20150930 10Q Q3

Table Of Contents

 

 

 

 

 

 

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 September 30, 2015

 

 

 

 

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.)

 

 

 

 

10000 Energy Drive 

Spring, Texas

77389

(Address of principal executive offices)

(Zip Code)

 

 

 

 

(832) 796-1000

(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.  Yes      No

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).  Yes   No 

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

Accelerated filer

Non-accelerated filer

Smaller reporting company

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

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 October 20, 2015

Common Stock, Par Value $0.01

384,478,569

 

 

 

 


 

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SOUTHWESTERN ENERGY COMPANY

 

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

46

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

47

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 (the “Exchange Act”). 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 Quarterly Report on 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 positions in the Fayetteville Shale, Northeast Appalachia and Southwest Appalachia overall as well as relative to other productive shale gas plays;

·

our ability to realize the expected benefits from recent acquisitions;

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·

the impact of title and environmental defects and other matters on the value of the properties acquired in our recent acquisitions and any other future acquisitions;

·

difficulties in integrating our operations as a result of any significant acquisitions;

·

the impact of government regulation, including the ability to obtain and maintain permits, any increase in severance or similar taxes, and legislation relating to hydraulic fracturing, 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;

·

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;

·

the different risks and uncertainties associated with proposed activities in Canada;

·

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”). 

 

Should one or more of the risks or uncertainties described above or elsewhere in this Quarterly Report 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.

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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 nine months ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

 

(in millions, except share/per share amounts)

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gas sales

$

458 

 

$

645 

 

$

1,540 

 

$

2,155 

Oil sales

 

19 

 

 

 

 

60 

 

 

12 

NGL sales

 

14 

 

 

–  

 

 

47 

 

 

Marketing

 

216 

 

 

227 

 

 

663 

 

 

765 

Gas gathering

 

42 

 

 

50 

 

 

136 

 

 

143 

 

 

749 

 

 

928 

 

 

2,446 

 

 

3,076 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Marketing purchases

 

213 

 

 

220 

 

 

654 

 

 

752 

Operating expenses

 

176 

 

 

108 

 

 

507 

 

 

309 

General and administrative expenses

 

60 

 

 

54 

 

 

188 

 

 

162 

Depreciation, depletion and amortization

 

275 

 

 

238 

 

 

876 

 

 

693 

Impairment of natural gas and oil properties

 

2,839 

 

 

–  

 

 

4,374 

 

 

–  

(Gain) loss on sale of assets, net

 

 

 

–  

 

 

(276)

 

 

–  

Taxes, other than income taxes

 

27 

 

 

22 

 

 

84 

 

 

72 

 

 

3,591 

 

 

642 

 

 

6,407 

 

 

1,988 

Operating Income (Loss)

 

(2,842)

 

 

286 

 

 

(3,961)

 

 

1,088 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

51 

 

 

25 

 

 

153 

 

 

75 

Other interest charges

 

 

 

 

 

54 

 

 

Interest capitalized

 

(53)

 

 

(14)

 

 

(155)

 

 

(40)

 

 

–  

 

 

13 

 

 

52 

 

 

39 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income, Net

 

–  

 

 

–  

 

 

 

 

Gain (Loss) on Derivatives

 

15 

 

 

78 

 

 

30 

 

 

(29)

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

(2,827)

 

 

351 

 

 

(3,981)

 

 

1,021 

Provision (Benefit) for Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

Current

 

–  

 

 

32 

 

 

 

 

34 

Deferred

 

(1,088)

 

 

108 

 

 

(1,539)

 

 

375 

 

 

(1,088)

 

 

140 

 

 

(1,532)

 

 

409 

Net Income (Loss)

$

(1,739)

 

$

211 

 

$

(2,449)

 

$

612 

Mandatory convertible preferred stock dividend

 

27 

 

 

–  

 

 

79 

 

 

–  

Net Income (Loss) Attributable to Common Stock

$

(1,766)

