SWN Q2 2013 10-Q

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

 

 

 

 

 

Form 10-Q

 

 

 

 

(Mark One)

[X]   Quarterly Report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the quarterly period ended June 30, 2013

 

 

 

 

Or

 

 

 

 

[  ] Transition Report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the transition period from __________ to __________

 

 

 

 

Commission file number:  1-08246

 

 

Southwestern Energy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

71-0205415

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

 

 

2350 North Sam Houston Parkway East, Suite 125, Houston, Texas

77032

(Address of principal executive offices)

(Zip Code)

 

 

 

 

(281) 618-4700

(Registrant’s telephone number, including area code)

 

 

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yesx  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class

Outstanding as of July 30, 2013

Common Stock, Par Value $0.01

351,512,483

 

 

 


 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY

 

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

44

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

47

Item 6.

Exhibits

47

 

 

 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

 

All statements, other than historical fact or present financial information, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements that address activities, outcomes and other matters that should or may occur in the future, including, without limitation, statements regarding the financial position, business strategy, production and reserve growth and other plans and objectives for our future operations, are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance. We have no obligation and make no undertaking to publicly update or revise any forward-looking statements, except as may be required by law.

 

Forward-looking statements include the items identified in the preceding paragraph, information concerning possible or assumed future results of operations and other statements in this Form 10-Q identified by words such as “anticipate,” “project,” “intend,” “estimate,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “plan,” “forecast,” “target” or similar expressions.

 

You should not place undue reliance on forward-looking statements. They are subject to known and unknown risks, uncertainties and other factors that may affect our operations, markets, products, services and prices and cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with forward-looking statements, risks, uncertainties and factors that could cause our actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

 

·

the timing and extent of changes in market conditions and prices for natural gas and oil (including regional basis differentials);

·

our ability to fund our planned capital investments;

·

our ability to transport our production to the most favorable markets or at all;

·

the timing and extent of our success in discovering, developing, producing and estimating reserves;

·

the economic viability of, and our success in drilling, our large acreage position in the Fayetteville Shale play overall as well as relative to other productive shale gas plays;

1


 

 

·

the impact of government regulation, including any increase in severance or similar taxes, legislation relating to hydraulic fracturing, the climate and over the counter derivatives;

·

the costs and availability of oilfield personnel, services and drilling supplies, raw materials, and equipment, including pressure pumping equipment and crews;

·

our ability to determine the most effective and economic fracture stimulation for the Fayetteville Shale play and Marcellus Shale play;

·

our future property acquisition or divestiture activities;

·

the impact of the adverse outcome of any material litigation against us;

·

the effects of weather;

·

increased competition and regulation;

·

the financial impact of accounting regulations and critical accounting policies;

·

the comparative cost of alternative fuels;

·

conditions in capital markets, changes in interest rates and the ability of our lenders to provide us with funds as agreed;

·

credit risk relating to the risk of loss as a result of non-performance by our counterparties; and

·

any other factors listed in the reports we have filed and may file with the Securities and Exchange Commission (“SEC”).

 

We caution you that forward-looking statements contained in this Form 10-Q are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of natural gas and oil. These risks include, but are not limited to, commodity price volatility, third-party interruption of sales to market, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved natural gas and oil reserves and in projecting future rates of production and timing of development expenditures and the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Annual Report on Form 10-K”), and all quarterly reports on Form 10-Q filed subsequently thereto, including this Form 10-Q (“Form 10-Qs”).

 

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages.

