direct
costs associated with offering the Fund’s shares including professional fees,
selling expenses and administrative costs payable to the Manager, an affiliate
of the Manager and outside brokers are reflected as a reduction of shareholders’
capital.
Asset
Retirement Obligations
For
oil
and natural gas properties, there are obligations to perform removal and
remediation activities when the properties are retired. When a project reaches
drilling depth and is determined to be either proved or dry, an asset retirement
obligation is incurred. Plug and abandonment costs associated with unsuccessful
projects are expensed as dry-hole costs.
In
accordance with the provisions of Statement of Financial Accounting Standards
No. 144 “Accounting for the Impairment of Long-Lived Assets” (“SFAS No.
144”), long-lived assets, such as oil and natural gas properties, are
evaluated when events or changes in circumstances indicate the carrying value
of
such assets may not be recoverable. The determination of whether impairment
has
occurred is made by comparing the carrying values of long-lived assets to
the estimated future undiscounted cash flows attributable
to the asset. The impairment loss recognized is the excess of the carrying
value
over the future discounted cash flows attributable to the asset or the estimated
fair value of the asset. No impairments have been recorded in the Fund
since inception.
Depletion
and Amortization
Depletion
and amortization of the cost of proved oil and natural gas properties are
calculated using the units of production method. Proved developed reserves
are
used as the base for depleting the cost of successful exploratory drilling
and
development costs. The sum of proved developed and proved undeveloped reserves
is used as the base for depleting (or amortizing) leasehold acquisition costs,
the costs to acquire proved properties and platform and pipeline costs. At
December 31, 2006, the Fund did not have accumulated depletion as production
has
not yet occurred.
Income
Taxes
No
provision is made for income taxes in the financial statements. Because the
fund
is an LLC, the income or losses are passed through and included in the tax
returns of the individual shareholders.
Cash
and cash equivalents
All
highly liquid investments with maturities when purchased of three months or
less
are considered as cash and cash equivalents. At times, bank deposits may be
in
excess of federal insured limits. At December 31, 2006, bank balances inclusive
of the salvage fund exceeded federally insured limits by $38 million. The Fund
maintains bank deposits with accredited financial institutions to mitigate
such
risk.
Salvage
Fund
Pursuant
to the Fund’s LLC Agreement, the Fund deposits in a separate interest-bearing
account, or a salvage fund, money to provide for dismantling production
platforms and facilities, plugging and abandoning the wells and removing the
platforms, facilities and wells after their useful lives, in accordance with
applicable federal and state laws and regulations.
Interest
earned on the account will become part of the salvage fund; there are no legal
restrictions on the withdrawal from the salvage fund.
Income
and Expense Allocation
Profits
and losses are to be allocated 85% to shareholders in proportion to their
relative capital contributions and 15% to the Manager, except for items of
expense, loss, deduction and credit that are attributable to the expenditure
of
shareholders’ capital contributions, which are allocated 99% to shareholders and
1% to the Manager.
3.
Recent
Accounting Standards
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159 “The Fair Value
Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which
permits entities to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value.
An
entity would report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. The decision about whether to elect the fair value option
is applied instrument by instrument, with a few exceptions; the decision is
irrevocable; and it is applied only to entire instruments and not to portions
of
instruments. The statement requires disclosures that facilitate comparisons
(a)
between entities that choose different measurement attributes for similar
F-9
assets
and liabilities and (b) between assets and liabilities in the financial
statements of an entity that selects different measurement attributes for
similar assets and liabilities. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year provided the entity
also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements,”
(“SFAS No.157”). Upon implementation, an entity shall report the effect of the
first remeasurement to fair value as a cumulative-effect adjustment to the
opening balance of retained earnings/accumulated deficit. Since the provisions
of SFAS No.159 are applied prospectively, any potential impact will depend
on
the instruments selected for fair value measurement at the time of
implementation. The Fund does not believe that its financial position, results
of operations or cash flows will be impacted by the adoption of SFAS No. 159.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), which applies under most other accounting pronouncements that require
or permit fair value measurements. SFAS No. 157 provides a common
definition of fair value as the price that would be received to sell an asset
or
paid to transfer a liability in a transaction between market participants.
