SWN Q2 2016 10-Q

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 June  30, 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 July 19, 2016

Common Stock, Par Value $0.01

493,455,527







 

 


 

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SOUTHWESTERN ENERGY COMPANY



INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016



 

 

PART I – FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements

3



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

30



Results of Operations

32



Liquidity and Capital Resources

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

43



 

 

PART II – OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults Upon Senior Securities

44

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45







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;

·

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

 

For the six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015



(in millions, except share/per share amounts)

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gas sales

$

251 

 

$

457 

 

$

566 

 

$

1,082 

Oil sales

 

20 

 

 

24 

 

 

31 

 

 

41 

NGL sales

 

20 

 

 

15 

 

 

37 

 

 

33 

Marketing

 

196 

 

 

222 

 

 

394 

 

 

447 

Gas gathering

 

35 

 

 

46 

 

 

73 

 

 

94 



 

522 

 

 

764 

 

 

1,101 

 

 

1,697 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Marketing purchases

 

197 

 

 

219 

 

 

393 

 

 

441 

Operating expenses

 

151 

 

 

176 

 

 

316 

 

 

331 

General and administrative expenses

 

56 

 

 

60 

 

 

110 

 

 

128 

Restructuring charges

 

11 

 

 

–  

 

 

75 

 

 

–  

Depreciation, depletion and amortization

 

107 

 

 

308 

 

 

250 

 

 

601 

Impairment of natural gas and oil properties

 

470 

 

 

1,535 

 

 

1,504 

 

 

1,535 

Gain on sale of assets, net

 

–  

 

 

(277)

 

 

–  

 

 

(277)

Taxes, other than income taxes

 

22 

 

 

27 

 

 

45 

 

 

57 



 

1,014 

 

 

2,048 

 

 

2,693 

 

 

2,816 

Operating Loss

 

(492)

 

 

(1,284)

 

 

(1,592)

 

 

(1,119)

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

56 

 

 

52 

 

 

109 

 

 

102 

Other interest charges

 

 

 

 

 

 

 

52 

Interest capitalized

 

(41)

 

 

(54)

 

 

(82)

 

 

(102)



 

17 

 

 

 

 

31 

 

 

52 



 

 

 

 

 

 

 

 

 

 

 

Other Income (Loss), Net

 

–   

 

 

 

 

(3)

 

 

Gain (Loss) on Derivatives

 

(85)

 

 

 

 

(99)

 

 

15 



 

 

 

 

 

 

 

 

 

 

 

Loss Before Income Taxes

 

(594)

 

 

(1,281)

 

 

(1,725)

 

 

(1,154)

Provision (Benefit) for Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

Current

 

–  

 

 

 

 

 –  

 

 

Deferred

 

(1)

 

 

(500)

 

 

–  

 

 

(451)



 

(1)

 

 

(493)

 

 

–  

 

 

(444)

Net Loss

$

(593)

 

$

(788)

 

$

(1,725)

 

$

(710)

Mandatory convertible preferred stock dividend

 

27 

 

 

27 

 

 

54 

 

 

52 

Net Loss Attributable to Common Stock

$

(620)

 

$

(815)

 

$

(1,779)

 

$

(762)



 

 

 

 

 

 

 

   

 

 

   

Loss Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(1.61)

 

$

(2.13)

 

$

(4.63)

 

$

(2.01)

Diluted

$

(1.61)

 

$

(2.13)

 

$

(4.63)

 

$

(2.01)



 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

385,594,815 

 

 

382,114,011 

 

 

384,232,831 

 

 

378,797,446 

Diluted

 

385,594,815 

 

 

382,114,011 

 

 

384,232,831 

 

 

378,797,446 







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 six months ended



June 30,

 

 

June 30,



2016

 

2015

 

2016

 

2015



(in millions)

Net loss

$

(593)

 

$

(788)

 

$

(1,725)

 

$

(710)



 

 

 

 