 

$

211 

 

$

(2,528)

 

$

612 

 

 

 

 

 

 

 

 

   

 

 

   

Earnings (Loss) Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(4.62)

 

$

0.60 

 

$

(6.65)

 

$

1.74 

Diluted

$

(4.62)

 

$

0.60 

 

$

(6.65)

 

$

1.74 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

382,098,080 

 

 

351,457,043 

 

 

379,909,748 

 

 

351,357,913 

Diluted

 

382,098,080 

 

 

352,327,250 

 

 

379,909,748 

 

 

352,334,546 

 

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

For the three months ended

 

 

For the nine months ended

 

September 30,

 

 

September 30,

 

2015

 

2014

 

2015

 

2014

 

(in millions)

Net income (loss)

$

(1,739)

 

$

211 

 

$

(2,449)

 

$

612 

 

 

 

 

 

 

 

 

 

 

 

 

Change in derivatives:

 

 

 

 

 

 

 

 

 

 

 

Settlements (1) 

 

(31)

 

 

(11)

 

 

(89)

 

 

29 

Ineffectiveness (2)

 

 

 

(2)

 

 

 

 

(1)

Change in fair value of derivative instruments (3)

 

 

 

48 

 

 

21 

 

 

(1)

Total change in derivatives

 

(22)

 

 

35 

 

 

(67)

 

 

27 

 

 

 

 

 

 

 

 

 

 

 

 

Change in value of pension and other postretirement liabilities:

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

–  

 

 

 

 

–  

 

 

 

 

 

 

 

 

 

 

 

 

Change in currency translation adjustment

 

(5)

 

 

(4)

 

 

(9)

 

 

(4)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

(1,765)

 

$

242 

 

$

(2,524)

 

$

635 

 

(1)

Net of ($19), ($7),  ($56) and $19 million in taxes for the three months ended September 30, 2015 and 2014, and nine months ended September 30, 2015 and 2014, respectively. 

 

(2)

Net of ($1) million in taxes for the three months ended September 30, 2014.

 

(3)

Net of $5, $32,  $13 and ($1) million in taxes for the three months ended September 30, 2015 and 2014, and nine months ended September 30, 2015 and 2014, respectively.

 

(4)

Net of $1 million in taxes for the nine months ended September 30, 2015.

 

 

 

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

September 30,

 

December 31,

 

2015

 

2014

ASSETS

(in millions)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

15 

 

$

53 

Accounts receivable

 

355 

 

 

530 

Inventories

 

33 

 

 

37 

Derivative assets

 

112 

 

 

337 

Other current assets

 

55 

 

 

158 

Total current assets

 

570 

 

 

1,115 

Natural gas and oil properties, using the full cost method, including $4,902 million as of September 30, 2015 and $4,646  million as of December 31, 2014 excluded from amortization

 

22,127 

 

 

20,506 

Gathering systems

 

1,274 

 

 

1,439 

Other

 

616 

 

 

612 

Less: Accumulated depreciation, depletion and amortization

 

(14,038)

 

 

(8,845)

Total property and equipment, net

 

9,979 

 

 

13,712 

Other long-term assets

 

176 

 

 

98 

TOTAL ASSETS

$

10,725 

 

$

14,925 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

$

 

$

4,501 

Accounts payable

 

615 

 

 

653 

Taxes payable

 

49 

 

 

92 

Interest payable

 

32 

 

 

34 

Current deferred income taxes

 

24 

 

 

109 

Dividends payable

 

27 

 

 

–  

Derivative liabilities

 

 

 

Other current liabilities

 

28 

 

 

30 

Total current liabilities

 

782 

 

 

5,428 

Long-term debt

 

4,663 

 

 

2,466 

Deferred income taxes

 

448 

 

 

1,951 

Pension and other postretirement liabilities

 

48 

 

 

44 

Other long-term liabilities

 

347 

 

 