 

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

2


 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

June 30,

 

June 30,

 

2013

 

2012

 

2013

 

2012

 

(in thousands, except share/per share amounts)

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gas sales

$

614,178 

 

$

435,392 

 

$

1,118,674 

 

$

897,526 

Gas marketing

 

200,979 

 

 

126,688 

 

 

380,820 

 

 

274,739 

Oil sales

 

2,684 

 

 

1,680 

 

 

8,034 

 

 

4,208 

Gas gathering

 

44,200 

 

 

42,316 

 

 

88,162 

 

 

84,438 

 

 

862,041 

 

 

606,076 

 

 

1,595,690 

 

 

1,260,911 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Gas purchases – midstream services

 

200,110 

 

 

127,614 

 

 

380,066 

 

 

274,290 

Operating expenses

 

82,155 

 

 

56,614 

 

 

146,379 

 

 

117,572 

General and administrative expenses

 

47,570 

 

 

44,932 

 

 

84,785 

 

 

93,758 

Depreciation, depletion and amortization

 

186,867 

 

 

207,830 

 

 

366,334 

 

 

401,457 

Impairment of natural gas and oil properties

 

–  

 

 

800,652 

 

 

–  

 

 

800,652 

Taxes, other than income taxes

 

20,022 

 

 

14,480 

 

 

40,849 

 

 

34,902 

 

 

536,724 

 

 

1,252,122 

 

 

1,018,413 

 

 

1,722,631 

Operating Income (Loss)

 

325,317 

 

 

(646,046)

 

 

577,277 

 

 

(461,720)

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

25,049 

 

 

23,956 

 

 

49,146 

 

 

43,691 

Other interest charges

 

1,044 

 

 

1,047 

 

 

2,154 

 

 

2,038 

Interest capitalized

 

(16,815)

 

 

(16,642)

 

 

(33,001)

 

 

(30,030)

 

 

9,278 

 

 

8,361 

 

 

18,299 

 

 

15,699 

 

 

 

 

 

 

 

 

 

 

 

 

Other Gain (Loss), Net

 

354 

 

 

2,577 

 

 

(179)

 

 

2,377 

Gain (Loss) on Derivatives

 

93,449 

 

 

(6,348)

 

 

63,655 

 

 

(4,714)

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

409,842 

 

 

(658,178)

 

 

622,454 

 

 

(479,756)

Provision for Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

Current

 

16,334 

 

 

100 

 

 

16,470 

 

 

268 

Deferred

 

147,877 

 

 

(253,146)

 

 

232,838 

 

 

(182,596)

 

 

164,211 

 

 

(253,046)

 

 

249,308 

 

 

(182,328)

Net Income (Loss)

$

245,631 

 

$

(405,132)

 

$

373,146 

 

$

(297,428)

 

 

 

 

 

 

 

 

   

 

 

   

Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.70 

 

$

(1.16)

 

$

1.07 

 

$

(0.85)

Diluted

$

0.70 

 

$

(1.16)

 

$

1.06 

 

$

(0.85)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

350,448,806 

 

 

348,162,723 

 

 

350,241,768 

 

 

348,081,399 

Diluted

 

351,082,807 

 

 

348,162,723 

 

 

350,911,892 

 

 

348,081,399 

See the accompanying notes which are an integral part of these

unaudited condensed consolidated financial statements.

3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

For the six months ended

 

June 30,

 

 

June 30,

 

2013

 

2012

 

 

2013

 

 

2012

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

245,631 

 

$

(405,132)

 

$

373,146 

 

$

(297,428)

 

 

 

 

 

 

 

 

 

 

 

 

Change in derivatives:

 

 

 

 

 

 

 

 

 

 

 

Settlements (1) 

 

(27,801)

 

 

(117,944)

 

 

(74,974)

 

 

(215,886)

Ineffectiveness (2)

 

1,219 

 

 

1,620 

 

 

438 

 

 

(1,537)

Change in fair value of derivative instruments (3)

 

67,572 

 

 

(36,481)

 

 

22,091 

 

 

130,453 

Total change in derivatives

 

40,990 

 

 

(152,805)

 

 

(52,445)

 

 

(86,970)

 

 

 

 

 

 

 

 

 

 

 

 

Change in value of pension and other postretirement liabilities:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost included in net periodic pension cost (4)

 

267 

 

 

254 

 

 

534 

 

 

508 

 

 

 

 

 

 

 

 

 

 

 

 

Change in currency translation adjustment

 

(1,418)

 

 

(516)

 

 

(2,447)

 

 

(35)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

285,470 

 

$

(558,199)

 

$

318,788 

 

$

(383,925)

 

 

(1)

Net of ($18.5), ($76.7), ($50.0) and ($140.4)  million in taxes for the three months ended June 30, 2013 and 2012, and six months ended June 30, 2013 and 2012, respectively. 