The new standard also provides guidance on the methods used to measure
fair value and requires expanded disclosures related to fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Fund does not believe that
its financial position, results of operations, or cash flows will be impacted
by
the adoption of SFAS No. 157.
In
September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,” (“SAB No. 108”) in an
effort to address diversity in the accounting practice of quantifying
misstatements and the potential for improper amounts on the balance sheet.
Prior
to the issuance of SAB No. 108, the two methods used for quantifying the effects
of financial statement errors were the rollover and iron curtain methods. Under
the rollover method, the primary focus is the income statement, including the
reversing effect of prior year misstatements. The iron curtain method focuses
on
the effect of correcting the ending balance sheet, with less importance on
the
reversing effects of prior year errors in the income statement. SAB No. 108
establishes a dual approach which requires the quantification of the effect
of
financial statement errors on each financial statement, as well as related
disclosures. Public companies are required to record the cumulative effect
of
initially adopting the dual approach method in the first year ending after
November 16, 2006 by recording any necessary corrections to asset and liability
balances with an offsetting adjustment to the opening balance of retained
earnings. The use of this cumulative effect transition method also required
detailed disclosures of the nature and amount of each error being corrected
and
how and when they arose. The Fund has adopted the provisions of SAB No. 108
and
there was no impact to its financial position, results of operations and cash
flows as a result of this pronouncement.
4.
Unproved Properties - Capitalized Exploratory Well Costs
Leasehold
acquisition and exploratory drilling costs are capitalized pending determination
of whether the well has found proved reserves. Unproved properties are assessed
on a quarterly basis by evaluating and monitoring if sufficient progress is
made
on assessing the reserves. Capitalization costs are expensed as dry-hole costs
in the event that reserves are not found or are not in sufficient quantities
to
complete the well and develop the field. At December 31, 2006, the Fund had
no
unproved properties.
5.
Short-term Investments in Marketable Securities inclusive of Salvage
Fund
Short-term
investments are comprised of US Treasury Notes with maturities greater than
three months and are considered held-to-maturity investments. Held-to-maturity
securities are those investments that the Fund has the ability and intent to
hold until maturity. Held-to maturity investments are recorded at cost plus
accrued income, adjusted for the amortization of premiums and discounts, which
approximate market value. Interest income is accrued as earned. The current
fair
value of the Fund’s held to maturity investments, including salvage fund, is
$51.3 million, with unrecognized holding gains of $30 thousand. US Treasury
Notes mature in May and June 2007.
F-10
6.
Distributions
Distributions
to shareholders are allocated in proportion to the number of shares
held.
The
Manager will determine whether Available Cash from Operations, as defined in
the
Fund’s Operating Agreement, is to be distributed. Such distribution will be
allocated 85% to the shareholders and 15% to the Manager, as defined in the
Fund’s Operating Agreement.
Available
Cash from Dispositions, as defined in the Fund’s Operating Agreement, will be
paid 99% to shareholders and 1% to the Manager until the shareholders have
received total distributions equal to their capital contributions. After
shareholders have received distributions equal to their capital contributions,
85% of Available Cash from Dispositions will be distributed to shareholders
and
15% to the Manager.
There
have been no distributions made by the Fund since its inception.
7.
Related Parties
Ridgewood
Energy Corporation, the Manager, was paid a one time investment fee of 4.5%
of
initial capital contributions. Fees are payable for services of investigating
and evaluating investment opportunities and effecting transactions and are
expensed as incurred. For the period April 12, 2006 (Inception) through December31, 2006 investment fees were approximately $6.5 million.
A
management agreement provides that the Manager render management, administrative
and advisory services. For such services, the Manager receives an annual
management fee, payable monthly, of 2.5% of total capital contributions.
Management fees of approximately $1.6 million were incurred for the period
April12, 2006 (Inception) through December 31, 2006. Of this amount, $38 thousand
was
included in due to affiliates at December 31, 2006. The Manager changed its
policy regarding the calculation of the management fees effective January 1,2007. See Note 11. Subsequent Events.
