Harbinger Group Inc.
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SEC Filings

10-Q
HRG GROUP, INC. filed this Form 10-Q on 08/09/2016
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gas prices have adversely affected Compass’ business, financial condition, cash flow, liquidity and results of operations, resulting in issues that may impair Compass’ ability to continue as a going concern in the future.”
In addition to the borrowings under the Compass Credit Agreement, HGI Energy has indebtedness of an aggregate of $100.0 million under notes issued by HGI Energy to FGL and Front Street, which are subsidiaries of HRG (the “Affiliate Notes”). HGI Energy’s only material asset is the equity interests it holds in Compass. Thus, HGI Energy’s ability to service the Affiliate Notes is dependent on the ability of Compass to generate sufficient net income and cash flows to make upstream cash distributions to HGI Energy. As discussed further herein, Compass has no obligation, and at this time no ability, to make any funds available to HGI Energy. In the past, HRG has voluntarily elected to contribute the capital to HGI Energy for it to pay the interest on the Affiliate Notes. During the Fiscal 2016 Nine Months, HRG funded $9.0 million of interest payments on the Affiliate Notes. As of the date of this report, HGI Energy was in compliance with covenants under the Affiliate Notes. Such covenants include limitations to restricted payments, including dividends to the holding company, incurrence of indebtedness and issuance of preferred stock, asset sales, transactions with affiliates, creation of liens, organizational existence, limits on mergers and consolidation and limits on sale and leaseback transactions. See Note 1, Description of Business to our Condensed Consolidated Financial Statements included in Part I - Item 1. Financial Statements regarding the treatment of the Affiliate Notes following the closing of the Compass Sale.
The following table presents Compass’ liquidity and financial position as of June 30, 2016 (in millions):
 
 
June 30,
2016
Borrowings under the Compass Credit Agreement
 
$
125.0

Less: Cash
 
5.4

Net debt
 
$
119.6

Borrowing base (1)
 
$
135.0

Unused borrowing base (2)
 
9.0

Unused borrowing base plus cash (2)
 
14.4

(1) Based on the November semi-annual borrowing base redetermination, at June 30, 2016, the borrowing base under the Compass Credit Agreement was adjusted by the lender group to $135.0 million.
(2) Net of $1.0 million in letters of credit for Compass as of June 30, 2016.
Capital Expenditures
Compass’ primary sources of capital resources and liquidity are cash flows from operations and borrowing capacity under the Compass Credit Agreement. The Fiscal 2016 Nine Months capital expenditures for Compass were $3.4 million, which primarily consisted of recompletion activities in the Permian and North Louisiana properties.
The following table presents Compass’ capital expenditures for the Fiscal 2016 Nine Months and fiscal year 2016 (in millions):
 
 
Fiscal Nine Months
 
July-September Forecast
 
Fiscal Year
 
 
2016
 
2016
 
2016
Capital expenditures:
 
 
 
 
 
 
Development capital
 
$
2.7

 
$
0.7

 
$
3.4

Corporate and other
 
0.7

 
0.2

 
0.9

    Total
 
$
3.4

 
$
0.9

 
$
4.3

Derivative financial instruments
Compass periodically uses oil and natural gas derivatives financial instruments to manage its exposure to commodity prices. These transactions limit exposure to declines in commodity prices, but also limit the benefits Compass would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of its derivative financial instrument management activities consists of non-cash income or expense due to changes in the fair value of its derivative financial instruments. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if Compass terminates a contract prior to its expiration. Compass does not designate these instruments as hedging instruments for financial reporting purposes and, as a result, Compass recognizes the change in the respective instruments’ fair value in earnings.
The impacts of realized and unrealized changes in the fair value of derivative financial instruments resulted in a net loss of $2.2 million for the Fiscal 2016 Quarter and a net gain of $0.3 million for the Fiscal 2016 Nine Months and a net loss of $2.7 million for the Fiscal 2015 Quarter and a net gain of $21.3 million for the Fiscal 2015 Nine Months, primarily as a result of decreased natural gas and crude oil prices. Based on the nature of Compass’ derivative financial instruments, increases in the related commodity price typically result in a decrease to the value of Compass’ derivative financial instruments. The significant fluctuations demonstrate

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