 

(2)

Net of $0.8, $1.1, $0.3 and ($1.0) million in taxes for the three months ended June 30, 2013 and 2012, and six months ended June 30, 2013 and 2012, respectively. 

 

(3)

Net of $45.0, ($23.7), $14.7, and $84.8 million in taxes for the three months ended June 30, 2013 and 2012, and six months ended June 30, 2013 and 2012, respectively.

 

(4)

Net of $0.2, $0.1, $0.4, and $0.3 million in taxes for the three months ended June 30, 2013 and 2012, and six months ended June 30, 2013 and 2012, respectively. 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes which are an integral part of these

unaudited condensed consolidated financial statements.

4


 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2013

 

2012

ASSETS

(in thousands)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

25,685 

 

$

53,583 

Restricted cash

 

–  

 

 

8,542 

Accounts receivable

 

445,936 

 

 

377,638 

Inventories

 

38,100 

 

 

28,141 

Hedging asset

 

246,455 

 

 

282,693 

Other

 

36,657 

 

 

58,315 

Total current assets

 

792,833 

 

 

808,912 

Natural gas and oil properties, using the full cost method, including $1,149.8
million in 2013 and $1,023.9 million in 2012 excluded from amortization

 

12,402,850 

 

 

11,283,114 

Gathering systems

 

1,242,468 

 

 

1,148,261 

Other

 

623,071 

 

 

597,064 

Less: Accumulated depreciation, depletion and amortization

 

(7,574,133)

 

 

(7,191,463)

Total property and equipment, net

 

6,694,256 

 

 

5,836,976 

Other assets

 

148,102 

 

 

91,639 

TOTAL ASSETS

$

7,635,191 

 

$

6,737,527 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

574,713 

 

$

459,569 

Taxes payable

 

80,570 

 

 

62,980 

Interest payable

 

33,358 

 

 

34,431 

Advances from partners

 

–  

 

 

68,919 

Current deferred income taxes

 

95,970 

 

 

106,123 

Other current liabilities

 

62,444 

 

 

35,749 

Total current liabilities

 

847,055 

 

 

767,771 

Long-term debt

 

1,897,734 

 

 

1,668,273 

Deferred income taxes

 

1,260,546 

 

 

1,049,138 

Pension and other postretirement liabilities

 

34,369 

 

 

33,174 

Other long-term liabilities

 

221,892 

 

 

183,299 

Total long-term liabilities

 

3,414,541 

 

 

2,933,884 

Commitments and contingencies (Note 11)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value; authorized 1,250,000,000 shares; issued 351,529,457 shares in 2013 and 351,100,391 in 2012

 

3,515 

 

 

3,511 

Additional paid-in capital

 

952,838 

 

 

934,939 

Retained earnings

 

2,322,296 

 

 

1,949,150 

Accumulated other comprehensive income

 

95,446 

 

 

149,804 

Common stock in treasury, 14,442 shares in 2013 and 64,715 in 2012

 

(500)

 

 

(1,532)

Total equity

 

3,373,595 

 

 

3,035,872 

TOTAL LIABILITIES AND EQUITY

$

7,635,191 

 

$

6,737,527 

 

 

 

 

 

 

See the accompanying notes which are an integral part of these

unaudited condensed consolidated financial statements.