The
Manager was paid an offering fee which approximated 3.5% of capital
contributions directly related to the offer and sale of shares of the Fund.
Such
offering fee was included in syndication costs (Note 2) of $17.0 million. For
the period ended December 31, 2006, offering fees were approximately $5.1
million. Of this amount, $30 thousand was included in due to affiliates at
December 31, 2006.
From
time
to time, short-term payables and receivables, which do not bear interest, arise
from transactions with affiliates in the ordinary course of business. There
were
no outstanding payables or receivables related to these transactions at December31, 2006.
In
2006,
Ridgewood Securities Corporation, a registered broker-dealer affiliated with
the
Manager, was paid selling commissions and placement fees of approximately $115
thousand and $1.4 million, respectively, for shares sold of the Fund which
are
reflected in syndication costs (Note 2). At December 31, 2006, approximately
$5
thousand was included in due to affiliates.
None
of
the compensation to be received by the Manager has been derived as a result
of
arm’s length negotiations.
The
Fund
has working interest ownership in certain projects to acquire and develop oil
and natural gas projects with other entities that are likewise managed by the
Manager.
8.
Fair Value of Financial Instruments
At
December 31, 2006, the carrying value of cash and cash equivalents, short-term
investments in marketable securities, and salvage fund, approximate fair value.
F-11
9.
Commitments and Contingencies
Environmental
Considerations
The
exploration for and development of oil and natural gas involves the extraction,
production and transportation of materials which, under certain conditions,
can
be hazardous or cause environmental pollution problems. The Manager and the
Operators are continually taking action they believe appropriate to satisfy
applicable federal, state and local environmental regulations and do not
currently anticipate that compliance with federal, state and local environmental
regulations will have a material adverse effect upon capital expenditures,
results of operations or the competitive position of the Fund in the oil and
natural gas industry. However, due to the significant public and governmental
interest in environmental matters related to those activities, the Manager
cannot predict the effects of possible future legislation, rule changes, or
governmental or private claims. At December 31, 2006, there were no known
environmental issues that required the Fund to record a liability.
Insurance
Coverage
The
Fund
is subject to all risks inherent in the exploration for and development of
oil
and natural gas. Insurance coverage as is customary for entities engaged in
similar operations is maintained, but losses may occur from uninsurable risks
or
amounts in excess of existing insurance coverage. The occurrence of an event
which is not insured or not fully insured could have an adverse impact upon
earnings and financial position.
10.
Information about Oil and Natural Gas Producing Activities
In
accordance with Statement of Financial Accounting Standards No. 69, “Disclosures
about Oil and Gas Producing Activities,” this section provides supplemental
information on oil and natural gas exploration and producing activities of
the
Fund. Tables II provides historical cost information pertaining to capitalized
costs, costs incurred in exploration, property acquisitions and development,
and
results of operations. As of December 31, 2006, the Fund did not have any oil
and gas properties or proved reserves to warrant additional
disclosures.
The
Fund
is engaged solely in oil and natural gas activities, all of which are located
in
the United States offshore waters of Louisiana in the Gulf of Mexico.
Effective
January 1, 2007, the Manager has changed its policy regarding the annual
management fee. Commencing in January 2007, the management fee payable will
be
equal to 2.5% of the total shareholder capital contributions, net of cumulative
dry-hole expenses incurred by the Fund. For the Fund, the management fee will
be
reduced by $68 thousand per month, based upon dry-hole expenses of $32.6 million
through December 31, 2006.
Green
Canyon 246
On
January 24, 2007, the Fund was informed by its operator, Woodside, that the
exploratory well being drilled by Woodside in the Green Canyon 246 lease block
did not have commercially productive quantities of either oil or natural gas
and
had therefore been deemed an unsuccessful well or dry-hole. The Fund owns a
41.7% working interest in Green Canyon 246. Dry-hole
costs related to Green Canyon 246, including plug and abandonment expenses,
incurred by the Fund for the period April 12, 2006 (Inception) through December31, 2006 were approximately $24.2 million. The Fund incurred additional dry-hole
costs related to Green Canyon 246 of $6.9 million during 2007.
F-13
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.