Financial and Operational Reporting Package. Fourth Quarter 2014

Transcription

1 Financial and Operational Reporting Package Fourth Quarter 2014

2 Financial and Operational Reporting Package Fourth Quarter 2014 Table of Contents Notes to Investors 1 Operating Results Financial Highlights 2 Statements of Income 3 Average Daily Volumes, Realized Prices and Adjusted Cash Operating Costs Per Unit 4 Derivative Schedule 5 Non-GAAP Reconciliations Adjusted EBITDAX 6 Earnings Per Share and Adjusted Earnings Per Share 7 Cash Operating Costs and Adjusted Cash Operating Costs 8 Discretionary Cash Flow and Discretionary Cash Flow Per Share 9 Glossary Page NYSE: EPE

3 NOTES TO INVESTORS Cautionary Statement This Financial and Operational Reporting Package (Package) includes summarized financial and other information about ( EP Energy or the Company ). The information in this Package is intended to provide highlights and should not be used as a substitute for financial information in EP Energy s filings with the Securities and Exchange Commission (SEC). Readers should refer to those filings. In addition, the glossary contains certain definitions of measures used in this Package and in other presentations we provide. These definitions may not be the same as definitions used by other companies. This Package may contain information that is based on estimates. The Company has made every reasonable effort to ensure that the information and assumptions on which these estimates are based are current, reasonable and complete. Factors that could cause actual results to differ materially from the estimates in this Package are changes in unaudited and/or unreviewed financial information and the effects of any changes in accounting rules and guidance, as well as other factors discussed in EP Energy s filings with the SEC. The financial data and statistics in this Package for Fourth Quarter 2014 reflect the operating results of EP Energy through December 31, Independent auditors have not audited this Package. The Company assumes no obligation to publicly update or revise any information contained herein as a result of new information, future events, or otherwise. Non-GAAP Financial Measures The SEC s Regulation G applies to any public disclosure or release of material information that includes a non- GAAP financial measure. In this Package, these measures may include EBITDAX, Adjusted EBITDAX, Adjusted EBITDAX Margin Per Unit, Adjusted Earnings Per Share (EPS), cash operating costs, adjusted cash operating costs, Discretionary Cash Flow and Discretionary Cash Flow Per Share. In the event of such a disclosure or release, Regulation G requires (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-gaap financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. The required presentations and reconciliations are included in the body of this Package. EP Energy believes that the non-gaap financial measures described in the glossary are useful to investors because these measurements are used by many companies in the industry as a measure of operating and financial performance and are commonly employed by financial analysts and others to evaluate the operating and financial performance of the Company and to compare it with the performance of other companies within the industry. These non-gaap financial measures may not be comparable to similarly titled measures used by other companies and should not be used as a substitute for net income (loss), income (loss) from continuing operations, earnings (loss) per share, operating income (loss), operating cash flows or other measures of financial performance or liquidity presented in accordance with GAAP. Presentation All periods included in this Package present our Brazil operations and certain domestic natural gas assets sold prior to December 31, 2014 as discontinued operations. Therefore, information associated with these assets have been excluded. NYSE: EPE 1

4 FINANCIAL HIGHLIGHTS (unaudited) Year-to-Date Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q (Loss) income from continuing operations ($ in millions) (100) (112) (141) 189 (146) (56) Adjusted EBITDAX ($ in millions) ,547 1,139 Average Cash Operating Costs ($/Boe) Adjusted Cash Operating Costs ($/Boe) Depreciation, depletion and amortization rate ($/Boe) Equivalent Consolidated Sales Volumes (MBoe/d) Consolidated Oil Sales Volumes (MBbls/d) NYSE: EPE 2