 

 

 

 

 

 

 

Change in derivatives:

 

 

 

 

 

 

 

 

 

 

 

Settlements (1) 

 

–  

 

 

(33)

 

 

–  

 

 

(58)

Change in fair value of derivative instruments (2)

 

–  

 

 

(4)

 

 

–  

 

 

13 

Total change in derivatives

 

–  

 

 

(37)

 

 

–  

 

 

(45)



 

 

 

 

 

 

 

 

 

 

 

Change in value of pension and other postretirement liabilities:

 

 

 

 

 

 

 

 

 

 

 

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

 

(1)

 

 

–  

 

 

–  

 

 

–  

Net gain incurred in period (4)

 

 

 

–  

 

 

 

 

–  



 

 

 

 

 

 

 

 

 

 

 

Change in currency translation adjustment

 

–  

 

 

 

 

 

 

(4)



 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

$

(590)

 

$

(823)

 

$

(1,718)

 

$

(759)













(1)

Net of ($20) million and ($37) million in taxes for the three and six months ended June 30, 2015. 

(2)

Net of $1 million and $8 million in taxes for the three and six months ended June 30, 2015.

(3)

Net of $1 million in taxes for the six months ended June 30, 2016.

(4)

Net of $1 million in taxes for the three and six months ended June 30, 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)





June 30,

 

December 31,



2016

 

2015

ASSETS

(in millions)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

998 

 

$

15 

Accounts receivable, net

 

235 

 

 

327 

Derivative assets

 

16 

 

 

Other current assets

 

29 

 

 

48 

Total current assets

 

1,278 

 

 

393 

Natural gas and oil properties, using the full cost method, including $3,382 million as of June 30, 2016 and $3,727 million as of December 31, 2015 excluded from amortization

 

22,657 

 

 

22,478 

Gathering systems

 

1,280 

 

 

1,280 

Other

 

592 

 

 

606 

Less: Accumulated depreciation, depletion and amortization

 

(18,582)

 

 

(16,821)

Total property and equipment, net

 

5,947 

 

 

7,543 

Other long-term assets

 

152 

 

 

150 

TOTAL ASSETS

$

7,377 

 

$

8,086 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

$

 

$

Accounts payable

 

296 

 

 

513 

Taxes payable

 

61 

 

 

64 

Interest payable

 

75 

 

 

75 

Dividends payable

 

27 

 

 

27 

Derivative liabilities

 

76 

 

 

Other current liabilities

 

55 

 

 

24 

Total current liabilities

 

591 

 

 

707 

Long-term debt

 

5,767 

 

 

4,704 

 Pension and other postretirement liabilities

 

51 

 

 

50 

 Other long-term liabilities

 

395 

 

 

343 

Total long-term liabilities

 

6,213 

 

 

5,097 

Commitments and contingencies (Note 11)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value; 1,250,000,000 shares authorized; issued
392,496,825 (1) shares as of June 30, 2016 (does not include 2,100,119 shares declared as a stock dividend on June 14, 2016 to be issued on July 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 June 30, 2016 and December 31, 2015, conversion in January 2018

 

–  

 

 

–  

Additional paid-in capital

 

3,418 

 

 

3,409 

Accumulated deficit

 

(2,807)

 

 

(1,082)

Accumulated other comprehensive loss

 

(41)

 

 

(48)

Common stock in treasury, 31,269 shares as of June 30, 2016 and 47,149 shares as of December 31, 2015, respectively

 

(1)

 

 

(1)

Total equity

 

573 

 

 

2,282 

TOTAL LIABILITIES AND EQUITY

$

7,377 

 

$

8,086 



(1)    Does not include 98,900,000 shares of common stock issued in July 2016.



The accompanying notes are an integral part of these

unaudited consolidated financial statements.





