4.  JV Drilling Program

On March 12, 2018, W&T and two other initial members formed and initially funded a limited liability company, Monza, which will jointly participate with us in the exploration, drilling and development of up to 14 identified drilling projects in the Gulf of Mexico over the next three years.  W&T contributed 88.94% of its working interest in the 14 identified projects to Monza and retained an 11.06% working interest.  The projected cost to Monza to fully develop the 14 projects is estimated to be $298.6 million, excluding contingencies.  Since the initial closing on March 12, 2018, additional investors have joined in Monza and as of April 27, 2018, total commitments by all investors are $297.6 million.  We anticipate additional investors will join in the program.  If we experience cost overruns on every project, which is unlikely, then the total cost of all projects could be as high as approximately $373 million, of which W&T would have an indirect (through Monza) cash commitment of approximately $37.5 million.  See Note 11 for additional information.  W&T will be the operator of all the drilling projects unless there is already a designated third-party operator.

One of the initial members of Monza is an entity owned and controlled by Harbourvest Partners, a Boston based private equity fund.  The other initial members are W&T and an entity owned and controlled by Mr. Tracy W. Krohn, our Chairman and Chief Executive Officer.  The Krohn entity invested as a minority investor on the same terms and conditions as Harbourvest Partners and its investment is limited to 4.5% of total invested capital within Monza.  The entity affiliated with Mr. Krohn has made a capital commitment to Monza of $13.4 million, which commitment will be increased as and when additional investors join the JV Drilling Program up to an amount not to exceed $16.8 million.  

In summary, W&T owns a direct interest in the 14 drilling projects as well as an indirect interest via its interest in Monza.  The JV Drilling Program is structured so that we initially receive an aggregate of 30.0% of the net revenues, through both our direct ownership of our working interest in the projects and our indirect interest through our interest in Monza, for contributing 20.0% of the estimated total well costs plus associated leases and providing access to available infrastructure at agreed upon rates.  

At the inception of Monza, W&T received a net reimbursement of approximately $20 million for the capital expenditures incurred prior to the close date for projects in the JV Drilling Program.  W&T may fund certain cost overruns, subject to certain exceptions, on JV Drilling Program wells above budgeted amounts.

We hold a variable interest in Monza, which is a variable interest entity which we account for utilizing proportional consolidation.  We do not fully consolidate Monza because we are not considered the primary beneficiary.  Information on the structure and relationship follows:

Board Structure and Authority.  Under the limited liability agreement, the business and affairs of Monza are managed by a board of five directors, which consists of three directors selected by Harbourvest and other investors, Mr. Krohn, and an additional independent director that will be selected by a majority of the investors in Monza subject to consent by W&T.  The day-to-day operations of Monza are being managed by W&T, under the direction of the Monza board, pursuant to a services agreement.  W&T has no control over the decisions of the Monza board.  W&T has veto rights for certain decisions, but does not have the ability to unilaterally make decisions for Monza, except for day-to-day decisions as permitted under the services agreement.  The Monza board is responsible for the management of Monza and for making decisions with respect to its interest in the 14 drilling projects, including approval of the budgets.    

Accounting Methodology and Carrying Amounts.  As we are not the primary beneficiary and we do not have control of Monza, we are utilizing proportional consolidation for our interest in Monza.  As of March 31, 2018 in the Condensed Consolidated Statement of Financial Position, we recorded $2.4 million in prepaid assets, $44.9 million in oil and natural gas properties, $2.4 million in other assets and $1.0 million in accounts payable in connection with our proportional interest in Monza’s assets and liabilities.

Maximum Exposure. Our maximum  exposure within Monza as of March 31, 2018 is $48.7 million, which consists of $6.7 million cash contributed to Monza and $42.0 million of fair value for the conveyance of the 88.94% of the Company’s working interest in the 14 projects.  We may also take responsibility for certain drilling and completion cost overruns, subject to certain limitations and certain exceptions.