SWN Q1 2016 10-Q

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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 March 31, 2016



 

 

 

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:  001-08246

Picture 1

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 April 19, 2016

Common Stock, Par Value $0.01

392,666,629







 

 


 

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SOUTHWESTERN ENERGY COMPANY



INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016



 

 

PART I – FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements



Condensed Consolidated Statements of Operations



Condensed Consolidated Statements of Comprehensive Income



Condensed Consolidated Balance Sheets



Condensed Consolidated Statements of Cash Flows



Condensed Consolidated Statements of Changes in Equity



Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

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

27 



Results of Operations

29 



Liquidity and Capital Resources

33 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37 

Item 4.

Controls and Procedures

38 



 

 

PART II – OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

38 

Item 1A.

Risk Factors

38 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38 

Item 3.

Defaults Upon Senior Securities

38 

Item 4.

Mine Safety Disclosures

38 

Item 5.

Other Information

38 

Item 6.

Exhibits

39 







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,” “intend,” “plan,” “project,” “estimate,” “continue,” “potential,” “should,” “could,” “may,” “will,” “objective,” “guidance,” “outlook,” “effort,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “forecast,” “target” or similar words.



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:



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·

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

·

our ability to fund our planned capital investments;

·

a change in our credit rating;

·

the extent to which lower commodity prices impact our ability to service or refinance our existing debt;

·

the impact of volatility in the financial markets or other global economic factors;

·

difficulties in appropriately allocating capital and resources among our strategic opportunities;

·

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

·

our ability to maintain leases that may expire if production is not established or profitability maintained;

·

our ability to realize the expected benefits from recent acquisitions;

·

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

·

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

·

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 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;

·

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



March 31,



2016

 

2015



(in millions, except share/per share amounts)

Operating Revenues:

 

 

 

 

 

Gas sales

$

315 

 

$

625 

Oil sales

 

11 

 

 

17 

NGL sales

 

17 

 

 

18 

Marketing

 

198 

 

 

225 

Gas gathering

 

38 

 

 

48 



 

579 

 

 

933 

Operating Costs and Expenses:

 

 

 

 

 

Marketing purchases

 

196 

 

 

222 

Operating expenses

 

165 

 

 

155 

General and administrative expenses

 

54 

 

 

68 

Restructuring charges

 

64 

 

 

–  

Depreciation, depletion and amortization

 

143 

 

 

293 

Impairment of natural gas and oil properties

 

1,034 

 

 

–  

Taxes, other than income taxes

 

23 

 

 

30 



 

1,679 

 

 

768 

Operating Income (Loss)

 

(1,100)

 

 

165 

Interest Expense:

 

 

 

 

 

Interest on debt

 

53 

 

 

50 

Other interest charges

 

 

 

49 

Interest capitalized

 

(41)

 

 

(48)



 

14 

 

 

51 



 

 

 

 

 

Other Loss, Net

 

(3)

 

 

(1)

Gain (Loss) on Derivatives

 

(14)

 

 

14 



 

 

 

 

 

Income (Loss) Before Income Taxes

 

(1,131)

 

 

127 

Provision for Income Taxes:

 

 

 

 

 

Deferred

 

 

 

49 



 

 

 

 

 

Net Income (Loss)

$

(1,132)

 

$

78 

Mandatory convertible preferred stock dividend

 

27 

 

 

25 

Participating securities - mandatory convertible preferred stock

 

–  

 

 

Net Income (Loss) Attributable to Common Stock

$

(1,159)

 

$

46 



 

   

 

 

   

Earnings (Loss) Per Common Share:

 

 

 

 

 

Basic

$

(3.03)

 

$

0.12 

Diluted

$

(3.03)

 

$

0.12 



 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

Basic

 

382,870,847 

 

 

375,444,030 

Diluted

 

382,870,847 

 

 

375,578,054 







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



March 31,



2016

 

2015



(in millions)

Net income (loss)

$

(1,132)

 

$

78 



 

 

 

 

 

Change in derivatives:

 

 

 

 

 

Settlements (1) 

 

–  

 

 

(25)

Change in fair value of derivative instruments (2)

 

–  

 

 

17 

Total change in derivatives

 

–  

 

 

(8)



Change in value of pension and other postretirement liabilities:

 

 

 

 

 

Amortization of prior service cost and net loss included in net periodic pension cost (3)

 

 

 

–  



 

 

 

 

 

Change in currency translation adjustment

 

 

 

(6)



 

 

 

 

 

Comprehensive income (loss)

$

(1,128)

 

$

64 

(1)

Net of ($17) million in taxes for the three months ended March 31, 2015. 