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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



 

 

 

 

 



For the six months ended



June 30,



2016

 

2015



(in millions)

Cash Flows From Operating Activities

 

 

 

 

 

Net loss

$

(1,725)

 

$

(710)

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

 

 

 

 

 

Depreciation, depletion and amortization

 

250 

 

 

603 

Impairment of natural gas and oil properties

 

1,504 

 

 

1,535 

Amortization of debt issuance costs

 

 

 

49 

Deferred income taxes

 

–  

 

 

(451)

Loss on derivatives, net of settlement

 

129 

 

 

71 

Stock-based compensation

 

17 

 

 

12 

Gain on sale of assets, net

 

–  

 

 

(277)

Restructuring charges

 

29 

 

 

–  

Other

 

 

 

–  

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

92 

 

 

162 

Inventories

 

(7)

 

 

–  

Accounts payable

 

(139)

 

 

(22)

Taxes payable

 

(3)

 

 

(30)

Interest payable

 

–  

 

 

14 

Other assets and liabilities

 

 

 

(16)

Net cash provided by operating activities

 

165 

 

 

940 



 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Capital investments

 

(241)

 

 

(974)

Acquisitions

 

–  

 

 

(569)

Proceeds from sale of property and equipment

 

54 

 

 

703 

Other

 

 

 

10 

Net cash used in investing activities

 

(186)

 

 

(830)



 

 

 

 

 

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

 

(3,268)

 

 

(1,534)

Borrowings under revolving credit facility

 

3,152 

 

 

1,804 

Payments on commercial paper

 

(242)

 

 

(1,182)

Borrowings under commercial paper

 

242 

 

 

1,288 

Change in bank drafts outstanding

 

(21)

 

 

(1)

Proceeds from issuance of long-term debt

 

1,191 

 

 

2,200 

Debt issuance costs

 

(16)

 

 

(17)

Proceeds from issuance of common stock

 

–  

 

 

669 

Proceeds from issuance of mandatory convertible preferred stock

 

–  

 

 

1,673 

Preferred stock dividend

 

(27)

 

 

(25)

Other

 

(6)

 

 

–  

Net cash provided by (used in) financing activities

 

1,004 

 

 

(126)



 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

983 

 

 

(16)

Cash and cash equivalents at beginning of year

 

15 

 

 

53 

Cash and cash equivalents at end of period

$

998 

 

$

37 



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

 

 

 

 

 

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stock in

 

 

 



Issued

 

Amount

 

Shares

 

Capital

 

Deficit

 

Income (Loss)

 

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

–  

 

 

–  

 

–  

 

 

–  

 

 

(1,725)

 

 

–  

 

 

–  

 

 

(1,725)

Other comprehensive income

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

 

 

–  

 

 

Total comprehensive loss

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

(1,718)

Stock-based compensation

–  

 

 

–  

 

–  

 

 

42 

 

 

–  

 

 

–  

 

 

–  

 

 

42 

Preferred stock dividend

3,024,737 

 

 

–  

 

–  

 

 

(27)

 

 

–  

 

 

–  

 

 

 

 

 

(27)

Issuance of restricted stock

84,165 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(89,095)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Tax withholding – stock compensation

(661,531)

 

 

–  

 

–  

 

 

(6)

 

 

–  

 

 

–  

 

 

–  

 

 

(6)

Balance at June 30, 2016

392,496,825 

 

$

 

1,725,000 

 

$

3,418 

 

$

(2,807)

 

$

(41)

 

$

(1)

 

$

573 



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 is also focused on creating and capturing additional value through its natural gas gathering and marketing businesses (“Midstream”).  Southwestern conducts most of its businesses through subsidiaries and operates principally in two segments: E&P and Midstream.



