2012 Annual Report - Stone Energy Corporation

We had working capital at December 31, 2012 of $300.3 million. Included in working capital at December 31, 2012 is aportion of the proceeds received from the issuance of the 2017 Convertible Notes and the 2022 Notes.Capital Expenditures. During the year ended December 31, 2012, additions to oil and gas property costs of $642.5 millionincluded $102.8 million of lease and property acquisition costs, $25.0 million of capitalized salaries, general and administrativeexpenses (inclusive of incentive compensation) and $37.7 million of capitalized interest. These investments were financed withcash flow from operating activities and the net proceeds from the 2017 Convertible Notes.Bank Credit Facility. On April 26, 2011, we entered into an amended and restated revolving credit facility totaling $700million (subject to borrowing base limitations) through a syndicated bank group, replacing our previous facility. Our bank creditfacility matures on April 26, 2015. On October 22, 2012, our borrowing base under our bank credit facility was reaffirmed at$400 million. As of December 31, 2012 and February 21, 2013, we had no outstanding borrowings under our bank credit facilityand letters of credit totaling $21.0 million had been issued pursuant to the bank credit facility, leaving $379.0 million ofavailability under the facility. Our bank credit facility is guaranteed by our only subsidiary, Stone Energy Offshore, L.L.C.(“Stone Offshore”).The borrowing base under our bank credit facility is redetermined semi-annually, in May and November, by the lenders takinginto consideration the estimated value of our oil and gas properties and those of our direct and indirect material subsidiaries inaccordance with the lenders’ customary practices for oil and gas loans. In addition, we and the lenders each have discretion at anytime, but not more than two additional times in any calendar year, to have the borrowing base redetermined. Our bank creditfacility is collateralized by substantially all of Stone’s and Stone Offshore’s assets. Stone and Stone Offshore are required tomortgage, and grant a security interest in, their oil and gas reserves representing at least 80% of the discounted present value of thefuture net cash flows from their oil and gas reserves reviewed in determining the borrowing base. At our option, loans under thebank credit facility will bear interest at a rate based on the adjusted London Interbank Offering Rate plus an applicable margin, ora rate based on the prime rate or Federal funds rate plus an applicable margin.Under the financial covenants of our bank credit facility, we must (i) maintain a ratio of consolidated debt to consolidatedEBITDA, as defined in the credit agreement, for the preceding four quarterly periods of not greater than 3.25 to 1 and (ii) maintaina ratio of consolidated EBITDA to consolidated Net Interest Expense, as defined in the credit agreement, for the preceding fourquarterly periods of not less than 3.0 to 1. As of December 31, 2012, our debt to EBITDA Ratio was 1.55 to 1 and our EBITDAto consolidated Net Interest Expense Ratio was approximately 21.56 to 1. In addition, the bank credit facility includes certaincustomary restrictions or requirements with respect to disposition of properties, incurrence of additional debt, change of ownershipand reporting responsibilities. These covenants may limit or prohibit us from paying cash dividends but do allow for limited stockrepurchases. These covenants also restrict our ability to prepay other indebtedness under certain circumstances.7½% Senior Notes due 2022. On November 8, 2012, we completed the public offering of $300 million aggregate principalamount of our 2022 Notes. The net proceeds from the offering after deducting underwriting discounts, commissions, fees andexpenses totaled $293.2 million. Approximately $204.4 million of the net proceeds from the offering were used to fund the tenderoffer and consent solicitation and redemption of our outstanding 2014 Notes. The remaining proceeds will be used for generalcorporate purposes.6¾% Senior Subordinated Notes due 2014. In November 2012, we used proceeds from the 2022 Notes offering to purchaseour 2014 Notes pursuant to a tender offer and consent solicitation. In December 2012, the remaining 2014 Notes were redeemedin full. The total cost of the redemption was $204.4 million, which included $200.7 million to redeem the notes plus accrued andunpaid interest of $3.7 million. The transaction resulted in a charge to earnings of $2.0 million in 2012.1¾% Senior Convertible Notes due 2017. On March 6, 2012, we issued in a private offering $300 million in aggregateprincipal amount of 2017 Convertible Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. Thenet proceeds from the sale of the 2017 Convertible Notes were $291.1 million, after deducting fees and expenses. The 2017Convertible Notes mature on March 1, 2017, unless earlier converted or repurchased. We may not redeem the 2017 ConvertibleNotes at our option prior to the maturity date.The 2017 Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of ourcommon stock, at our election, based on an initial conversion rate of 23.4449 shares of our common stock per $1,000 principalamount of 2017 Convertible Notes, which corresponds to an initial conversion price of approximately $42.65 per share of ourcommon stock. On December 31, 2012, our closing share price was $20.52. The conversion rate, and thus the conversion price,may be adjusted under certain circumstances as described in the indenture related to the 2017 Convertible Notes. Upon31