(2)

Net of $7 million in taxes for the three months ended March 31, 2015.

(3)

Net of $1 million in taxes for the three months ended March 31, 2016.



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)



March 31,

 

December 31,



2016

 

2015

ASSETS

(in millions)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,597 

 

$

15 

Accounts receivable, net

 

224 

 

 

327 

Derivative assets

 

35 

 

 

Other current assets

 

28 

 

 

48 

Total current assets

 

1,884 

 

 

393 

Natural gas and oil properties, using the full cost method, including $3,505 million as of March 31, 2016 and $3,727  million as of December 31, 2015 excluded from amortization

 

22,610 

 

 

22,478 

Gathering systems

 

1,281 

 

 

1,280 

Other

 

602 

 

 

606 

Less: Accumulated depreciation, depletion and amortization

 

(18,002)

 

 

(16,821)

Total property and equipment, net

 

6,491 

 

 

7,543 

Other long-term assets

 

143 

 

 

150 

TOTAL ASSETS

$

8,518 

 

$

8,086 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

$

 

$

Accounts payable

 

346 

 

 

513 

Taxes payable

 

52 

 

 

64 

Interest payable

 

32 

 

 

75 

Dividends payable

 

27 

 

 

27 

Derivative liabilities

 

 

 

Other current liabilities

 

12 

 

 

24 

Total current liabilities

 

478 

 

 

707 

Long-term debt

 

6,442 

 

 

4,704 

Deferred income taxes

 

 

 

–  

Pension and other postretirement liabilities

 

50 

 

 

50 

Other long-term liabilities

 

398 

 

 

343 

Total long-term liabilities

 

6,892 

 

 

5,097 

Commitments and contingencies (Note 11)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value; 1,250,000,000 shares authorized;  issued 389,673,678 shares as of March 31, 2016 (does not include 3,024,737 shares declared as a stock dividend on March 16, 2016 and issued on April 15, 2016)  and 390,138,549 as of December 31, 2015

 

 

 

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 as of March 31, 2016 and December 31, 2015, conversion in January 2018

 

–  

 

 

–  

Additional paid-in capital

 

3,403 

 

 

3,409 

Accumulated deficit

 

(2,214)

 

 

(1,082)

Accumulated other comprehensive loss

 

(44)

 

 

(48)

Common stock in treasury, 31,269 shares as of March 31, 2016 and 47,149 shares as of December 31, 2015, respectively

 

(1)

 

 

(1)

Total equity

 

1,148 

 

 

2,282 

TOTAL LIABILITIES AND EQUITY

$

8,518 

 

$

8,086 



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 three months ended



March 31,



2016

 

2015



(in millions)

Cash Flows From Operating Activities

 

 

 

 

 

Net income (loss)

$

(1,132)

 

$

78 

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

 

 

 

 

 

Depreciation, depletion and amortization

 

143 

 

 

293 

Impairment of natural gas and oil properties

 

1,034 

 

 

–  

Amortization of debt issuance costs

 

 

 

46 

Deferred income taxes

 

 

 

49 

Loss on derivatives, net of settlement

 

21 

 

 

21 

Stock-based compensation

 

 

 

Restructuring charges

 

42 

 

 

–  

Other

 

 

 

–  

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

103 

 

 

38 

Accounts payable

 

(124)

 

 

(35)

Taxes payable

 

(12)

 

 

(20)

Interest payable

 

(11)

 

 

(1)

Other assets and liabilities

 

11 

 

 

66 

Net cash provided by operating activities

 

92 

 

 

541 



 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Capital investments

 

(196)

 

 

(508)

Acquisitions

 

–  

 

 

(591)

Proceeds from sale of property and equipment

 

 –  

 

 

Other

 

 –  

 

 

Net cash used in investing activities

 

(196)

 

 

(1,095)



 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Payments on short-term debt

 

 –  

 

 

(4,500)

Payments on revolving credit facility

 

(864)

 

 

(830)