374 

Total long-term liabilities

 

5,506 

 

 

4,835 

Commitments and contingencies (Note 10)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value; authorized 1,250,000,000 shares; issued 384,552,961 shares as of September 30, 2015 and 354,488,992 as of December 31, 2014

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, 6.25% Series B Mandatory Convertible, $1,000 per share liquidation preference, 1,725,000 shares issued and outstanding

 

–  

 

 

–  

Additional paid-in capital

 

3,396 

 

 

1,019 

Retained earnings

 

1,051 

 

 

3,577 

Accumulated other comprehensive income (loss)

 

(13)

 

 

62 

Common stock in treasury, 45,990 shares as of September 30, 2015 and 11,055 shares as of December 31, 2014

 

(1)

 

 

–  

Total equity

 

4,437 

 

 

4,662 

TOTAL LIABILITIES AND EQUITY

$

10,725 

 

$

14,925 

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

 

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

For the nine months ended

 

September 30,

 

2015

 

2014

 

(in millions)

Cash Flows From Operating Activities

 

 

 

 

 

Net income (loss)

$

(2,449)

 

$

612 

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

 

 

 

 

 

Depreciation, depletion and amortization

 

877 

 

 

693 

Impairment of natural gas and oil properties

 

4,374 

 

 

–  

Amortization of debt issuance cost

 

50 

 

 

Deferred income taxes

 

(1,539)

 

 

375 

Loss on derivatives excluding derivatives, settled

 

105 

 

 

Stock-based compensation

 

18 

 

 

13 

Gain on sale of assets, net

 

(276)

 

 

–  

Other

 

 

 

(3)

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

175 

 

 

Inventories

 

 

 

Accounts payable

 

(55)

 

 

52 

Taxes payable (receivable)

 

(43)

 

 

Interest payable

 

(1)

 

 

(10)

Other assets and liabilities

 

(13)

 

 

22 

Net cash provided by operating activities

 

1,227 

 

 

1,774 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Capital investments

 

(1,392)

 

 

(1,511)

Acquisitions

 

(582)

 

 

(202)

Proceeds from sale of property and equipment

 

704 

 

 

20 

Other

 

 

 

Net cash used in investing activities

 

(1,263)

 

 

(1,687)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Payments on current portion of long-term debt

 

(1)

 

 

(1)

Payments on long-term debt

 

(500)

 

 

–  

Payments on short-term debt

 

(4,500)

 

 

–  

Payments on revolving credit facility

 

(2,168)

 

 

(3,573)

Borrowings under revolving credit facility

 

2,148 

 

 

3,429 

Payments on commercial paper

 

(5,179)

 

 

–  

Borrowings under commercial paper

 

5,699 

 

 

–  

Change in bank drafts outstanding

 

26 

 

 

45 

Proceeds from issuance of long-term debt

 

2,200 

 

 

–  

Debt issuance costs

 

(17)

 

 

–  

Proceeds from exercise of common stock options

 

–  

 

 

10 

Proceeds from issuance of common stock

 

669 

 

 

–  

Proceeds from issuance of mandatory convertible preferred stock

 

1,673 

 

 

–  

Mandatory convertible preferred stock dividend

 

(52)

 

 

                    –  

Net cash used in financing activities

 

(2)

 

 

(90)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(38)

 

 

(3)

Cash and cash equivalents at beginning of year

 

53 

 

 

23 

Cash and cash equivalents at end of period

$

15 

 

$

20 

 

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

Preferred

 

 

 

 

 

Accumulated

 

 

 

 

Common Stock

 

Stock

 

Additional

 

 

 

Other

Common

 

 

 

Shares

 

 

 

Shares

 

Paid-In

 

Retained

 

Comprehensive

Stock in 

 

 

 

Issued

 

Amount

Issued

 

Capital

 

Earnings

 

Income (Loss)

Treasury

 

Total

 

(in millions, except share amounts)