5 STATEMENTS OF INCOME ($ in millions) (unaudited) Year-to-Date Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Operating revenues Oil $ 406 $ 461 $ 474 $ 364 $ 257 $ 284 $ 364 $ 349 $ 1,705 $ 1,254 Natural gas NGLs Financial derivatives (135) (290) 381 1,029 (131) 166 (142) (52) Total operating revenues , ,084 1,576 Operating expenses Natural gas purchases Transportation costs Lease operating expense General and administrative (1) Depreciation, depletion and amortization Impairment charges Exploration and other expense Taxes, other than income taxes Total operating expenses ,591 1,193 Operating (loss) income (60) (100) 573 1,080 (50) , Other income (expense) (19) - 1 (12) Loss on extinguishment of debt (17) (1) (2) (6) - (17) (9) Interest expense (79) (80) (76) (83) (92) (86) (91) (85) (318) (354) (Loss) income from continuing operations before income taxes (156) (180) (141) 189 (116) 76 1,159 8 Income tax (benefit) expense (56) (68) (Loss) income from continuing operations (100) (112) (141) 189 (146) (56) Income (loss) from discontinued operations, net of tax 10 (6) (1) Net (loss) income $ (90) $ (118) $ 305 $ 634 $ (114) $ 201 $ 310 $ 53 $ 731 $ 450 (1) Q includes $90 million of transaction, management and other fees paid to affiliates of Apollo Global Management LLC, Riverstone Holdings LLC, Access Industries and Korea National Oil Corporation, collectively, the Sponsors. NYSE: EPE 3

6 AVERAGE DAILY VOLUMES, REALIZED PRICES AND ADJUSTED CASH OPERATING COSTS PER UNIT Year-to-Date Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Oil Sales Volumes (MBbls/d) Eagle Ford Wolfcamp Altamont Haynesville Other Total Consolidated Oil Sales Volumes (1) Natural Gas Sales Volumes (MMcf/d) Eagle Ford Wolfcamp Altamont Haynesville Other Total Consolidated Natural Gas Sales Volumes NGLs Sales Volumes (MBbls/d) Eagle Ford Wolfcamp Altamont Haynesville Other Total Consolidated NGLs Sales Volumes Equivalent Sales Volumes (MBoe/d) Eagle Ford Wolfcamp Altamont Haynesville Other Total Consolidated Equivalent Sales Volumes (1) Average realized prices (2) Oil price on physical sales ($/Bbl) $ $ $ $ $ $ $ $ $ $ Oil, including financial derivative cash settlements ($/Bbl) (3) $ $ $ $ $ $ $ $ $ $ Natural gas price on physical sales ($/Mcf) $ 4.21 $ 4.07 $ 3.32 $ 3.43 $ 3.09 $ 3.73 $ 3.19 $ 3.10 $ 3.76 $ 3.28 Natural gas, including financial derivative cash settlements ($/Mcf) (3) $ 3.26 $ 3.38 $ 3.27 $ 3.44 $ 3.43 $ 2.68 $ 2.95 $ 2.70 $ 3.34 $ 2.97 NGLs price on physical sales ($/Bbl) $ $ $ $ $ $ $ $ $ $ NGLs, including financial derivative cash settlements ($/Bbl) (3) $ $ $ $ $ - $ - $ - $ - $ $ - Average transportation costs (2) Oil ($/Bbl) $ 1.83 $ 1.66 $ 1.56 $ 1.58 $ 2.10 $ 2.16 $ 2.00 $ 1.83 $ 1.65 $ 2.01 Natural gas ($/Mcf) $ 0.59 $ 0.62 $ 0.52 $ 0.92 $ 0.60 $ 0.59 $ 0.75 $ 0.49 $ 0.65 $ 0.52 NGLs ($/Bbl) $ 6.09 $ 6.88 $ 4.73 $ 4.23 $ 3.58 $ 5.98 $ 7.65 $ 6.20 $ 5.42 $ 6.07 Combined ($/Boe) $ 2.84 $ 2.93 $ 2.42 $ 3.06 $ 2.87 $ 3.01 $ 2.94 $ 2.61 $ 2.81 $ 2.85 Average cash operating costs and adjusted cash operating costs ($/Boe) (2) Lease operating expenses $ 5.42 $ 5.69 $ 5.12 $ 5.39 $ 4.90 $ 5.01 $ 4.75 $ 5.28 $ 5.40 $ 4.98 Production taxes General and administrative expenses Taxes other than production and income taxes (1.47) (0.18) Other expense (4) Total cash operating costs $ $ $ $ $ $ $ $ $ $ Transition/restructuring costs, non-cash compensation expense and other (5) (12.20) (0.36) (3.11) (1.53) (1.95) (2.25) (2.67) (2.19) Total adjusted cash operating costs $ $ $ $ $ $ $ $ $ $ Depreciation, depletion and amortization rate ($/Boe) (2) $ $ $ $ $ $ $ $ $ $ (1) For 2014, Q1 and Q2 do not include 0.5 MBbls/d and 4.0 MBoe/d, 0.3 MBbls/d and 2.7 MBoe/d, respectively, of oil sales and equivalent sales volumes related to Arklatex and South Louisiana Wilcox classified as discontinued operations. For 2013, Q1, Q2, Q3 and Q4 do not include 1.0 MBbls and 5.5 MBoe/d, 0.8 MBbls and 5.2 MBoe/d, 0.7 MBbls and 4.7 MBoe/d, 0.6 MBbls and 4.5 MBoe/d, respectively, of oil sales and equivalent sales volumes related to Arklatex and South Louisiana Wilcox classified as discontinued operations. (2) Prices and costs per unit are calculated using consolidated volumes from continuing activities only. As such, volumes related to divested domestic assets or Brazil are not included in the calculations. (3) Prices per unit are calculated using total financial derivative cash settlements and premiums. Volumes used in calculating prices per unit do not include those associated with divested domestic assets or Brazil. (4) Includes $3 million recorded in conjunction with early rig termination fees. (5) A detail of these expenses is included in the reconciliation of Cash Operating Costs and Adjusted Cash Operating Costs on page 8. NYSE: EPE 4