Borrowings under revolving credit facility

 

2,600 

 

 

1,330 

Payments on commercial paper

 

(242)

 

 

–  

Borrowings under commercial paper

 

242 

 

 

–  

Change in bank drafts outstanding

 

(19)

 

 

(7)

Proceeds from issuance of long-term debt

 

–  

 

 

2,200 

Debt issuance costs

 

 –  

 

 

(17)

Proceeds from issuance of common stock

 

   

 

 

669 

Proceeds from issuance of mandatory convertible preferred stock

 

 –  

 

 

1,673 

Preferred stock dividend

 

(27)

 

 

–                     

Other

 

(4)

 

 

–  

Net cash provided by financing activities

 

1,686 

 

 

518 



 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

1,582 

 

 

(36)

Cash and cash equivalents at beginning of year

 

15 

 

 

53 

Cash and cash equivalents at end of period 

$

1,597 

 

$

17 



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)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Shares Issued

 

Amount

 

Shares

 

Additional Paid-In Capital

 

Accumulated Deficit

 

Accumulated Other Comprehensive Income (Loss)

 

Common Stock in Treasury

 

Total



(in millions, except share amounts)

Balance at December 31, 2015

390,138,549 

 

$

 

1,725,000 

 

$

3,409 

 

$

(1,082)

 

$

(48)

 

$

(1)

 

$

2,282 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

–  

 

 

–  

 

–  

 

 

–  

 

 

(1,132)

 

 

–  

 

 

–  

 

 

(1,132)

Other comprehensive income

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

 

 

–  

 

 

Total comprehensive loss

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

(1,128)

Stock-based compensation

–  

 

 

–  

 

–  

 

 

26 

 

 

–  

 

 

–  

 

 

–  

 

 

26 

Preferred stock dividend

–  

 

 

–  

 

–  

 

 

(27)

 

 

–  

 

 

–  

 

 

–  

 

 

(27)

Issuance of restricted stock

84,165 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(24,333)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Tax withholding – stock compensation

(524,703)

 

 

–  

 

–  

 

 

(5)

 

 

–  

 

 

–  

 

 

–  

 

 

(5)

Balance at March 31, 2016

389,673,678 

 

$

 

1,725,000 

 

$

3,403 

 

$

(2,214)

 

$

(44)

 

$

(1)

 

$

1,148 



The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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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 Pennsylvania, West Virginia and Arkansas.  



The Company’s operations in northeast Pennsylvania are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale (herein referred to as “Northeast Appalachia”), its operations in West Virginia and southwest Pennsylvania are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs (herein referred to as “Southwest Appalachia”) and its operations in Arkansas are primarily focused on an unconventional natural gas reservoir known as the Fayetteville Shale. Collectively, the Company’s properties located in Pennsylvania and West Virginia are herein referred to as the “Appalachian Basin.”  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 has exploration and production activities ongoing in Colorado and Louisiana, along with other areas in which it is currently exploring for new development opportunities.  The Company also has drilling rigs in Pennsylvania, West Virginia and Arkansas, as well as in other operating areas, 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, 2015 (“2015 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 2015 Annual Report.



Certain reclassifications have been made to the prior year financial statements to conform to the 2016 presentation.  The effects of the reclassifications were not material to the Company’s unaudited condensed consolidated financial statements. 







(2)  CASH AND CASH EQUIVALENTS



The following table presents a summary of Cash and cash equivalents as of March 31, 2016 and December 31, 2015:





 

 

 

 

 



 

 

 

 

 



March 31,

 

December 31,



2016

 

2015



 

(in millions)



 

 

 

 

 

Cash

$

57 

 

$

15 

Marketable securities

 

1,540 

 

 

 

Total cash and cash equivalents

$

1,597 

 

$

15 



On March 30, 2016, the Company borrowed $1.55 billion on its revolving credit facility with the proceeds invested in marketable securities.  The $1.55 billion borrowing was repaid on April 1, 2016.  For related discussion see Note 10 to the unaudited condensed consolidated financial statements included in this Quarterly Report.



