1.  Basis of Presentation

Operations.  W&T Offshore, Inc. and subsidiaries, referred to herein as “W&T,” “we,” “us” or the “Company,” is an independent oil and natural gas producer focused primarily in the Gulf of Mexico and onshore Texas.  The Company is active in the exploration, development and acquisition of oil and natural gas properties.  Our interest in fields, leases, structures and equipment are primarily owned by W&T Offshore, Inc. (on a stand-alone basis, the “Parent Company”) and our 100%-owned subsidiary, W & T Energy VI, LLC (“Energy VI”).

Interim Financial Statements.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim periods and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements for annual periods.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Reclassifications. Certain reclassifications have been made to prior periods’ financial statements to conform to the current presentation.  The change in Insurance receivables was combined with the change in Joint interest and other receivables on the Condensed Consolidated Statements of Cash Flows.  

Transactions between Entities Under Common Control.  The prior period financial information presented in Note 13, Supplemental Guarantor Information, has been retrospectively adjusted due to transactions between entities under common control, as required under authoritative guidance.

Allowance for Doubtful Accounts.  Historically, we have had only minor issues collecting our receivables.  For situations where collectability is uncertain, and for joint-interest arrangements where the ability to recover receivables from future net revenues is uncertain, we establish an allowance for doubtful accounts.  As of September 30, 2014, we had an immaterial amount recorded in the allowance for doubtful accounts.  No allowance for doubtful accounts was recorded at December 31, 2013.

Other Income.  For the three and nine months ended September 30, 2013, the amount reported consisted primarily of $9.2 million received in conjunction with a payment to the Company for an option exercised by a counterparty.  Partially offsetting were related third-party expenses of $0.1 million.  The net amount was included in net cash flows from investing activities within the line, Proceeds from sales of assets and other, net on the Condensed Consolidated Statements of Cash Flows.

Income Taxes.  Due to the recent volatility in crude oil prices and its impact on future results, the Company changed the method of recording income taxes from the annualized effective tax rate method to the year-to-date method for the three and nine months ended September 30, 2014.  For the three and nine months ended September 30, 2013, the Company used the annualized effective tax method.    

Use of Estimates.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Adjustment Related to Additional Volumes.  In January 2014, we identified that we had been receiving an erroneous conversion factor from a third party that had the effect of understating natural gas production at our Viosca Knoll 783 field (Tahoe).  The incorrect conversion factor had been used on all natural gas production from the field since we acquired it in 2011.  The effect of using this incorrect conversion factor did not affect revenues, operating cash flows or royalty payments to the federal government but did impact reported natural gas production and the calculation of depletion expense.  We performed an analysis of the information, assessing both quantitative and qualitative factors, and determined that the impact on our net income reported for quarters in 2013, as well as the impact to our earnings trend, was not material to the previously reported results, thus the adjustment was recognized in the fourth quarter of 2013.  The amounts included in the adjustment recognized in the fourth quarter 2013 period which relate to the third quarter of 2013 were: an increase in natural gas production volumes of 237 million cubic feet (“MMcf”) (with no corresponding increase in revenue); an increase to depreciation, depletion, amortization and accretion expense (“DD&A”) of $0.6 million; and a decrease to net income of $0.4 million.  The amounts included in the adjustment recognized in the fourth quarter 2013 period which relate to the nine months ended September 30, 2013 were: an increase in natural gas production volumes of 754 MMcf (with no corresponding increase in revenue); an increase to DD&A of $2.1 million; and a decrease to net income of $1.4 million.

Recent Accounting Developments.  In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Summary and Amendments That Create Revenue from Contracts and Customers (Topic 606).  ASU 2014-09 amends and replaces current revenue recognition requirements, including most industry-specific guidance.  The revised guidance establishes a five step approach to be utilized in determining when, and if, revenue should be recognized.  ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016.  Upon application, an entity may elect one of two methods, either restatement of prior periods presented or recording a cumulative adjustment in the initial period of application.  We have not determined the effect ASU 2014-09 will have on the recognition of our revenue, if any, nor have we determined the method we will utilize upon adoption, which would be in the first quarter of 2017.

    In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (“ASU 2014-15”), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40).  The guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter.  We do not expect the revised guidance to materially affect our evaluation as to being a going concern, or have an effect on our financial statements or related disclosures.