 

5


 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

For the six months ended

 

June 30,

 

2013

 

2012

 

(in thousands)

Cash Flows From Operating Activities

 

 

 

 

 

Net income (loss)

$

373,146 

 

$

(297,428)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

368,305 

 

 

403,250 

Impairment of natural gas and oil properties

 

–  

 

 

800,652 

Deferred income taxes

 

232,838 

 

 

(182,596)

Unrealized gain on derivatives

 

(62,560)

 

 

(2,031)

Stock-based compensation

 

5,962 

 

 

5,549 

Other

 

1,198 

 

 

(2,049)

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(68,309)

 

 

69,166 

Inventories

 

(6,222)

 

 

8,088 

Accounts payable

 

48,193 

 

 

(1,349)

Taxes payable

 

17,590 

 

 

20,762 

Interest payable

 

(383)

 

 

4,762 

Advances from partners

 

(68,919)

 

 

31,995 

Other assets and liabilities

 

36,713 

 

 

(21,381)

Net cash provided by operating activities

 

877,552 

 

 

837,390 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Capital investments

 

(1,175,634)

 

 

(1,140,661)

Proceeds from sale of property and equipment

 

–  

 

 

174,337 

Transfers to restricted cash

 

–  

 

 

(167,750)

Transfers from restricted cash

 

8,542 

 

 

23,366 

Other

 

5,628 

 

 

8,895 

Net cash used in investing activities

 

(1,161,464)

 

 

(1,101,813)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Payments on current portion of long-term debt

 

(600)

 

 

(600)

Payments on revolving long-term debt

 

(1,233,150)

 

 

(1,273,700)

Borrowings under revolving long-term debt

 

1,463,150 

 

 

602,200 

Change in bank drafts outstanding

 

21,214 

 

 

(30,730)

Proceeds from issuance of long-term debt

 

–  

 

 

998,780 

Debt issuance costs

 

–  

 

 

(8,338)

Proceeds from exercise of common stock options

 

5,283 

 

 

2,698 

Net cash provided by financing activities

 

255,897 

 

 

290,310 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

117 

 

 

(15)

Increase (decrease) in cash and cash equivalents

 

(27,898)

 

 

25,872 

Cash and cash equivalents at beginning of year

 

53,583 

 

 

15,627 

Cash and cash equivalents at end of period

$

25,685 

 

$

41,499 

See the accompanying notes which are an integral part of

these unaudited condensed consolidated financial statements.

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

Other

 

Common

 

 

 

 

Shares

 

 

 

 

Paid-In

 

Retained

 

Comprehensive

 

Stock in

 

 

 

 

Issued

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Treasury

 

Total

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

351,100 

 

$

3,511 

 

$

934,939 

 

$

1,949,150 

 

$

149,804 

 

$

(1,532)

 

$

3,035,872 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

–  

 

 

–  

 

 

–  

 

 

373,146 

 

 

–  

 

 

–  

 

 

373,146 

Other comprehensive loss

–  

 

 

–  

 

 

–  

 

 

–  

 

 

(54,358)

 

 

–  

 

 

(54,358)

Total comprehensive income

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

318,788 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

–  

 

 

–  

 

 

11,696 

 

 

–  

 

 

–  

 

 

–  

 

 

11,696 

Exercise of stock options

467 

 

 

 

 

5,279 

 

 

–  

 

 

–  

 

 

–  

 

 

5,283 

Issuance of restricted stock

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(42)

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Treasury stock – non-qualified plan

–  

 

 

–  

 

 

924 

 

 

–  

 

 

–  

 

 

1,032 

 

 

1,956 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

351,529 

 

$

3,515 

 

$

952,838 

 

$

2,322,296 

 

$

95,446 

 

$

(500)

 

$

3,373,595 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes which are an integral part of these 

unaudited condensed consolidated financial statements.

 

 

 

7


 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

 

Southwestern Energy Company (including its subsidiaries, collectively, “we”, “Southwestern” or the “Company”) is an independent energy company engaged in natural gas and oil exploration, development and production. The Company engages in natural gas and oil exploration and production, natural gas gathering and natural gas marketing through its subsidiaries. Southwestern’s exploration, development and production (“E&P”) activities are principally focused within the United States on development of an unconventional gas reservoir located on the Arkansas side of the Arkoma Basin, which the Company refers to as the Fayetteville Shale play.  The Company is actively engaged in exploration and production activities in Pennsylvania, where we are targeting the unconventional gas reservoir known as the Marcellus Shale, and to a lesser extent in Texas and in Arkansas and Oklahoma in the Arkoma Basin.  The Company also actively seeks to find and develop new oil and natural gas plays with significant exploration and exploitation potential.  Southwestern’s natural gas gathering and marketing (“Midstream Services”) activities primarily support the Company’s E&P activities in Arkansas, Pennsylvania and Texas.  