Balance at December 31, 2014

354,488,992 

 

$

 

–  

 

$

1,019 

 

$

3,577 

 

$

62 

 

$

–  

 

$

4,662 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

–  

 

 

–  

 

–  

 

 

–  

 

 

(2,449)

 

 

–  

 

 

–  

 

 

(2,449)

Other comprehensive loss

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

(75)

 

 

–  

 

 

(75)

Total comprehensive loss

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

(2,524)

Stock-based compensation

–  

 

 

–  

 

–  

 

 

35 

 

 

–  

 

 

–  

 

 

–  

 

 

35 

Preferred stock dividends

–  

 

 

–  

 

–  

 

 

–  

 

 

(79)

 

 

–  

 

 

–  

 

 

(79)

Issuance of restricted stock

105,584 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(69,657)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Issuance of common stock

30,000,000 

 

 

–  

 

–  

 

 

669 

 

 

–  

 

 

–  

 

 

–  

 

 

669 

Issuance of preferred stock

–  

 

 

–  

 

1,725,000 

 

 

1,673 

 

 

–  

 

 

–  

 

 

–  

 

 

1,673 

Treasury stock – non-qualified plan

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

(1)

 

 

(1)

Tax withholding – stock compensation

(1,958)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Non-controlling interest

–  

 

 

–  

 

–  

 

 

–  

 

 

 

 

–  

 

 

–  

 

 

Balance at September 30, 2015

384,522,961 

 

$

 

1,725,000 

 

$

3,396 

 

$

1,051 

 

$

(13)

 

$

(1)

 

$

4,437 

 

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

7


 

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

 

Southwestern Energy Company (including its subsidiaries, collectively “Southwestern” or the “Company”) is an independent energy company engaged in natural gas and oil exploration, development and production (“E&P”). The Company’s current operations are principally focused within the United States on the development of unconventional reservoirs located in Arkansas, Pennsylvania and West Virginia. The Company’s operations in Arkansas are primarily focused on an unconventional natural gas reservoir known as the Fayetteville Shale, and its operations in northeast Pennsylvania are focused on an unconventional natural gas reservoir known as the Marcellus Shale (herein referred to as “Northeast Appalachia”). The Company also has a significant stake in properties located in West Virginia and adjacent areas in southwest Pennsylvania. These operations, primarily in West Virginia, are focused on the Marcellus, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs (herein referred to as “Southwest Appalachia”).  To a lesser extent, the Company has exploration and production activities ongoing in Colorado, Louisiana and elsewhere in the United States. The Company also actively seeks to find and develop new natural gas and oil plays with significant exploration and exploitation potential, which it refers to as “New Ventures,” and to obtain additional reserves through acquisitions. The Company also operates drilling rigs in Arkansas, Pennsylvania and West Virginia, and provides oilfield products and services, principally serving its exploration and production operations. Southwestern’s natural gas gathering and marketing (“Midstream Services”) activities primarily support the Company’s E&P activities in Arkansas, Pennsylvania, Louisiana and West Virginia.  

 

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. 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 for the year ended December 31, 2014 (“2014 Annual Report”).

 

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 2014 Annual Report.

 

 

 

(2) ACQUISITIONS AND DIVESTITURES

 

In May 2015, the Company sold conventional oil and gas assets located in East Texas and the Arkoma Basin for approximately $214 million. The net book value of these assets was primarily in the full cost pool and was held in the E&P segment as of the closing date. The proceeds from the transaction were used to reduce Company debt. Approximately $206 million of the proceeds received were recorded as a reduction of the capitalized costs of the Company’s natural gas and oil properties in the United States pursuant to the full cost method of accounting. The transaction is subject to customary post-closing adjustments.