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(3) REDUCTION IN WORKFORCE



In January 2016, the Company announced a 40% workforce reduction of approximately 1,100 employees as a result of lower anticipated drilling activity.  This reduction was substantially complete as of March 31, 2016.  The following table presents a summary of the restructuring charges for the three months ended March 31, 2016:



 

 



 

 



For the three months



ended March 31, 2016



(in millions)



 

 

Severance (including payroll taxes)

$

42 

Stock-based compensation

 

18 

Benefits

 

Outplacement services, other

 

Total restructuring charges (1)

$

64 

(1)

Total restructuring charges were $61 million and $3 million for the Company’s E&P and Midstream segments, respectively.

As of March 31, 2016, the Company recorded a liability of $24 million for severance payments (including payroll taxes) which is reflected in accounts payable on the condensed consolidated balance sheets.  A substantial portion of this liability will be paid in April 2016.



(4) ACQUISITIONS AND DIVESTITURES



In May 2015, the Company sold conventional oil and gas assets located in East Texas and the Arkoma Basin for approximately $211 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 the Company’s debt.  Approximately $205 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.



In April 2015, the Company sold its gathering assets located in Bradford and Lycoming counties in northeast 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 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.



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.  The firm transport is being amortized over 19 years. As of March 31, 2016 and December 31, 2015 the Company has amortized $10 million and $8 million, respectively.  This transaction was funded with the revolving credit facility and was accounted for as a business combination.



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 $357 million, (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 $357 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 oil and gas 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 (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

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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.



(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 properties.   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 are subject to a ceiling test that limits such pooled costs, net of applicable deferred taxes, to the aggregate of the present value of future net revenues attributable to proved natural gas, oil and NGL reserves discounted at 10%  (standardized measure) 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, oil and NGL prices may subsequently increase the ceiling.  Companies using the full cost method are required to 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 $2.40 per MMBtu, West Texas Intermediate oil of $42.77 per barrel and NGLs of $5.76 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 $641 million (net of tax) at March 31, 2016 and resulted in a non-cash ceiling test impairment.  The Company had no hedge positions accounted for as cash flow hedges as of March 31, 2016.  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 average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $3.88 per MMBtu, West Texas Intermediate oil of $79.21 per barrel and NGLs of $16.38 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 March 31, 2015.  Cash flow hedges of natural gas production in place increased the ceiling amount by approximately $45 million as of March 31, 2015.    In the second, third and fourth quarters 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, $1,746 million (net of tax) at September 30, 2015 and $1,586 million (net of tax) at December 31, 2015, resulting in non-cash ceiling test impairments in each quarter.



(6) 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 the reportable period.   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 holder 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

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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.



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.



On March 16, 2016, the Company declared its quarterly dividend, payable to holders of the mandatory convertible preferred stock, and announced that it would pay the dividend in common stock, in lieu of cash, to the extent permitted by the certificate of designations for the Series B preferred stock.  The Company issued 3,024,737 shares of common stock on April 15, 2016 in payment of the dividend.



The following table presents the computation of earnings per share for the three months ended March 31, 2016 and 2015:









 

 

 

 

 

 



 

For the three months ended



 

March 31,



 

2016

 

2015



 

(in millions, except share/per share amounts)

Net income (loss)

 

$

(1,132)

 

$

78 

Mandatory convertible preferred stock dividend

 

 

27 

 

 

25 

Net income (loss) attributable to shareholders

 

 

(1,159)

 

 

53 

Participating securities - mandatory convertible preferred stock

 

 

–  

 

 

Net income (loss) attributable to common stock

 

$

(1,159)

 

$

46 



 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

Weighted average outstanding

 

 

382,870,847 

 

 

375,444,030 

Issued upon assumed exercise of outstanding stock options (1)

 

 

–  

 

 

–  

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

 

 

–  

 

 

133,634 

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

 

 

–  

 

 

390 

Effect of issuance of mandatory convertible preferred stock (4)

 

 

–  

 

 

–  

Effect of declaration of preferred stock dividends (5)

 

 

–  

 

 

–  

Weighted average and potential dilutive outstanding

 

 

382,870,847 

 

 

375,578,054 



 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

Basic

 

$

($3.03)

 

$

0.12 

Diluted

 

$

($3.03)

 

$

0.12 

(1)

Due to the net loss for the three months ended March 31, 2016, the unvested stock options were not recognized in diluted earnings per share calculations as they would be antidilutive.  Options for 5,732,521 shares and 3,704,089 shares were excluded from the calculation of diluted shares for the three months ended March 31, 2016 and 2015, respectively, because they would have had an antidilutive effect.