 

The accompanying unaudited condensed consolidated financial statements were prepared using accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been appropriately condensed or omitted in this Quarterly Report on Form 10-Q. The Company believes the disclosures made are adequate to make the information presented not misleading.

 

The unaudited condensed consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented herein. It is recommended that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Annual Report on Form 10-K”).

 

The Company’s significant accounting policies, which have been reviewed and approved by the Audit Committee of the Company’s Board of Directors, are summarized in Note 1 in the Notes to the Consolidated Financial Statements included in the Company’s 2012 Annual Report on Form 10-K.

 

Certain reclassifications have been made to the prior year financial statements to conform to the 2013 presentation. The effects of the reclassifications were not material to the Company’s unaudited condensed consolidated financial statements.

 

 

 

(2) ACQUISITIONS AND DIVESTITURES

 

In April 2013, the Company entered into a definitive purchase agreement to acquire natural gas properties located in Pennsylvania prospective for the Marcellus Shale for approximately $93.0 million, subject to closing conditions.  The Company utilized its revolving credit facility to finance the acquisition.  The Company closed on the acquisition during the second quarter of 2013 and accounted for it as an asset acquisition.

 

In May 2012, the Company sold certain oil and natural gas leases, wells and gathering equipment in East Texas for approximately $166.0 millionThe assets included in the sale represented all of the Company’s interests and related assets in the Overton Field in Smith County. The net production from the sold assets was approximately 24.0 MMcfe per day as of the closing date and our net proved reserves were approximately 143.0 Bcfe at December 31, 2011. 

8


 

 

(3) PREPAID EXPENSES

 

The components of prepaid expenses included in other current assets as of June 30, 2013 and December 31, 2012 consisted of the following:

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2013

 

2012

 

 

(in thousands)

 

 

 

 

 

 

Prepaid drilling costs

$

18,107 

 

$

30,101 

Prepaid insurance

 

2,825 

 

 

9,507 

Total

$

20,932 

 

$

39,608 

 

(4) INVENTORY

 

Inventory recorded in current assets includes $3.7 million at June  30, 2013 and $5.6 million at December 31, 2012 for natural gas in underground storage owned by the Company’s E&P segment, and $34.4 million at June  30, 2013 and $22.5 million at December 31, 2012 for tubular and other equipment used in the E&P segment.

 

Other assets include $15.9 million at June  30, 2013 and $13.8 million at December 31, 2012, respectively, for inventory held by the Midstream Services segment consisting primarily of pipe that will be used to construct gathering systems for the Fayetteville Shale play.

 

(5) NATURAL GAS AND OIL PROPERTIES

 

The Company utilizes the full cost method of accounting for costs related to the exploration, development and acquisition of natural gas and oil reserves. Under this method, all such costs (productive and nonproductive), including salaries, benefits and other internal costs directly attributable to these activities are capitalized on a country by country basis and amortized over the estimated lives of the properties using the units-of-production method. These capitalized costs, less accumulated amortization and related deferred income taxes, are subject to a ceiling test that limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved natural gas and oil reserves, net of taxes, discounted at 10 percent plus the lower of cost or market value of unproved properties. Any costs in excess of the ceiling are written off as a non-cash expense. The expense may not be reversed in future periods, even though higher natural gas and oil prices may subsequently increase the ceiling. Full cost companies must use the average quoted price from the first day of each month from the previous 12 months, including the impact of derivatives qualifying as cash flow hedges, to calculate the ceiling value of their reserves.