Exploration and Production.    Southwestern’s primary business is the exploration for and production of natural gas and oil, with current operations principally focused on the development of unconventional natural gas reservoirs located in Pennsylvania, West Virginia and Arkansas.  The Company’s operations in northeast Pennsylvania, herein referred to as “Northeast Appalachia,” are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale.  Operations in West Virginia and southwest Pennsylvania, herein referred to as “Southwest Appalachia,” are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs.  Collectively, Southwestern refers to its properties located in Pennsylvania and West Virginia as the “Appalachian Basin.”  The Company’s operations in Arkansas are primarily focused on an unconventional natural gas reservoir known as the Fayetteville Shale.  Southwestern 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 located in Pennsylvania, West Virginia and Arkansas and provides oilfield products and services, principally serving its E&P operations.



Midstream.  Through the Company’s affiliated midstream subsidiaries, Southwestern engages in natural gas gathering activities in Arkansas and Louisiana.  These activities primarily support the Company’s E&P operations and generate revenue from fees associated with the gathering of natural gas.  Southwestern’s marketing activities capture opportunities that arise through the marketing and transportation of the natural gas, oil and NGLs produced in its E&P operations.



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. 









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(2) CASH AND CASH EQUIVALENTS



The following table presents a summary of cash and cash equivalents as of June 30, 2016 and December 31, 2015:





 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2016

 

2015



(in millions)



 

 

 

 

 

Cash

$

12 

 

$

15 

Marketable securities (1)

 

986 

 

 

 

Total cash and cash equivalents

$

998 

 

$

15 

(1)

Consists of money market funds.



(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 completed in the first quarter of 2016In April 2016, the Company also partially restructured executive management, which was substantially completed in the second quarter of 2016.



The following table presents a summary of the restructuring charges for the three and six months ended June  30, 2016:





 

 

 

 

 

 



 

For the three

months ended

 

For the six

months ended



 

June 30, 2016

 

June 30, 2016



 

(in millions)

Severance (including payroll taxes) (1)

 

$

 

$

44 

Stock-based compensation (2)

 

 

 

 

24 

Pension and other postretirement benefits (3)

 

 

 

 

Other benefits

 

 

–  

 

 

Outplacement services, other

 

 

–  

 

 

Total restructuring charges (4)

 

$

11 

 

$

75 

(1)Includes $1 million related to executive management restructuring for the three and six months ended June 30, 2016.

(2)

Includes $3 million related to executive management restructuring for the three and six months ended June 30, 2016.

(3)

Includes non-cash charges related to the curtailment and settlement of the pension and other postretirement benefit plans. See Note 12 for additional details regarding the Company’s retirement and employee benefit plans.

(4)

Total restructuring charges were $11 million and less than $1 million for the Company’s E&P and Midstream segments, respectively, for the three months ended June 30, 2016. For the six months ended June 30, 2016, restructuring charges were $72 million and $3 million for the Company’s E&P and Midstream segments, respectively.



The following table presents a summary of liabilities associated with the Company’s restructuring activities at June 30, 2016, which are reflected in accounts payable on the unaudited condensed consolidated balance sheet (in millions):





 

 

 

Liability at March 31, 2016

 

$

24 

Additions

 

 

Distributions

 

 

(24)

Liability at June 30, 2016

 

$



Severance payments and other separation costs related to restructuring will be completed by the end of the fourth quarter, resulting in the recognition of approximately $0.5 million of additional expense in the second half of 2016.











(4) ACQUISITIONS AND DIVESTITURES



In June 2016, the Company entered into a definitive agreement with Antero Resources Corporation to sell approximately 55,000 net acres in West Virginia for $450 million, subject to customary adjustments.  The net book value of these assets is in the full cost pool and was held in the E&P segment as of June 30, 2016.  The transaction is expected to close in the third quarter of 2016, subject to customary closing conditions and purchase price adjustments.  At June 30, 2016, a $45 million deposit from Antero Resources Corporation was included in other current liabilities within the unaudited condensed consolidated balance sheet.  The Company intends to use $375 million of proceeds from the sale for general corporate purposes, including to fund capital projects, and to use the remainder to reduce indebtedness.