7 Crude Oil (Volumes in MMBbls) Notional Volume Average Price (1) Notional Volume Average Price (1) Fixed Price Swaps WTI $ $ Brent 2.56 $ $ - LLS - $ $ Ceilings 1.10 $ $ - Three Way Collars Ceiling - Brent 1.10 $ $ - Floors - Brent (2) 1.10 $ $ - Ceiling - LLS - $ $ Floors - LLS (3) - $ $ Basis Swaps - Crude Oil (Volumes in MMBbls) LLS vs. WTI (4) 3.29 $ $ 3.00 LLS vs. Brent (5) 3.65 $ (3.77) 4.03 $ (3.58) Midland vs. Cushing (6) 1.10 $ (0.65) - $ - Natural Gas (Volumes in TBtu) Fixed Price Swaps 62 $ $ 4.20 Basis Swaps - Natural Gas (7) (Volumes in TBtu) EP ENERGY CORPORATION DERIVATIVE SCHEDULE AS OF DECEMBER 31, 2014 TGP 1.00 $ (0.10) - $ - CIG 4.00 $ (0.25) - $ - Waha 4.00 $ (0.07) - $ - Note: Positions are as of December 31, 2014 (Contract Months: January Forward). (1) Prices presented are per Bbl of oil and MMBtu of natural gas. (2) If market prices settle at or below $85.00 in 2015, we will receive a locked in cash settlement of the market price plus $15.00 per Bbl. (3) If market prices settle at or below $76.54 in 2016, we will receive a locked-in cash settlement of the market price plus $13.65 per Bbl. (4) EP Energy receives WTI plus basis spread listed and pays LLS. (5) EP Energy receives Brent plus basis spread listed and pays LLS. (6) EP Energy receives Cushing plus basis spread listed and pays Midland. (7) EP Energy receives the basis spread listed and pays TGP, CIG and Waha basis NYSE: EPE 5