 

In April 2015, the Company sold its gathering assets located in Bradford and Lycoming counties in northeastern Pennsylvania to Howard Midstream Energy Partners, LLC for an adjusted sales price of approximately $489 million. The net book value of these assets was $206 million and was held in the Midstream segment as of the closing date.  A gain on sale of $283 million was recognized and is included in (Gain) loss on sale of assets, net on the unaudited condensed consolidated statement of operations. The assets include approximately 100 miles of natural gas gathering pipelines, with nearly 600 million cubic feet per day of capacity.  The proceeds from the transaction were used to substantially repay borrowings under the Company’s $500 million term loan facility that would have matured in December 2016.  

 

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Table of Contents

 

In January 2015, the Company completed an acquisition of certain natural gas and oil assets including approximately 46,700 net acres in northeast Pennsylvania from WPX Energy, Inc. for an adjusted purchase price of $270 million (the “WPX Property Acquisition”). This acreage was producing approximately 50 million net cubic feet of gas per day from 63 operated horizontal wells as of December 2014. As part of this transaction, the Company assumed firm transportation capacity of 260 million cubic feet of gas per day predominantly on the Millennium pipeline. This transaction was funded with the revolving credit facility and was accounted for as a business combination. The Company allocated approximately $151 million of the purchase price of the WPX Property Acquisition to natural gas and oil properties and approximately $119 million to intangible assets in other current assets and other long-term assets, based on the respective fair values of the assets acquired which have been updated to reflect final settlement adjustments.  

 

In January 2015, the Company completed an acquisition in which the Company’s subsidiary acquired certain natural gas and oil assets from Statoil ASA covering approximately 30,000 acres in West Virginia and southwest Pennsylvania comprising approximately 20% of Statoil’s interests in that acreage for $365 million, subject to customary post-closing adjustments (the “Statoil Property Acquisition”). All of these assets are also assets in which the Company has acquired interests under the Chesapeake Property Acquisition (as defined below). This transaction was funded with the revolving credit facility and was accounted for as a business combination. The Company allocated approximately $365 million of the purchase price to natural gas and oil properties, based on the respective fair values of the assets acquired.

 

In December 2014, the Company completed an acquisition of certain natural gas and oil assets from Chesapeake Energy Corporation covering approximately 413,000 net acres in West Virginia and southwest Pennsylvania targeting natural gas, natural gas liquids (“NGLs”) and crude oil contained in the Upper Devonian, Marcellus and Utica Shales for approximately $5.0 billion, subject to customary post-closing adjustments (the “Chesapeake Property Acquisition”). The transaction was temporarily financed using a $4.5 billion 364-day senior unsecured bridge term loan credit facility and a $500 million two-year unsecured term loan.  The Company repaid all principal and interest outstanding on the $4.5 billion bridge facility in January 2015 after permanent financing was finalized and, as a result, expensed $47 million of short-term unamortized debt issuance costs related to the bridge facility in January 2015 recognized in other interest charges on the unaudited condensed consolidated statement of operations. The term loan facility was repaid in full in April 2015 with proceeds from the divestiture of the Company’s northeastern Pennsylvania gathering assets and borrowings under the revolving credit facility.

 

The Chesapeake Property Acquisition qualified as a business combination, and as a result, the Company estimated the fair value of the assets acquired and liabilities assumed as of the December 22, 2014 acquisition date. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements also utilize assumptions of market participants. The Company used a discounted cash flow model and made market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates. These assumptions represent Level 3 inputs, as defined in Note 8 – Fair Value Measurements. The following table summarizes the consideration paid for the Chesapeake Property Acquisition and the fair value of the assets acquired and liabilities assumed as of the acquisition date. The purchase price allocation is preliminary and has been adjusted to reflect changes in unproved property and working capital.  These amounts are subject to further adjustments and will be finalized as soon as possible, but no later than December 2015.