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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 included 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 June  30, 2016 and December 31, 2015 the Company has amortized $13 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 of 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 were also assets in which the Company had 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 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, 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 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 designated for hedge accounting, 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 $2.24 per MMBtu, West Texas Intermediate oil of $39.63 per barrel and NGLs of $5.87 per barrel, adjusted for market differentials, the Company’s net book value of its United States and Canada natural gas and oil properties exceeded the ceiling by $297 million (net of tax) at June 30, 2016 and resulted in a non-cash ceiling test impairment.  The Company had no hedge positions that were designated for hedge accounting as of June  30, 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 $3.39 per MMBtu, West Texas Intermediate oil of $68.17 per barrel and NGLs of $12.53 per barrel, adjusted for market differentials, the net book value of the Company’s United States natural gas and oil properties exceeded the ceiling by $944 million (net of tax) at June 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 $60 million as of June 30, 2015.  In the 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 $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. In the first quarter of 2016, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $641 million (net of tax) at March 31, 2016, resulting in a non-cash ceiling test impairment in the 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, the assumed conversion of mandatory convertible preferred stock and the shares of common stock declared as a preferred stock dividend.   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 July 2016, the Company completed an underwritten public offering of 98,900,000 shares of its common stock, with an offering price to the public of $13.00 per share. Net proceeds, after underwriting discount and offering expenses, from the common stock offering were approximately $1,247 million.  The proceeds from the offering were used to repay $375 million of the $750 million term loan entered into in November 2015 and to settle certain tender offers by purchasing an aggregate principal amount of approximately $700 million of the Company’s outstanding senior notes due in the first quarter of 2018.  The remaining proceeds of the offering will be used for general corporate purposes.  The 98,900,000 shares of common stock were issued in July 2016 and are therefore not included in the outstanding common stock share counts or earnings per share calculations for the quarter ended June 30, 2016.



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 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 total potential shares of common stock resulting from the conversion will range from 63,829,830 to 74,999,895 shares.



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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.



On June 14, 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 2,100,119 shares of common stock on July 15, 2016 in payment for the dividend.



The following table presents the computation of earnings per share for the three and six months ended June 30, 2016 and 2015:









 

 

 

 

 

 

 

 

 

 

 



For the three months ended

 

For the six months ended



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015



(in millions, except share/per share amounts)

Net loss

$

(593)

 

$

(788)

 

$

(1,725)

 

$

(710)

Mandatory convertible preferred stock dividend

 

27 

 

 

27 

 

 

54 

 

 

52 

Net loss attributable to shareholders

$

(620)

 

$

(815)

 

$

(1,779)

 

$

(762)



 

 

 

 

 

 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding

 

385,594,815 

 

 

382,114,011 

 

 

384,232,831 

 

 

378,797,446 

Issued upon assumed exercise of outstanding stock options (1)

 

–  

 

 

–  

 

 

–  

 

 

–  

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

 

–  

 

 

–  

 

 

–  

 

 

–  

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

 

–  

 

 

–  

 

 

–  

 

 

–  

Effect of issuance of mandatory convertible preferred stock (4)

 

–  

 

 

–  

 

 

–  

 

 

–  

Effect of declaration of preferred stock dividends (5)

 

 –  

 

 

–  

 

 

–  

 

 

–  

Weighted average and potential dilutive outstanding

 

385,594,815 

 

 

382,114,011 

 

 

384,232,831 

 

 

378,797,446 



 

 

 

 

 

 

 

 

 

 

 

Loss per common share (6):

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(1.61)

 

$

(2.13)

 

$

(4.63)

 

$

(2.01)

Diluted

$

(1.61)

 

$

(2.13)

 

$

(4.63)

 

$

(2.01)

(1)

Due to the net loss for the three and six months ended June 30, 2016 and 2015, the unvested stock options were not recognized in diluted earnings per share calculations as they would be antidilutive.  Options for 4,028,819 shares and 4,781,109 shares were excluded from the calculation of diluted shares for the three and six months ended June 30, 2016, respectively, because they would have had an antidilutive effect. Options for 3,832,533 shares and 3,768,666 shares were excluded from the calculation of diluted shares for the three and six months ended June 30, 2015, respectively, because they would have had an antidilutive effect.