8 RECONCILIATION OF ADJUSTED EBITDAX ($ in millions, except equivalent volumes and per unit) (unaudited) Year-to-Date Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Net (loss) income $ (90) $ (118) $ 305 $ 634 $ (114) $ 201 $ 310 $ 53 $ 731 $ 450 (Income) loss from discontinued operations, net of tax (10) 6 1 (1) (27) (12) (456) (11) (4) (506) (Loss) income from continuing operations (100) (112) (141) 189 (146) (56) Income tax (benefit) expense (56) (68) Interest expense, net of capitalized interest Depreciation, depletion and amortization Exploration expense (1) EBITDAX , , Mark-to-market on financial derivatives (2) (381) (1,029) 131 (166) 142 (55) (985) 52 Cash settlements and premiums on financial derivatives (3) (25) (32) (3) (5) (25) Non-cash portion of compensation expense (4) 9 (5) Transition, restructuring and other costs (5) 1 - (6) (4) 8 Fees paid to Sponsors (6) Loss on extinguishment of debt (Earnings) loss from unconsolidated affiliate (2) (4) Impairment charges Adjusted EBITDAX (7) $ 350 $ 372 $ 419 $ 406 $ 259 $ 264 $ 309 $ 307 $ 1,547 $ 1,139 Total consolidated equivalent volumes (MBoe) (8) 8,166 8,804 9,286 9,417 7,053 7,285 7,674 7,626 35,673 29,638 Adjusted EBITDAX Margin Per Unit (MBoe) (9) $ $ $ $ $ $ $ $ $ $ (1) Represents exploration expense only and does not include $3 milllion of other expense recorded in Q (2) Represents the income statement impact of financial derivatives. (3) For 2014, Q2 includes premiums received of approximately $1 million. For 2013, Q1, Q2, and Q3 include premiums received of approximately $8 million, less than $1 million, and $1 million, respectively. (4) Non-cash portion of compensation expense represents compensation expense under our long-term incentive programs adjusted for cash payments made under our long-term incentive plans. Cash payments in 2014 were approximately $12 million in Q2, less than $1 million in Q3 and Q4 and in 2013 was approximately $10 million in Q2. (5) Reflects an $11 million insurance settlement and $5 million of acquisition costs in Q3 2014, as well as transition and severance costs related to restructuring. (6) Represents the transaction, management and other fees paid to the Sponsors. Our transaction and management fee agreements with our Sponsors terminated with the completion of our initial public offering in January (7) For 2014, Q1 and Q2 do not include $8 million and $3 million, respectively, of Adjusted EBITDAX related to Arklatex and South Louisiana Wilcox classified as discontinued operations. For 2013, Q1, Q2, Q3 and Q4 do not include $11 million, $10 million, $7 million and $6 million, respectively, of Adjusted EBITDAX related to Arklatex and South Louisiana Wilcox classified as discontinued operations. (8) Excludes volumes associated with our equity investment in Four Star Oil & Gas Company (Four Star) sold in September (9) Adjusted EBITDAX Margin Per Unit is based on actual total amounts rather than the rounded totals presented. NYSE: EPE 6

9 EARNINGS PER SHARE AND ADJUSTED EARNINGS PER SHARE (in millions, except earnings per share amounts) (unaudited) Pre-Tax 2014 Year-to-Date Q1 Q2 Q3 Q After-Tax Diluted EPS Pre-Tax After-Tax Diluted EPS Pre-Tax After-Tax Diluted EPS Pre-Tax After-Tax Diluted EPS Pre-Tax After-Tax Diluted EPS Net (loss) income $ (90) $ (0.38) $ (118) $ (0.49) $ 305 $ 1.25 $ 634 $ 2.60 $ 731 $ 3.02 (Income) loss from discontinued operations, net of tax (10) (0.04) (1) - (4) (0.02) (Loss) income from continuing operations $ (100) (0.42) $ (112) (0.46) $ $ $ Adjustments (1) Impact of financial derivatives (2) $ 110 $ 70 $ 0.30 $ 258 $ 163 $ 0.67 $ (384) $ (244) $ (1.00) $ (925) $ (591) $ (2.42) $ (941) $ (602) $ (2.48) Fees paid to Sponsors (3) Loss on extinguishment of debt Incremental taxes on organizational restructuring Transition, restructuring and other costs (4) (6) (4) (0.01) (4) (2) - Impairment charges Total adjustments $ 218 $ 144 $ 0.60 $ 258 $ 163 $ 0.67 $ (389) $ (248) $ (1.01) $ (923) $ (579) $ (2.38) $ (836) $ (520) $ (2.14) Adjusted EPS $ 0.18 $ 0.21 $ 0.24 $ 0.22 $ 0.86 Basic and fully diluted weighted average shares (1) All individual adjustments assume a statutory federal and blended state tax rate, as well as any other income tax effects specifically attributable to that item. (2) Represents mark-to-market impact, cash settlements and premiums related to financial derivatives. (3) Represents transaction, management and other fees paid to Sponsors. (4) Reflects an $11 million insurance settlement and $5 million of acquisition costs in Q3 2014, as well as transition and severance costs related to restructuring. NYSE: EPE 7