(2)

Due to the net loss for the three months ended March 31, 2016, the unvested share-based payments were not recognized in diluted earnings per share calculations as they would be antidilutive.  The calculation excluded 5,779,820 shares and 1,916,645 shares of restricted stock for the three months ended March 31, 2016 and 2015, respectively, because they would have had an antidilutive effect. 

(3)

For the three months ended March 31, 2016, 297,297 shares of performance units were excluded from the calculation of diluted earnings per share as they would be antidilutive.

(4)

For the three months ended March 31, 2016 and 2015, 74,999,895 and 58,333,252, respectively, of weighted average common shares issuable upon the assumed conversion of the mandatory convertible preferred stock were excluded from the diluted earnings per share calculation as they would be antidilutive.

(5)

Due to the net loss for the three months ended March 31, 2016, 3,024,737 shares of common stock declared as preferred stock dividends were excluded from the diluted earnings per share calculations as they would have had an antidilutive effect.



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(7) DERIVATIVES AND RISK MANAGEMENT



The Company is exposed to volatility in market prices and basis differentials for natural gas, oil and NGLs which impacts the predictability of its cash flows related to the sale of those commodities.   These risks are managed by the Company’s use of certain derivative financial instruments.  As of March 31, 2016, the Company’s derivative financial instruments consisted of fixed price swaps, sold call options, purchased put options and interest rate swaps.  The Company also had basis swaps and sold call options as of December 31, 2015.  The basis swaps settled in the first quarter of 2016. 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.



 

Sold call options

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



 

Purchased put options

The Company purchases put options from the counterparty by payment of a cash premium.  If the market price is lower than the put’s strike price at the time of settlement, the Company receives from the counterparty such difference on purchased put options.  If the market price settles above the put’s strike price, no payment is 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.



 

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.



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.



The following table provides information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect the Company’s exposure.  None of the financial instruments below are designated for hedge accounting treatment.  The table presents the notional amount in Bcf, the weighted average contract prices and the fair value by expected maturity dates as of March 31, 2016.







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Weighted Average Price per MMBtu

 

 

 



Volume (Bcf)

 

Swaps

 

Purchased Puts

 

Sold Calls

 

Fair value at March 31, 2016
($ in millions)

Natural Gas:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Price Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

64 

 

$

2.48 

 

$

–  

 

$

–  

 

$

20 

Purchased Put Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

43 

 

$

–  

 

$

2.35 

 

$

–  

 

$

15 

Sold Call Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

90 

 

$

–  

 

$

–  

 

$

5.00 

 

$

–  

2017

86 

 

$

–  

 

$

–  

 

$

3.25 

 

$

(16)

2018

63 

 

$

–  

 

$

–  

 

$

3.50 

 

$

(12)

2019

52 

 

$

–  

 

$

–  

 

$

3.50 

 

$

(13)

2020

32 

 

$

–  

 

$

–  

 

$

3.75 

 

$

(9)



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The balance sheet classification of the assets related to derivative financial instruments (none of which are designated for hedge accounting) are summarized below as of March  31, 2016  and December 31, 2015:







 

 

 

 

 

 

 

 



 

Derivative Assets



 

Balance Sheet Classification

 

Fair Value



 

 

 

March 31, 2016

 

December 31, 2015



 

 

(in millions)



 

 

 

 

 

 

 

 

Basis swaps

 

Derivative assets

 

$

–  

 

$

Fixed price swaps

 

Derivative assets

 

 

20 

 

 

–  

Purchased put options

 

Derivative assets

 

 

15 

 

 

–  

Total derivative assets

 

 

 

$

35 

 

$



 

 



 

Derivative Liabilities



 

Balance Sheet Classification

 

Fair Value



 

 

 

March 31, 2016

 

December 31, 2015



 

 

 

(in millions)



 

 

 

 

 

 

 

 

Sold call options

 

Derivative liabilities

 

$

 

$

–  

Interest rate swaps

 

Derivative liabilities

 

 

 

 

Sold call options

 

Other long-term liabilities

 

 

45 

 

 

–  

Interest rate swaps

 

Other long-term liabilities

 

 

 

 

Total derivative liabilities

 

 

 

$

58 

 

$



At March 31, 2016, the net fair value of the Company’s financial instruments related to natural gas was a  $15 million liability.  The net fair value of the Company’s interest rate swaps was an $8 million liability at March 31, 2016.