 

 

 

 

 

Consideration (in millions):

 

 

    Cash

$

4,959 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

Assets acquired:

 

 

      Proved natural gas and oil properties

 

1,418 

      Unproved natural gas and oil properties

 

3,574 

      Other property and equipment

 

33 

      Inventory

 

Total assets acquired

 

5,028 

Liabilities assumed:

 

 

      Asset retirement obligations

 

(42)

         Other liabilities

 

(27)

Total liabilities assumed

 

(69)

 

$

4,959 

 

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Summarized below are the consolidated results of operations for the three and nine months ended September 30, 2014 on an unaudited pro forma basis, as if the acquisition and financing had occurred on January 1, 2013. The unaudited pro forma financial information was derived from the historical consolidated statement of operations of the Company and the statement of revenues and direct operating expenses for the Chesapeake Property Acquisition properties. The unaudited pro forma financial information does not purport to be indicative of results of operations that would have occurred had the acquisition and related permanent financing occurred on the basis assumed above, nor is such information indicative of the Company’s expected future results of operations. The unaudited pro forma financial information excludes the WPX Property and Statoil Property Acquisitions as the impacts are immaterial.

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

September 30, 2014

 

September 30, 2014

 

(unaudited)

 

(in millions, except per share amounts)

Revenues

$

1,019 

 

$

3,416 

Net Income

$

234 

 

$

720 

Earnings per common share:

 

 

 

 

 

Basic

$

0.46 

 

$

1.43 

Diluted

$

0.45 

 

$

1.42 

 

In the second and third quarters of 2014, the Company completed several acquisitions to purchase approximately 380,000 net acres in northwest Colorado principally in the Niobrara formation for approximately $215 million. The Company utilized its revolving credit facility to finance these acquisitions and accounted for them as asset acquisitions.

 

(3) INVENTORY

 

Inventory is comprised of tubulars and other equipment and natural gas in underground storage. Tubulars and other equipment are carried at the lower of cost or market and are accounted for by a moving weighted average cost method that is applied within specific classes of inventory items. Natural gas in underground storage is carried at the lower of cost or market and accounted for by a weighted average cost method.

 

The components of inventory recorded in current assets as of September 30, 2015 and December 31, 2014 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2015

 

2014

 

(in millions)

Tubulars and other equipment

$

31 

 

$

33 

Natural gas in underground storage

$

 

$

 

(4) 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 discounted at 10% 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. Companies using the full cost method 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.

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Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $3.06 per MMBtu, West Texas Intermediate oil of $55.73 per barrel and NGLs of $8.62 per barrel, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by $1,746 million (net of tax) at September 30, 2015 and resulted in a non-cash ceiling test impairment. Cash flow hedges of natural gas production in place increased the ceiling amount by approximately $40 million as of September 30, 2015. In the second quarter of 2015, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $944 million (net of tax) at June 30, 2015 and resulted in a non-cash ceiling test impairment.  Decreases in market prices as well as changes in production rates, levels of reserves, evaluation of costs excluded from amortization, future development costs and production costs could result in future ceiling test impairments. Using the first-day-of-the-month prices of natural gas for the first ten months of 2015 and NYMEX strip prices for the remainder of 2015, as applicable, the prices required to be used to determine the ceiling amount in the Company’s full cost ceiling test are likely to require  a material write-down in the fourth quarter of 2015. The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize its deferred tax assets.  A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. While the Company is unable to reasonably estimate the amounts at this time, based on the expected material write-downs of the value of its oil and natural gas properties, it is possible the Company’s deferred tax assets will not be realized in subsequent quarters. 

 

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $4.24 per MMBtu, West Texas Intermediate oil of $95.56 per barrel and NGLs of $36.70 per barrel, adjusted for market differentials, the net book value of the Company’s United States natural gas and oil properties did not exceed the ceiling amount and did not result in a ceiling test impairment at September 30, 2014. Cash flow hedges of natural gas production in place increased the ceiling amount by approximately $14 million as of September 30, 2014.