10 RECONCILIATION OF CASH OPERATING COSTS AND ADJUSTED CASH OPERATING COSTS (1) (unaudited) 2014 Q1 Q2 Q3 Q4 Year-to-Date Total Per-Unit Total Per-Unit Total Per-Unit Total Per-Unit Total Per-Unit ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) Total operating expenses $ 436 $ $ 376 $ $ 380 $ $ 399 $ $ 1,591 $ Depreciation, depletion and amortization (192) (23.47) (214) (24.31) (228) (24.56) (241) (25.63) (875) (24.53) Transportation costs (23) (2.85) (26) (2.93) (22) (2.42) (29) (3.06) (100) (2.81) Exploration expense (3) (8) (0.99) (5) (0.53) (5) (0.54) (4) (0.45) (22) (0.62) Natural gas purchases (3) (0.43) (5) (0.49) (8) (0.92) (7) (0.71) (23) (0.64) Impairment charges (1) (0.07) (1) (0.12) (2) (0.05) Total cash operating costs and per-unit cash costs $ 210 $ $ 126 $ $ 116 $ $ 117 $ $ 569 $ Transition/restructuring costs, non-cash portion of compensation expense and other (4) (100) (12.20) (3) (0.36) (95) (2.67) Total adjusted cash operating costs and per-unit adjusted cash costs $ 110 $ $ 131 $ $ 119 $ $ 114 $ $ 474 $ Total consolidated equivalent volumes (MBoe) 8,166 8,804 9,286 9,417 35, Q1 Q2 Q3 Q4 Year-to-Date Total Per-Unit Total Per-Unit Total Per-Unit Total Per-Unit Total Per-Unit ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) ($ MM) ($/Boe) (2) Total operating expenses $ 264 $ $ 284 $ $ 314 $ $ 331 $ $ 1,193 $ Depreciation, depletion and amortization (116) (16.48) (137) (18.75) (164) (21.36) (168) (22.07) (585) (19.74) Transportation costs (20) (2.86) (22) (3.01) (23) (2.94) (20) (2.61) (85) (2.85) Exploration expense (12) (1.72) (13) (1.80) (12) (1.49) (4) (0.57) (41) (1.39) Natural gas purchases (2) (0.21) (8) (1.17) (6) (0.85) (9) (1.11) (25) (0.85) Impairment charges (2) (0.24) - - (2) (0.06) Total cash operating costs and per-unit cash costs (6) $ 114 $ $ 104 $ $ 107 $ $ 130 $ $ 455 $ Transition/restructuring costs, non-cash portion of compensation expense and other (5) (22) (3.11) (12) (1.53) (14) (1.95) (17) (2.25) (65) (2.19) Total adjusted cash operating costs and per-unit adjusted cash costs (6) $ 92 $ $ 92 $ $ 93 $ $ 113 $ $ 390 $ Total consolidated equivalent volumes (MBoe) (6) 7,053 7,285 7,674 7,626 29,638 (1) Per unit costs are based on continuing activities only and exclude divested domestic assets and Brazil. (2) Per unit costs are based on actual total amounts rather than the rounded totals presented. (3) For 2014, Q4 does not include approximately $3 million recorded in conjunction with early rig termination fees included in exploration and other expense on our income statement. (4) (5) In 2014, Q1 includes $90 million of transaction, management and other fees paid to our Sponsors, $9 million of non-cash compensation expense and $1 million of restructuring charges; Q2 includes $7 million of non-cash compensation expense adjusted for cash payments made of approximately $12 mllion; Q3 includes $11 million of cash received from an insurance settlement, $5 million of acquisition costs and $2 million of non-cash compensation expense adjusted for cash payments made of less than $1 million; and Q4 includes $3 million of non-cash compensation expense adjusted for cash receipts of less than $1 million and $1 million of restructuring charges. In 2013, Q1 includes $3 million of transition and severance costs, $6 million of management and other fees paid to our Sponsors and $13 million of non-cash compensation expense; Q2 includes $4 million of transition and severance costs, $7 million of management and other fees paid to our Sponsors and $11 million of non-cash compensation expense adjusted for cash payments made of approximately $10 million; Q3 includes $6 million of management and other fees paid to our Sponsors and $8 million of non-cash compensation expense; and Q4 includes $7 million of management and other fees paid to our Sponsors, $9 million of non-cash compensation expense and $1 million of transaction costs. (6) Excludes volumes and costs associated with our equity investment in Four Star sold in September NYSE: EPE 8