Derivative Contracts not Designated for Hedge Accounting



As of March 31, 2016, the Company did not have any positions designated for hedge accounting treatment.  Gains and losses on derivatives that are not designated for hedge accounting treatment, or that do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the condensed consolidated statements of operations.   Accordingly, the gain (loss) on derivatives component of the statements of operations reflects the gains and losses on both settled and unsettled derivatives.  The Company calculates gains and losses on settled derivatives as the summation of gains and losses on positions which have settled within the reporting period.  Only the settled gains and losses are included in the Company’s realized commodity price calculations.



The Company is a party to interest rate swaps that were entered into to mitigate the Company’s exposure to volatility in interest rates.  The interest rate swaps have a notional amount of $170 million and expire in June 2020.  The Company did not designate the interest rate swaps for hedge accounting.  Changes in the fair value of the interest rate swaps are included in gain (loss) on derivatives in the unaudited condensed consolidated statements of operations.



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The following tables summarize the before tax effect of fixed price swaps, basis swaps, sold call options, purchased put options and interest rate swaps not designated for hedge accounting on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Gain (Loss) on Derivatives,



 

 

 

Unsettled



 

 

 

Recognized in Earnings



 

Consolidated Statement of Operations

 

For the three months ended



 

Classification of Gain (Loss) on

 

March 31,

Derivative Instrument

 

Derivatives, Unsettled

 

2016

 

2015



 

 

 

(in millions)

Basis swaps

 

Gain (Loss) on Derivatives

 

$

(3)

 

$

(8)

Sold call options

 

Gain (Loss) on Derivatives

 

 

(50)

 

 

Purchased put options

 

Gain (Loss) on Derivatives

 

 

15 

 

 

–  

Fixed price swaps

 

Gain (Loss) on Derivatives

 

 

20 

 

 

(18)

Interest rate swaps

 

Gain (Loss) on Derivatives

 

 

(3)

 

 

(3)



 

 

 

 

 

 

 

 

Total loss on unsettled derivatives

 

$

(21)

 

$

(21)



 

 

 

 

 

 

 

 



 

 

 

Gain (Loss)



 

 

 

on Derivatives, Settled (1)



 

 

 

Recognized in Earnings



 

Consolidated Statement of Operations

 

For the three months ended



 

Classification of Gain (Loss)

 

March 31,

Derivative Instrument

 

on Derivatives, Settled (1)

 

2016

 

2015



 

 

 

(in millions)

Basis swaps

 

Gain (Loss) on Derivatives

 

$

 

$

(6)

Fixed price swaps

 

Gain (Loss) on Derivatives

 

 

 

 

42 

Interest rate swaps

 

Gain (Loss) on Derivatives

 

 

(1)

 

 

(1)



 

 

 

 

 

 

 

 

Total gain on settled derivatives (2)

 

$

 

$

35 



 

 

 

 

 

 

Total gain (loss) on derivatives

 

$

(14)

 

$

14 

(1)

The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions that have settled within the period.

(2)

These amounts are included, along with gas sales revenues, in the calculation of the Company’s realized natural gas price.



Derivative Contracts Designated for Hedge Accounting



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 designated for hedge accounting.  Accounting guidance for qualifying hedges allows an unsettled derivative’s unrealized gains and losses to be recorded either in earnings or as a component of other comprehensive income until settled.  In the period of settlement, the Company recognizes the gains and losses from these qualifying hedges in operating revenues.  In 2015, the Company had certain fixed price swaps that were designated for hedge accounting.  For the three months ended March 31, 2015, the Company reported a gain in other comprehensive income of $24 million (pre-tax) related to the effective portion of our unsettled fixed price swaps.  The ineffective portion of those fixed price swaps was recognized in earnings and had an inconsequential impact to the unaudited condensed consolidated statement of operations for the three ended March 31, 2015.  During the first quarter of 2015, a gain of $42 million (pre-tax) on settled fixed price swaps was transferred from other comprehensive income into gas sales revenues in the consolidated statements of operations.  As of March 31, 2016, the Company did not have any positions designated for hedge accounting treatment.