 

All of the Company’s costs directly associated with the acquisition and evaluation of properties in Canada relating to its exploration program as of September 30, 2015 were unproved and did not exceed the ceiling amount. If the Company’s exploration program in Canada is terminated or otherwise unsuccessful on all or a portion of the Company’s Canadian assets, including the effects of the recently imposed moratorium in New Brunswick and changes in laws or regulations or otherwise, a ceiling test impairment may result in the future.

 

(5) EARNINGS PER SHARE

 

Basic earnings per common share is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding during each year. The diluted earnings per share calculation adds to the weighted average number of common shares outstanding: the incremental shares that would have been outstanding assuming the exercise of dilutive stock options, the vesting of unvested restricted shares of common stock and performance units and the assumed conversion of mandatory convertible preferred stock. An antidilutive impact is an increase in earnings per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.

 

In January 2015, the Company completed concurrent underwritten public offerings of 30,000,000 shares of its common stock and 34,500,000 depositary shares (both share counts include shares issued as a result of the underwriters exercising their options to purchase additional shares). The common stock offering was priced at $23.00 per share. Net proceeds, after underwriting discount and expenses, from the common stock offering were approximately $669 million. Net proceeds, after underwriting discount and expenses, from the depositary share offering were approximately $1.7 billion. Each depositary share represents a 1/20th interest in a share of the Company’s mandatory convertible preferred stock, with a liquidation preference of $1,000 per share (equivalent to a $50 liquidation preference per depositary share). The proceeds from the offerings were used to partially repay borrowings under the Company’s $4.5 billion 364-day bridge facility with the remaining balance of the bridge facility fully repaid with proceeds from the Company’s January 2015 public offering of $2.2 billion in long-term senior notes.

 

The mandatory convertible preferred stock entitles the holders to a proportional fractional interest in the rights and preferences of the convertible preferred stock, including conversion, dividend, liquidation and voting rights. Unless converted earlier at the option of the holders, on or around January 15, 2018 each share of convertible preferred stock will automatically convert into between 37.0028 and 43.4782 shares of the Company’s common stock (and, correspondingly, each depositary share will convert into between 1.85014 and 2.17391 shares of the Company’s common stock), subject to customary anti-dilution adjustments, depending on the volume-weighted average price of the Company’s common stock over a 20 trading day averaging period immediately prior to that date.

 

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The mandatory convertible preferred stock has the non-forfeitable right to participate on an as converted basis at the conversion rate then in effect in any common stock dividends declared and as such, is considered a participating security. Accordingly, it is included in the computation of basic and diluted earnings per share, pursuant to the two-class method. In the calculation of basic earnings per share attributable to common shareholders, participating securities are allocated earnings based on actual dividend distributions received plus a proportionate share of undistributed net income attributable to common shareholders, if any, after recognizing distributed earnings. The Company’s participating securities do not participate in undistributed net losses because they are not contractually obligated to do so.

 

The following table presents the computation of earnings per share for the three and nine months ended September 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

 

(in millions, except share/per share amounts)

Net income (loss)

$

(1,739)

 

$

211 

 

$

(2,449)

 

$

612 

Mandatory convertible preferred stock dividend

 

27 

 

 

   

 

 

79 

 

 

 – 

Net income (loss) attributable to common stock

 

(1,766)

 

 

211 

 

 

(2,528)

 

 

612 

 

 

 

 

 

 

 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding

 

382,098,080 

 

 

351,457,043 

 

 

379,909,748 

 

 

351,357,913 

Issued upon assumed exercise of outstanding stock options (1)

 

–  

 

 

235,944 

 

 

–  

 

 

354,940 

Effect of issuance of non-vested restricted common stock (2)

 

–  

 

 

514,668 

 

 

–  

 

 

484,786 

Effect of issuance of non-vested performance units (3)

 

–  

 

 

119,595 

 

 

–  

 

 

136,907 

Effect of issuance of mandatory convertible preferred stock (4)

 

–  

 

 

–  

 

 

–  

 

 

–  

Weighted average and potential dilutive outstanding

 