11 DISCRETIONARY CASH FLOW AND DISCRETIONARY CASH FLOW PER SHARE ($ in millions, except per share amounts) (unaudited) Year-to-Date Q1 Q2 Q3 Q Net (loss) income $ (90) $ (118) $ 305 $ 634 $ 731 (Income) loss from discontinued operations, net of tax (10) 6 1 (1) (4) (Loss) income from continuing operations (100) (112) Depreciation, depletion and amortization Impact of financial derivatives (1) (384) (925) (941) Transition, restructuring and other costs (2) 1 - (6) 1 (4) Fees paid to Sponsors (3) Deferred income taxes (57) (81) Non-cash exploration expense Other non-cash income items Discretionary Cash Flow $ 274 $ 291 $ 352 $ 337 $ 1,254 Discretionary Cash Flow Per Share (4)(5) $ 1.15 $ 1.19 $ 1.45 $ 1.38 $ 5.19 Discretionary Cash Flow $ 274 $ 291 $ 352 $ 337 $ 1,254 Transition, restructuring and other costs (2) (1) - 6 (1) 4 Fees paid to Sponsors (3) (90) (90) Working capital and other changes 40 (25) 59 (56) 18 Net cash provided by operating activities $ 223 $ 266 $ 417 $ 280 $ 1, (1) (2) (3) (4) (5) Represents mark-to-market impact, cash settlements and premiums related to financial derivatives. Reflects an $11 million insurance settlement and $5 million of acquisition costs in Q3 2014, as well as transition and severance costs related to restructuring. Represents transaction, management and other fees paid to Sponsors. Our transaction and management fee agreements with our Sponsors terminated with the completion of our initial public offering in January Reflects basic and fully diluted weighted average shares of approximately 238 million, 244 million, 244 million, 244 million and 242 million for Q1, Q2, Q3, Q4 and Year-to-Date, respectively. Q1, Q2, Q3 and Q4 do not include $0.05, $0.07, $(0.07) and $0.01, respectively, of Discretionary Cash Flow Per Share related to discontinued operations. NYSE: EPE 9