 

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $3.44 per MMBtu and $88.13 per barrel for West Texas Intermediate oil, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties did not exceed the ceiling amount and did not result in a ceiling test impairment at June  30, 2013. Cash flow hedges of natural gas production in place increased the ceiling value by $150.8 million, net of tax, at June  30, 2013.    Decreases in average quoted prices from June 30, 2013 levels as well as changes in production rates, levels of reserves, capitalized costs, the evaluation of costs excluded from amortization, future development costs, service costs and taxes could result in future ceiling test impairments.

 

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $3.15 per MMBtu and $92.17 per barrel for West Texas Intermediate oil, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $496.4 million (net of tax) at June 30, 2012 and resulted in a non-cash ceiling test impairment.  Cash flow hedges of natural gas production in place increased the ceiling by $354.8 million at June 30, 2012.

 

All of the Company’s costs directly associated with the acquisition and evaluation of properties in Canada relating to its exploration program at June  30, 2013 were unproved and did not exceed the ceiling amount.  If the exploration program in Canada is unsuccessful on all or a portion of these properties, a ceiling test impairment may result in the future.

 

9


 

 

(6) EARNINGS PER SHARE

 

The following table presents the computation of earnings per share for the three- and six-month periods ended June  30, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

June 30,

 

June 30,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

$

245,631 

 

$

(405,132)

 

$

373,146 

 

$

(297,428)

 

 

 

 

 

 

 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding

 

350,448,806 

 

 

348,162,723 

 

 

350,241,768 

 

 

348,081,399 

Issued upon assumed exercise of outstanding stock options

 

386,999 

 

 

–  

 

 

481,528 

 

 

–  

Effect of issuance of nonvested restricted common stock

 

247,002 

 

 

–  

 

 

188,596 

 

 

–  

Weighted average and potential dilutive outstanding(1)

 

351,082,807 

 

 

348,162,723 

 

 

350,911,892 

 

 

348,081,399 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.70 

 

$

(1.16)

 

$

1.07 

 

$

(0.85)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

$

0.70 

 

$

(1.16)

 

$

1.06 

 

$

(0.85)

 

 (1) Options for 1,599,246 shares and 29,251 shares of restricted stock were excluded from the calculation for the three months ended June 30, 2013 because they would have had an antidilutive effect.  Due to the net loss for the three months ended June 30, 2012, options for 1,723,316 shares and 156,047 shares of restricted stock were antidilutive and excluded from the calculation.  Options for 2,079,849 shares and 246,347 shares of restricted stock were excluded from the calculation for the six months ended June 30, 2013 because they would have had an antidilutive effect.  Due to the net loss for the six months ended June 30, 2012, options for 1,783,073 shares and 121,078 shares of restricted stock were antidilutive and excluded from the calculation.

10


 

 

 

(7) DERIVATIVES AND RISK MANAGEMENT

 

The Company is exposed to volatility in market prices and basis differentials for natural gas and crude oil which impacts the predictability of its cash flows related to the sale of natural gas and oil, and is exposed to volatility in interest rate risks. These risks are managed by the Company’s use of certain derivative financial instruments.  At June  30, 2013 and December 31, 2012, the Company’s derivative financial instruments consisted of price swaps, basis swaps, fixed price call options, and interest rate swaps. A description of the Company’s derivative financial instruments is provided below:

 

Fixed price swaps

The Company receives a fixed price for the contract and pays a floating market price to the counterparty.

 

 

Floating price swaps

The Company receives a floating market price from the counterparty and pays a fixed price.

 

 

Costless-collars

Arrangements that contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.

 

 

Basis swaps

Arrangements that guarantee a price differential for natural gas from a specified delivery point. The Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.

 

 

Fixed price call options

The Company sells fixed price call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, the Company pays the counterparty such excess on sold fixed price call options. If the market price settles below the fixed price of the call option, no payment is due from either party.

 

 

Interest rate swaps

Interest-rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest-rate changes.

 

GAAP requires that all derivatives be recognized in the balance sheet as either an asset or liability and be measured at fair value. Under GAAP, certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as either a cash flow or a fair value hedge. Accounting for qualifying hedges requires a derivative’s gains and losses to be recorded either in earnings or as a component of other comprehensive income. Gains and losses on derivatives that are not elected for hedge accounting treatment or that do not meet hedge accounting requirements are recorded in earnings.