(2)

Due to the net loss for the three and six months ended June 30, 2016 and 2015, the unvested share-based payments were not recognized in diluted earnings per share calculations as they would be antidilutive.  The calculation excluded 3,353,371 shares and 2,844,365 shares of restricted stock for the three and six months ended June 30, 2016, respectively, because they would have had an antidilutive effect. The calculation excluded 1,507,788 shares and 1,787,257 shares of restricted stock for the three and six months ended June 30, 2015, respectively, because they would have had an antidilutive effect.

(3)

Due to the net loss for the three and six months ended June 30,  2016, 780,920 shares and 577,624 shares, respectively, of performance units were excluded from the calculation of diluted earnings per share as they would have had an antidilutive effect. Due to the net loss for the three and six months ended June 30, 2015, the calculation excluded 129,202 shares and 116,185 shares, respectively, of performance units as they would have had an antidilutive effect.

(4)

Due to the net loss for the three and six months ended June 30,  2016, 74,999,895 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, respectively, as they would be antidilutive.  Due to the net loss for the three and six months ended June 30, 2015, 72,723,440 and 64,687,701 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, respectively, as they would be antidilutive.

(5)

Due to the net loss for the three months ended June 30, 2016, 2,100,119 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.

(6)

Does not include the effect of 98,900,000 shares of common stock issued in July 2016.





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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 June 30, 2016, the Company’s derivative financial instruments consisted of fixed price swaps, purchased put options, two-way costless collars, three-way costless collars, basis swaps, sold call options and interest rate swaps. The Company had basis swaps and sold call options as of December 31, 2015. 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.



 

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.



 

Two-way costless collars

Arrangements that contain a fixed floor price (purchased put option) and a fixed ceiling price (sold call option). At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor price and the ceiling price, no payments are due from either party, and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price.



 

Three-way costless collars

Arrangements that contain a two-way costless collar and a sold put option. At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the middle strike price and the ceiling price, no payments are due from either party, (3) if the index is between the lowest strike price and the middle strike price, the Company will receive the difference between the middle strike price and the index price, and (4) if the index price is below the floor price, the Company will receive the difference between the purchased put strike price and the sold put strike 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.



 

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.



 

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.



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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 June 30, 2016.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Weighted Average Price per MMBtu

 

 

 



Volume (Bcf)

 

Swaps

 

Sold Puts

 

Purchased Puts

 

Sold Calls

 

Basis Differential

 

Fair value at June 30, 2016 ($ in millions)

Financial protection on production

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

61 

 

$

2.57 

 

$

–  

 

$

–   

 

$

–   

 

$

–  

 

$

(24)

Purchased put options

17 

 

$

–  

 

$

–  

 

$

2.34 

 

$

–   

 

$

–  

 

$

–  

Two-way costless collars

12 

 

$

–  

   

$

–  

 

$

2.76 

 

$

3.35 

 

$

–  

 

$

(1)

Basis swaps

 

$

–  

 

$

–  

 

$

–   

 

$

–   

 

$

0.36 

 

$

Total

97 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(20)

2017 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

144 

 

$

3.07 

 

$

–  

 

$

–   

 

$

–   

 

$

–  

 

$

(16)

Two-way costless collars

47 

 

$

–  

 

$

–  

 

$

2.90 

 

$

3.33 

 

$

–  

 

$

(4)

Three-way costless collars

18 

 

$

–  

 

$

2.25 

 

$

2.75 

 

$

3.56 

 

$

–  

 

$

(2)

Basis swaps

15 

 

$

–  

 

$

–  

 

$

–   

 

$

–   

 

$

0.02 

 

$

(6)

Total

224