11.  Contingencies

Notice of Suspension and Debarment.  In November 2013, W&T Offshore, Inc., the Parent Company, received a Notice of Suspension and Proposed Debarment and a Notice of Clean Water Act Listing from the U.S. Environmental Protection Agency (the “EPA”).  The Notices were directed to only the Parent Company and do not name or apply to our wholly-owned subsidiaries.  The first Notice suspends the Parent Company and proposes a three year debarment from participation in future federal contracts, including future federal oil and gas leases, and assistance activities and renders the Parent Company ineligible to receive any federal contracts or approved subcontracts or to act as an agent or representative on behalf of another in such transaction, or receive certain federal benefits.  The second Notice provides a narrower prohibition on federal contracts or benefits for the Parent Company.  The Notices stemmed from the Parent Company’s previously disclosed plea agreement and corporate conviction on two criminal counts as described in Item 8, Financial Statements and Supplementary Data, in our Annual Report on Form 10-K for the year end December 31, 2013.  

The Notices prevent the Parent Company from obtaining federal oil and gas leases, whether at a future lease sale or an existing lease by assignment.  The Notices do not affect current or future drilling or production operations or the existing lease ownership of the Parent Company.

The Company does not believe that the regulatory requirements for suspension and debarment exist.  The Company has corrected the issues leading to the 2009 offenses that form the basis for suspension and debarment and has been and remains a responsible operator.  Suspension is not necessary to protect the Government’s business interests.  The Company believes the EPA action fails to recognize the Company’s compliance with the plea agreement referenced above, our demonstration that the conditions which gave rise to the violations have been corrected and that the Company is a responsible operator acting under a comprehensive environmental and safety compliance program.  We have had continuing discussions with the EPA Suspension and Debarment Officials and made filings to contest the limitations in both Notices and seek to remove the suspension in a cooperative fashion as soon as practicable.  The timing and ultimate result of these efforts, however, cannot be predicted at this time.

Disqualification of waiver concerning certain supplement bonding requirements from the Bureau of Ocean Energy Management (“BOEM”).  In November and December 2013, W&T Offshore, Inc. received letters from the BOEM claiming that it no longer qualifies for a waiver of certain supplemental bonding requirements for potential offshore decommissioning, plugging, and abandonment liabilities. These letters pertain to the Parent Company’s prior supplemental bonding waiver.  Our wholly-owned subsidiary, Energy VI, is not exempt from supplemental bonding under BOEM’s procedures and therefore such wholly-owned subsidiary provides supplemental bonding for its plugging and abandonment liabilities. The supplemental bonding requirements are separate and distinct from the suspension and debarment issue described above.  The letters notified the Parent Company that it must provide supplemental bonding on certain of its offshore leases, rights of way and easements in the Gulf of Mexico.  We believe that this action is without basis and inconsistent with regulatory requirements.  We have had and continue to have discussions with representatives of the BOEM regarding this decision in an attempt to resolve this issue. We are also discussing potential additional supplemental bonding requirements that may be required to be met in the event that the BOEM’s decision regarding the Parent Company’s supplemental bonding waiver is not modified or reversed. While these discussions remain ongoing, in order to preserve our rights, in January 2014 we filed a Petition for Stay Pending Appeal and Request for Interim Relief with the U.S. Department of Interior’s Board of Land Appeals. The petition seeks a stay of any supplemental bonding requirements pending the appeal and to reverse BOEM’s revocation of W&T Offshore, Inc.’s waiver of supplemental bonding requirements. Initially, we were granted a stay until February 15, 2014 in response to our petition and recently we were granted a stay until June 15, 2014 to facilitate ongoing negotiations.  We continue to believe that the Parent Company qualifies for a supplemental bonding waiver.

The Parent Company has transferred certain assets together with associated ARO liability to our wholly-owned subsidiary, Energy VI.  These actions were taken to assist the Parent Company in its efforts to obtain from the BOEM a continuation of the waiver of supplemental bonding for the Parent Company.   We believe these efforts should result in the BOEM’s continuation of our waiver of supplemental bonding.  These actions have caused us to obtain additional supplemental bonds for Energy VI related to the ARO for the transferred properties, incurring approximately $0.9 million of additional bond fees.  Similar bonds fees will be required every year the bonds are in effect until the properties are plugged and abandoned.  To date, letters of credit have not been required to secure supplemental bonding for Energy VI, but it is possible that letters of credit may be required in the future.  The revolving bank credit facility allows for the issuance of up to $300.0 million of letters of credit.  If we were required to post letters of credit for this purpose, this would utilize a portion of our borrowing capacity available under our revolving bank credit facility.