 

The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties. Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. However, the events in the financial markets in recent years demonstrate there can be no assurance that a counterparty will be able to meet its obligations to the Company.

 

 

11


 

 

The balance sheet classification of the assets related to derivative financial instruments are summarized below at June  30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

June 30, 2013

 

December 31, 2012

 

 

Balance Sheet Classification

 

Fair Value

 

Balance Sheet Classification

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

 

Hedging asset

 

$

189,541 

 

Hedging asset

 

$

279,443 

Fixed price swaps

 

Other assets

 

 

12,214 

 

Other assets

 

 

8,550 

Total derivatives designated as hedging instruments

 

 

 

$

201,755 

 

 

 

$

287,993 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Basis swaps

 

Hedging asset

 

$

8,402 

 

Hedging asset

 

$

3,250 

Fixed price swaps

 

Hedging asset

 

 

48,512 

 

Hedging asset

 

 

–  

Basis swaps

 

Other assets

 

 

2,565 

 

Other assets

 

 

901 

Fixed price swaps

 

Other assets

 

 

39,276 

 

Other assets

 

 

–  

Interest rate swaps

 

Other assets

 

 

6,218 

 

Other assets

 

 

–  

Total derivatives not designated as hedging instruments

 

 

 

$

104,973 

 

 

 

$

4,151 

 

 

 

 

 

 

 

 

 

 

 

Total derivative assets

 

 

 

$

306,728 

 

 

 

$

292,144 

 

 

 

 

 

Derivative Liabilities

 

 

June 30, 2013

 

December 31, 2012

 

 

Balance Sheet Classification

 

Fair Value

 

Balance Sheet Classification

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Basis swaps

 

Other current liabilities

 

$

69 

 

Other current liabilities

 

$

138 

Fixed price call options

 

Other long-term liabilities

 

 

38,856 

 

Other long-term liabilities

 

 

4,128 

Interest rate swaps

 

Other current liabilities

 

 

308 

 

Other current liabilities

 

 

–  

Interest rate swaps

 

Other long-term liabilities

 

 

3,294 

 

Other long-term liabilities

 

 

–  

Total derivatives not designated as hedging instruments

 

 

 

$

42,527 

 

 

 

$

4,266 

 

 

 

 

 

 

 

 

 

 

 

Total derivative liabilities

 

 

 

$

42,527 

 

 

 

$

4,266 

 

 

 

Cash Flow Hedges

 

The reporting of gains and losses on cash flow derivative hedging instruments depends on whether the gains or losses are effective at offsetting changes in the cash flows of the hedged item. The effective portion of the gains and losses on the derivative hedging instruments are recorded in other comprehensive income until recognized in earnings during the period that the hedged transaction takes place. The ineffective portion of the gains and losses from the derivative hedging instrument is recognized in earnings immediately.

 

12


 

 

 

As of June  30, 2013, the Company had cash flow hedges on the following volumes of natural gas production (in Bcf):

 

 

 

 

Year

Fixed price swaps

2013

168.8

2014

51.1

 

As of June  30, 2013, the Company recorded a net gain in accumulated other comprehensive income related to its hedging activities of $119.7 million. This amount is net of a deferred income tax liability recorded as of June  30, 2013 of $79.8 million. The amount recorded in accumulated other comprehensive income will be relieved over time and recognized in the statement of operations as the physical transactions being hedged occur. Assuming the market prices of natural gas futures as of June  30, 2013 remain unchanged, the Company would expect to transfer an aggregate after-tax net gain of $112.5 million from accumulated other comprehensive income to earnings during the next 12 months. Gains or losses from derivative instruments designated as cash flow hedges are reflected as adjustments to gas sales in the unaudited condensed consolidated statements of operations. Volatility in earnings and other comprehensive income may occur in the future as a result of the Company’s derivative activities.

