Annual report pursuant to Section 13 and 15(d)

Discontinued Operations

v3.5.0.2
Discontinued Operations
 12 Months Ended
Jun. 30, 2016
Discontinued Operations and Disposal Groups [Abstract]  
Discontinued Operations
Note 4 - Discontinued Operations
On March 31, 2016, the Company entered into an Exchange Agreement with One Stone pursuant to which, subject primarily to stockholder approval, One Stone would transfer its ownership of 100% of Magellan's Series A Preferred Stock in exchange for 100% of Magellan's interest in the CO2 Business. As of March 31, 2016, the Company determined that it was probable that the Exchange would be approved by the stockholders. Therefore, assets and liabilities of the CO2 Business were reclassified as held for sale and recorded at their fair values, less the cost to sell. The assets and liabilities are shown as held for sale for all periods presented. Subsequent to June 30, 2016, on July 13, 2016, the stockholders of Magellan voted in favor of the Exchange and on August 1, 2016 the Exchange closed.
In addition, on June 10, 2016, the Company entered into into three concurrent agreements, including the Weald ATA, the IoW ATA, and the Settlement Agreement, which resulted in the disposal of its interests in four licenses in the UK and the settlement of all legal claims related to its dispute with Celtique. As of June 30, 2016, the Company determined that it was probable that the transactions contemplated by these agreements would close, and therefore the assets and liabilities of MPUK related to them were reclassified as held for sale and recorded at the lower of their cost or their fair values, less the cost to sell. The assets and liabilities are shown as held for sale for all periods presented. Subsequent to June 30, 2016, on August 11, 2016, the conditions to completion of these agreements were met, and the transactions contemplated by the Weald ATA, the IoW ATA, and the Settlement Agreement closed.
The results of operations of the CO2 Business and the exploration licenses included in the Weald ATA and the IoW ATA, including the settlement of the Celtique litigation were reclassified to discontinued operations in fiscal year 2016. Prior year amounts related to the discontinued operations in the consolidated statements of operations and statements of cash flows have been reclassified to conform to the current period presentation. Summarized results of the Company's discontinued operations are as follows:
 
 
June 30,
 
 
2016
 
2015
 
 
CO2 Business
 
Weald Basin
 
Total
 
CO2 Business
 
Weald Basin
 
Total
 
 
(in thousands)
Revenue
 
$
1,990

 
$
—

 
$
1,990

 
$
4,459

 
$
—

 
$
4,459

Operating, exploration and general and administrative expenses
 
3,070

 
361

 
3,431

 
6,708

 
370

 
7,078

Depletion, depreciation, amortization and accretion
 
651

 
—

 
651

 
1,001

 
—

 
1,001

Exploration
 
—

 
—

 
—

 
—

 
—

 
—

Impairment expense
 
11,280

 
—

 
11,280

 
18,027

 
—

 
18,027

General and administrative
 
—

 
—

 
—

 
—

 
—

 
—

Interest expense and other disposal costs
 
926

 
—

 
926

 
168

 
—

 
168

Total expenses
 
$
15,927

 
$
361

 
$
16,288

 
25,904

 
370

 
26,274

Non-controlling interest
 
49

 
—

 
49

 
411

 
—

 
411

Loss from discontinued operations before tax
 
$
(13,888
)
 
$
(361
)
 
$
(14,249
)
 
$
(21,034
)
 
$
(370
)
 
$
(21,404
)

The Company reviewed the recoverability of the carrying values of its assets and liabilities related to the CO2 Business and the Weald Basin. As a result of this review, the Company recorded an impairment of $11.3 million in discontinued operations for the year ended June 30, 2016, to adjust the carrying values of the exchanged assets and liabilities of the CO2 Business to their estimated fair values less costs to sell at June 30, 2016. For the fiscal year ended June 30, 2015, the Company had previously recorded an impairment of $17.4 million related to the proved oil and gas property and a goodwill impairment of $674 thousand related to the CO2 Business. The carrying values of the Weald Basin assets were less than their fair values; therefore, no adjustment was necessary. The adjusted carrying amounts of the major classes of assets and liabilities included in discontinued operations are as follows:
 
 
June 30,
 
 
2016
 
2015
 
 
CO2 Business
 
Weald Basin
 
Total
 
CO2 Business
 
Weald Basin
 
Total
 
 
(in thousands)
Carrying amounts of major classes of assets included as part of assets held for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
141