382,098,080 

 

 

352,327,250 

 

 

379,909,748 

 

 

352,334,546 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(4.62)

 

$

0.60 

 

$

(6.65)

 

$

1.74 

Diluted

$

(4.62)

 

$

0.60 

 

$

(6.65)

 

$

1.74 

 

(1)

Due to the net loss for the three and nine months ended September 30, 2015, options of 3,796,778 shares and 3,778,140 shares, respectively, were antidilutive and excluded from the calculation of diluted earnings per share.  For the three and nine months ended September 30, 2014, options of 1,254,842 shares and 1,111,128 shares, respectively, were antidilutive and excluded from the calculation of diluted earnings per share. 

 

(2)

Due to the net loss for the three and nine months ended September 30, 2015,  1,469,380 shares and 1,472,379 shares, respectively, of restricted stock were antidilutive and excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2014, 27,916 shares and 24,215 shares, respectively, of restricted stock were antidilutive and excluded from the calculation of diluted earnings per share. 

 

(3)

Due to the net loss for the three and nine months ended September 30, 2015, 89,802 shares and 135,836 shares, respectively, of performance units were antidilutive and excluded from the calculation of diluted earnings per share.

 

(4)

Due to the net loss for the three and nine months ended September 30, 2015,  74,999,895 and 69,505,397 of weighted average common shares issuable upon the assumed conversion of the mandatory convertible preferred stock, respectively, were antidilutive and excluded from the calculation of diluted earnings per share.

 

 

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(6) DERIVATIVES AND RISK MANAGEMENT

 

The Company is exposed to volatility in market prices and basis differentials for natural gas and oil which impacts the predictability of its cash flows related to the sale of natural gas, NGLs and oil. These risks are managed by the Company’s use of certain derivative financial instruments.  As of September  30, 2015 and December 31, 2014, the Company’s derivative financial instruments consisted of fixed price swaps, floating 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.

 

 

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.

 

All derivatives are recognized in the balance sheet as either an asset or liability and are measured at fair value other than transactions for which normal purchase/normal sale is applied. 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. In the period of settlement, the Company recognizes the gains and losses from these qualifying hedges in operating revenues. Gains and losses on derivatives that are not designated for hedge accounting treatment or that do not meet hedge accounting requirements are recorded in earnings as a component of gain (loss) on derivatives. Within the gain (loss) on derivatives component of the statement of operations are gains (losses) on derivatives excluding derivatives, settled and gains (losses) on derivatives, settled. The Company calculates gains (losses) on derivatives, settled, as the summation of gains and losses on positions which have settled within the period.

 

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.

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The balance sheet classification of the assets related to derivative financial instruments are summarized below as of September  30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

September 30, 2015

 

December 31, 2014

 

 

Balance Sheet Classification

 

Fair Value

 

Balance Sheet Classification

 

Fair Value

 

 

(in millions)

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

 

Derivative assets

 

$

55 

 

Derivative assets

 

$

165 

Total derivatives designated as hedging instruments

 

 

 

$

55 

 

 

 

$

165 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Basis swaps

 

Derivative assets

 

$

 

Derivative assets

 

$

Fixed price swaps

 

Derivative assets

 

 

54 

 

Derivative assets

 

 

163 

Basis swaps

 

Other long-term assets

 

 

–  

 

Other long-term assets

 

 

Interest rate swaps

 

Other long-term assets

 

 

–  

 

Other long-term assets

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

57 

 

 

 

$

174 

 

 

 

 

 

 

 

 

 

 

 

Total derivative assets

 

 

 

$

112 

 

 

 

$

339 

 

 

 

 

 

Derivative Liabilities

 

 

September 30, 2015

 

December 31, 2014

 

 

Balance Sheet Classification

 

Fair Value

 

Balance Sheet Classification

 

Fair Value

 

 

(in millions)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Basis swaps

 

Derivative liabilities