 

The following tables summarize the before tax effect of all cash flow hedges on the unaudited condensed consolidated financial statements for the three- and six-month periods ended June  30, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in
Other Comprehensive Income

 

 

 

 

(Effective Portion)

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

 

June 30,

 

June 30,

Derivative Instrument

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Fixed price swaps

 

 

 

$

112,621 

 

$

(47,829)

 

$

38,719 

 

$

171,128 

Costless-collars

 

 

 

$

–  

 

$

(12,370)

 

$

–  

 

$

44,141 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification of Gain

 

Gain Reclassified from Accumulated Other

 

 

Reclassified from

 

Comprehensive Income into Earnings

 

 

Accumulated Other

 

(Effective Portion)

 

 

Comprehensive Income

 

For the three months ended

 

For the six months ended

 

 

into Earnings

 

June 30,

 

June 30,

Derivative Instrument

 

(Effective Portion)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Fixed price swaps

 

Gas Sales

 

$

46,335 

 

$

128,894 

 

$

124,956 

 

$

235,205 

Costless-collars

 

Gas Sales

 

$

–  

 

$

65,732 

 

$

–  

 

$

121,042 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in
Earnings

 

 

 

 

(Ineffective Portion)

 

 

Classification of Gain (Loss)

 

For the three months ended

 

For the six months ended

 

 

Recognized in Earnings

 

June 30,

 

June 30,

Derivative Instrument

 

(Ineffective Portion)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Fixed price swaps

 

Gas Sales

 

$

(2,032)

 

$

(2,303)

 

$

(731)

 

$

1,996 

Costless-collars

 

Gas Sales

 

$

–  

 

$

(371)

 

$

–  

 

$

540 

 

Fair Value Hedges

 

For fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings immediately.  For the three- and six-months ended June 30, 2012, the impact on earnings was not material and as of June 30, 2013 and December 31, 2012, the Company had no fair value hedges.

13


 

 

 

Other Derivative Contracts

 

Although the Company’s basis swaps meet the objective of managing commodity price exposure, these trades are typically not entered into concurrent with the Company’s derivative instruments that qualify as cash flow hedges and therefore do not generally qualify for hedge accounting. Basis swap derivative instruments that do not qualify as cash flow hedges are recorded on the balance sheet at their fair values under hedging assets, other assets and other current liabilities, as applicable, and all realized and unrealized gains and losses related to these contracts are recognized immediately in the unaudited condensed consolidated statements of operations as a component of gain (loss) on derivatives.  

 

As of June  30, 2013, the Company had basis swaps on natural gas production that did not qualify for hedge accounting treatment of 14.1 Bcf and 15.2 Bcf in 2013 and 2014, respectively.

 

As of June  30, 2013, the Company had fixed price call options on 199.8 Bcf of 2015 natural gas production that did not qualify for hedge accounting treatment and 181.6 Bcf of 2014 natural gas production on fixed price swaps not designated for hedge accounting.

 

The Company is a party to an interest rate swap with counterparty banks. The interest rate swap was entered into in order to mitigate the Company’s exposure to volatility in interest rates related to its building lease. The interest rate swap has a notional amount of $170 million and expires on June 20, 2020. The Company did not designate the interest rate swap for hedge accounting.  Changes in the fair value of the interest rate swap are included in gain (loss) on derivatives in the unaudited condensed consolidated statements of operations.  The Company had no interest rate swaps in 2012. 

 

The following table summarizes the before tax effect of basis swaps, fixed price call options that did not qualify for hedge accounting, fixed price swaps not designated for hedge accounting,  and interest rate swaps not designated for hedge accounting on the unaudited condensed consolidated statements of operations for the three- and six-month periods ended June  30, 2013 and 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gain (Loss)

 

 

 

 

Recognized in Earnings

 

 

Income Statement

 

For the three months ended

 

For the six months ended

 

 

Classification

 

June 30,

 

June 30,

Derivative Instrument

 

of Unrealized Gain (Loss)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Basis swaps

 

Gain (Loss) on Derivatives

 

$

9,835 

 

$

(218)

 

$