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(8) RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME



The following tables detail the components of accumulated other comprehensive income (loss) and the related tax effects for the three months ended March  31, 2016:







 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended



 

March 31, 2016



 

Pension and Other Postretirement

 

 

Foreign Currency

 

 

Total



 

(in millions) (1)

Beginning balance at December 31, 2015

 

$

(25)

 

 

$

(23)

 

 

$

(48)



 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications

 

 

 –  

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from other comprehensive income (loss) (2)

 

 

 

 

 

–  

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive loss

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Ending balance at March 31, 2016

 

$

(24)

 

 

$

(20)

 

 

$

(44)

(1)

All amounts are net of tax.

(2)

See separate table below for details about these reclassifications.















 

 

 

 

 

Details about Accumulated
Other Comprehensive Income

 

Affected Line Item in the Consolidated Statement of Operations

 

 

Amount Reclassified from Accumulated Other Comprehensive Income



 

 

 

 

For the three months ended
March 31, 2016



 

 

 

 

(in millions)

Pension and other postretirement

 

 

 

 

 

Amortization of prior service cost and net loss (1)

 

General and administrative expenses

 

$



 

Provision for income taxes

 

 

Total reclassifications for the period

 

Net loss

 

$



(1)

See Note 12 for additional details regarding the Company’s retirement and employee benefit plans.



(9) FAIR VALUE MEASUREMENTS



The carrying amounts and estimated fair values of the Company’s financial instruments as of March  31, 2016 and December 31, 2015 were as follows:





 

 

 

 

 

 

 

 

 

 

 



March 31, 2016

 

December 31, 2015



Carrying

 

Fair

 

Carrying

 

Fair



Amount

 

Value

 

Amount

 

Value



(in millions)

Cash and cash equivalents

$

1,597 

 

$

1,597 

 

$

15 

 

$

15 

Credit facility

 

1,852 

 

 

1,852 

 

 

116 

 

 

116 

Term loan facility

 

748 

 

 

748 

 

 

747 

 

 

747 

Senior notes

 

3,843 

 

 

2,729 

 

 

3,842 

 

 

2,651 

Derivative instruments, net

 

(23)

 

 

(23)

 

 

(2)

 

 

(2)



The carrying values of cash and cash equivalents, accounts receivable, accounts payable, other current assets and current liabilities on the unaudited condensed consolidated balance sheets approximate fair value because of their short-term nature.  For debt and derivative instruments, the following methods and assumptions were used to estimate fair value:



Debt:  The fair values of the Company’s senior notes were based on the market value of the Company’s publicly traded debt as determined based on the yield of the Company’s senior notes.





The carrying values of the borrowings under the Company’s unsecured revolving credit and term loan facilities approximate fair value because the interest rate is variable and reflective of market rates.  The Company considers the fair value of its debt to be a Level 2 measurement on the fair value hierarchy. 



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Derivative Instruments:  The fair value of all derivative instruments is the amount at which the instrument could be exchanged currently between willing parties.  The amounts are based on quoted market prices, best estimates obtained from counterparties and an option pricing model, when necessary, for price option contracts.



The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:



Level 1 valuations - Consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority.



Level 2 valuations - Consist of quoted market information for the calculation of fair market value.



Level 3 valuations - Consist of internal estimates and have the lowest priority.



The Company has classified its derivatives into these levels depending upon the data utilized to determine their fair values.  The Company’s fixed price swaps (Level 2) are estimated using third-party discounted cash flow calculations using the NYMEX futures index.  The Company utilized discounted cash flow models for valuing its interest rate derivatives (Level 2).  The net derivative values attributable to the Company's interest rate derivative contracts as of March 31, 2016 are based on (i) the contracted notional amounts, (ii) active market-quoted London Interbank Offered Rate (“LIBOR”) yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.  The Company’s sold call options and purchased put options (Level 3) are valued using the Black-Scholes model, an industry standard option valuation model that takes into account inputs such as contract terms, including maturity, and market parameters, including assumptions of the NYMEX futures index, interest rates, volatility and credit worthiness.  The Company’s basis swaps (Level 3) are estimated using third-party calculations based upon forward commodity price curves.



Inputs to the Black-Scholes model, including the volatility input, which is the significant unobservable input for