 
$
—

 
$
141

 
$
282

 
$
—

 
$
282

Accounts receivable
 
249

 
—

 
249

 
504

 
—

 
504

Inventories
 
232

 
301

 
533

 
297

 
354

 
651

Other classes of current assets that are not major
 
34

 
—

 
34

 
77

 
—

 
77

Property and equipment, net
 
23,941

 
812

 
24,753

 
35,593

 
953

 
36,546

Other classes of assets that are not major
 
332

 
—

 
332

 
376

 
—

 
376

Total assets of the disposal group classified as held for sale in the balance sheet
 
$
24,929

 
$
1,113

 
$
26,042

 
$
37,129

 
$
1,307

 
$
38,436

 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying amounts of major classes of liabilities included as part of liabilities held for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
1,594

 
$
670

 
$
2,264

 
$
1,752

 
$
485

 
$
2,237

Note payable
 
5,500

 
—

 
5,500

 
5,500

 
—

 
5,500

Asset retirement obligations
 
2,818

 
—

 
2,818

 
2,647

 
—

 
2,647

Other classes of liabilities that are not major
 
56

 
—

 
56

 
104

 
—

 
104

Total liabilities of the disposal group classified as held for sale in the balance sheet
 
$
9,968

 
$
670

 
$
10,638

 
$
10,003

 
$
485

 
$
10,488



Note Payable. The note payable included in liabilities held for sale of discontinued operations at June 30, 2016, and June 30, 2015, represents the Term Loan with WTSB as described below.
On September 17, 2014, the Company, through its former wholly owned subsidiary NP, entered into a senior secured revolving loan facility (the "Revolving Loan Facility") with WTSB. The Revolving Loan Facility had a floating interest rate based on the prime rate with a floor rate of 3.25%, with interest payable quarterly, a maturity of September 30, 2015, and a total available borrowing limit of $8.0 million, of which $5.5 million was drawn as of June 30, 2015, when the Company entered into an amendment to the Revolving Loan Facility whereby the Revolving Loan Facility was converted into a single term loan (the "Term Loan"). The maturity of the Term Loan was extended to June 30, 2020 and bears interest at the Prime Rate (3.5% at June 30, 2016) plus 1.50% with an interest rate floor of 4.75%. The Term Loan was secured by substantially all of NP's assets and a guarantee of Magellan secured by a pledge of its membership interest in NP. During the first 12 months of the Term Loan, only monthly interest payments were payable. Principal is amortized over its remaining four-year term. Under the terms of the Term Loan, Magellan and NP are subject to certain restrictive covenants customary in similar loan agreements. At June 30, 2016, the Company was in compliance with all such covenants. Upon closing of the Exchange on August 1, 2016, Magellan was released from the guarantee and One Stone received 100% of the outstanding membership interests in NP and assumed the Term Loan.
Asset Retirement Obligations. The estimated valuation of asset retirement obligations ("AROs") is based on the Company's historical experience and management's best estimate of plugging and abandonment costs by field. Assumptions and judgments made by management when assessing an ARO include: (i) the existence of a legal obligation; (ii) estimated probabilities, amounts, and timing of settlements; (iii) the credit-adjusted risk-free rate to be used; and (iv) inflation rates. Accretion expense related to the asset retirement obligations are included in discontinued operations in the accompanying consolidated statements of operations.
The following table summarizes the asset retirement obligation activity included in liabilities held for sale for the fiscal years ended:
 
June 30,
 
2016
 
2015
 
(In thousands)
Fiscal year opening balance
$
2,647

 
$
2,476

Accretion expense
171

 
171

Fiscal year closing balance
2,818

 
2,647

Less current asset retirement obligations
—

 
—

Long-term asset retirement obligations
$
2,818

 
$
2,647


Contingent Production Payments.The Company has retained potential future contingent production payments related to its September 2011 acquisition of NP. The contingent production payments are payable, up to a total of $5.0 million, if certain increased average daily production rates are achieved at the Poplar field. Based upon the latest reserves estimates available to the Company, the contingent production payments are unlikely to be paid, and therefore are not recorded in the accompanying consolidated financial statements.
Non-controlling Interest in Utah CO2 LLC. The Exchange Agreement provided for the transfer by the Company of its 51% interest in Utah CO2 to One Stone. The non-controlling interest in Utah CO2 has been included with liabilities held for sale in the consolidated balance sheets for all periods presented, and its results of operations are included in discontinued operations in the accompanying statements of operations for all periods presented.