12 GLOSSARY This contains a glossary of terms used in this Package as well as those used in other investor presentations and press releases. They are for reference only and may not be comparable to similarly titled measures used at other companies. NON-GAAP FINANCIAL MEASURES EBITDAX, Adjusted EBITDAX and Adjusted EBITDAX Margin Per Unit EBITDAX is defined as income (loss) from continuing operations plus interest and debt expense, income taxes, depreciation, depletion and amortization and exploration expense. Adjusted EBITDAX is defined as EBITDAX, adjusted as applicable in the relevant period for the net change in the fair value of derivatives (mark-to-market effects of financial derivatives, net of cash settlements and premiums paid or received related to these derivatives), the non-cash portion of compensation expense (which represents non-cash compensation expense under our long-term incentive programs adjusted for cash payments made under our long-term incentive plans), transition, restructuring and other non-recurring costs, management and other fees paid to our Sponsors, losses on extinguishment of debt, equity earnings from Four Star prior to its sale in 2013, and impairment charges. Adjusted EBITDAX Margin Per Unit is calculated using Adjusted EBITDAX divided by consolidated equivalent volumes. We believe that the presentation of EBITDAX, Adjusted EBITDAX and Adjusted EBITDAX Margin Per Unit is important to provide management and investors with additional information (i) to evaluate our ability to service debt adjusting for items required or permitted in calculating covenant compliance under our debt agreements, (ii) to provide an important supplemental indicator of the operational performance of our business, (iii) for evaluating our performance relative to our peers, (iv) to measure our liquidity (before cash capital requirements and working capital needs) and (v) to provide supplemental information about certain material non-cash and/or other items that may not continue at the same level in the future. EBITDAX, Adjusted EBITDAX and Adjusted EBITDAX Margin Per Unit have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP or as an alternative to net income (loss), income (loss) from continuing operations, operating income (loss), operating cash flows or other measures of financial performance or liquidity presented in accordance with GAAP. For example, our presentation of EBITDAX, Adjusted EBITDAX and Adjusted EBITDAX Margin Per Unit may not be comparable to similarly titled measures used by other companies in our industry. Furthermore, our presentation of EBITDAX, Adjusted EBITDAX and Adjusted EBITDAX Margin Per Unit should not be construed as an inference that our future results will be unaffected by the items noted above or what we believe to be other unusual or non-recurring items or that in the future we may not incur expenses that are the same as or similar to some of the adjustments in this presentation. Adjusted EPS Adjusted EPS is defined as diluted earnings per share adjusted for certain items that the Company considers to be significant to understanding our underlying performance for a given period. Adjusted EPS is useful in analyzing the Company s ongoing earnings potential and understanding certain significant items impacting the comparability of EP Energy s results. Adjusted EPS is income (loss) per common share from continuing operations adjusted for the impact of financial derivatives (mark-to-market effects of financial derivatives, net of cash settlements and premiums paid or received related to these derivatives), management and other fees paid to our Sponsors, losses on extinguishment of debt, impairment charges and other non-recurring costs, including incremental taxes on organizational restructuring and transition and restructuring charges. We believe Adjusted EPS is a valuable measure of operating performance and efficiency; however, this measure may not be comparable to similarly titled measures used by other companies and its subject to several of the same limitations as analytical tools as noted in the paragraphs above. NYSE: EPE 10

13 Cash Operating Costs and Adjusted Cash Operating Costs We monitor cash operating costs required to produce our oil and natural gas. Cash operating costs is a non-gaap measure calculated on a per Boe basis and includes total operating expenses less depreciation, depletion and amortization expense, transportation costs, exploration expense, natural gas purchases, impairment charges and other expenses. Adjusted cash operating costs is a non-gaap measure and is defined as cash operating costs less transition, restructuring and other non-recurring costs, management and other fees paid to the Sponsors, and the non-cash portion of compensation expense (which represents compensation expense under our long-term incentive programs adjusted for cash payments made under our long-term incentive plans). We believe cash operating costs and adjusted cash operating costs per unit are valuable measures of operating performance and efficiency; however, these measures may not be comparable to similarly titled measures used by other companies, are subject to several of the same limitations as analytical tools as noted in the paragraphs above, and should not be considered in isolation as a substitute for analysis of our results as reported under U.S. GAAP or as an alternative to operating expenses, operating cash flows or other measures of financial performance or liquidity presented in accordance with GAAP. Discretionary Cash Flow and Discretionary Cash Flow Per Share Discretionary Cash Flow and Discretionary Cash Flow Per Share are non-gaap measures calculated using income (loss) from continuing operations adjusted for certain items including depreciation, depletion and amortization, the impact of financial derivatives (mark-to-market effects of financial derivatives, net of cash settlements and premiums paid or received related to these derivatives), transition, restructuring and other nonrecurring costs, management and other fees paid to our Sponsors, deferred income taxes, non-cash exploration expense, and other non-cash income items. We have presented Discretionary Cash Flow and Discretionary Cash Flow Per Share because management believes that they provide useful additional information to investors for analysis of the Company's ability to internally generate funds for exploration, development and acquisitions as well as adjusting net income (loss) for unusual items to allow for a more consistent comparison from period to period. In addition, the Company believes that these measures are widely used by professional research analysts and others in the valuation, comparison and investment recommendations of companies in the oil and gas exploration and production industry. These measures may not be comparable to similarly titled measures used by other companies and are subject to several of the same limitations as analytical tools as noted in the paragraphs above. NYSE: EPE 11