Notification by ONRR of fine for non-compliance.  In December 2013 and January 2014, we were notified by the Office of Natural Resources Revenue (“ONRR”) of an underpayment of royalties on certain Federal offshore oil and gas leases that cumulatively approximated $30,000 over several years, which represents 0.0045% of royalty payments paid by us during the same period of the underpayment.  In March 2014, we received notice from the ONRR of a statutory fine of $2.3 million relative to such underpayment, which is substantially in excess of the underpayment.  We believe the fine is excessive and extreme considering the circumstances and in relation to the underpayment itself.  On April 23, 2014, we filed a request for a hearing on the record and a general denial of ONRR’s allegations contained in the notice.  We intend to contest the fine to the fullest extent possible.  As no amount has been determined as more likely than any other within the range of possible resolutions, no amount has been accrued as of March 31, 2014 per authoritative guidance.  However, we cannot state with certainty that our estimate of the exposure is accurate concerning this matter.  

Insurance Claims.  During the fourth quarter of 2012, underwriters of W&T’s excess liability policies (“Excess Policies”) (Indemnity Insurance Company of North America, New York Marine & General Insurance Company, Navigators Insurance Company, XL Specialty Insurance Company and Liberty Mutual Insurance Co.) filed declaratory judgment actions in the United States District Court for the Southern District of Texas seeking a determination that our Excess Policies do not cover removal-of-wreck and debris claims arising from Hurricane Ike to the extent we have first exhausted the limits of our Energy Package (defined as certain insurance policies relating to our oil and gas properties which includes named windstorm coverage) with only removal-of-wreck and debris claims.  The court consolidated the various suits filed by the underwriters.  In January 2013, we filed a motion for summary judgment seeking the court’s determination that such Excess Policies do not require us to exhaust the limits of our Energy Package policies with only removal-of-wreck and debris claims.  In July 2013, the District Court ruled in favor of the underwriters, adopting their position that the Excess Policies cover removal-of-wreck and debris claims only to the extent the limits of our Energy Package policies have been exhausted with removal-of-wreck and debris claims.  We disagree with the Court’s ruling and have appealed the decision.  As of March 31, 2014, we had not filed any claims under such Excess Policies; however, claims were filed subsequent to March 31, 2014.  The amount in dispute is estimated at approximately $46.0 million, of which substantially all has been incurred.  Removal-of-wreck costs are recorded in Oil and natural gas properties and equipment on the Condensed Consolidated Balance Sheets.  If we are successful in our appeal, any recoveries from claims made on these Excess Policies will be recorded as reductions in this line item, which will reduce our DD&A rate.

Royalties.  In 2009, the Company recognized $5.3 million in allowable reductions of cash payments for royalties owed to the ONRR for transportation of their deepwater production through our subsea pipeline systems.  In 2010, the ONRR audited the calculations and support related to this usage fee, and in the third quarter of 2010, we were notified that the ONRR had disallowed approximately $4.7 million of the reductions taken.  We recorded a reduction to other revenue of $4.7 million in the third quarter of 2010 to reflect this disallowance; however, we disagree with the position taken by the ONRR and we are pursuing our claim to resolve the matter.

Other Claims.  We are a party to various pending or threatened claims and complaints seeking damages or other remedies concerning our commercial operations and other matters in the ordinary course of our business.  In addition, claims or contingencies may arise related to matters occurring prior to our acquisition of properties or related to matters occurring subsequent to our sale of properties.  In certain cases, we have indemnified the sellers of properties we have acquired, and in other cases, we have indemnified the buyers of properties we have sold.  We are also subject to federal and state administrative proceedings conducted in the ordinary course of business.  Although we can give no assurance about the outcome of pending legal and federal or state administrative proceedings and the effect such an outcome may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Contingent Liability Recorded.  There were minimal expenses recognized related to accrued and settled claims, complaints and fines for the three months ended March 31, 2014 and 2013.  As of March 31, 2014 and December 31, 2013, we have recorded $0.1 million and $0.2 million, respectively, which are included in Accrued liabilities on the Condensed Consolidated Balance Sheets, for the loss contingencies matters in the normal course of business.