20180630 10Q Q2

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, 2018



 

 

 

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 2

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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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 31, 2018



Common Stock, Par Value $0.01

 

 

586,302,472

 

 


 

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SOUTHWESTERN ENERGY COMPANY



INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018



 

 

PART I – FINANCIAL INFORMATION

Page



 

 

Item 1.

Financial Statements



Condensed Consolidated Statements of Operations



Condensed Consolidated Statements of Comprehensive Income (Loss)



Condensed Consolidated Balance Sheets



Condensed Consolidated Statements of Cash Flows



Condensed Consolidated Statements of Changes in Equity



Notes to Unaudited Condensed Consolidated Financial Statements



 

Note 1. Basis of Presentation



 

Note 2. Revenue Recognition



 

Note 3. Reduction in Workforce

10 



 

Note 4. Cash and Cash Equivalents

11 



 

Note 5. Natural Gas and Oil Properties

11 



 

Note 6. Earnings per Share

12 



 

Note 7. Derivatives and Risk Management

13 



 

Note 8. Reclassifications From Accumulated Other Comprehensive Income (Loss)

17 



 

Note 9. Fair Value Measurements

18 



 

Note 10. Debt

20 



 

Note 11. Commitments and Contingencies

23 



 

Note 12. Pension Plan and Other Postretirement Benefits

25 



 

Note 13. Stock-Based Compensation

25 



 

Note 14. Segment Information

28 



 

Note 15. Income Taxes

30 



 

Note 16. New Accounting Pronouncements

31 



 

Note 17. Condensed Consolidated Financial Information

32 

Item 2.

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

39 



Results of Operations

41 



Liquidity and Capital Resources

49 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53 

Item 4.

Controls and Procedures

54 



 

 

PART II – OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

55 

Item 1A.

Risk Factors

55 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55 

Item 3.

Defaults Upon Senior Securities

55 

Item 4.

Mine Safety Disclosures

55 

Item 5.

Other Information

55 

Item 6.

Exhibits

56 



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,

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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:

·

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 profitably maintained;

·

our ability to realize the expected benefits from acquisitions;

·

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

·

availability and costs of personnel and of products and services provided by third parties;

·

the impact of laws and government regulation, including the ability to obtain and maintain permits, any increase in severance or similar taxes, and legislation and judicial or administrative decisions relating to hydraulic fracturing, climate change, other environmental matters and over-the-counter derivatives;

·

the impact of the adverse outcome of any material litigation against us or involving our industry;

·

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,

(in millions, except share/per share amounts)

2018

 

2017

 

2018

 

2017

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gas sales

$

407 

 

$

471 

 

$

947 

 

$

974 

Oil sales

 

44 

 

 

23 

 

 

79 

 

 

46 

NGL sales

 

75 

 

 

37 

 

 

140 

 

 

77 

Marketing

 

265 

 

 

250 

 

 

518 

 

 

503 

Gas gathering

 

24 

 

 

30 

 

 

48 

 

 

57 

Other

 

 

 

−   

 

 

 

 

–  



 

816 

 

 

811 

 

 

1,736 

 

 

1,657 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Marketing purchases

 

265 

 

 

253 

 

 

520 

 

 

504 

Operating expenses

 

193 

 

 

164 

 

 

382 

 

 

311 

General and administrative expenses

 

59 

 

 

58 

 

 

114 

 

 

108 

Restructuring charges

 

18 

 

 

–   

 

 

18 

 

 

–  

Depreciation, depletion and amortization

 

142 

 

 

123 

 

 

285 

 

 

229 

Taxes, other than income taxes

 

15 

 

 

25 

 

 

38 

 

 

51 



 

692 

 

 

623 

 

 

1,357 

 

 

1,203 

Operating Income

 

124 

 

 

188 

 

 

379 

 

 

454 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

59 

 

 

59 

 

 

124 

 

 

117 

Other interest charges

 

 

 

 

 

 

 

Interest capitalized

 

(29)

 

 

(28)

 

 

(57)

 

 

(56)



 

32 

 

 

34 

 

 

71 

 

 

66 



 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) on Derivatives

 

(36)

 

 

134 

 

 

(43)

 

 

250 

Loss on Early Extinguishment of Debt

 

(8)

 

 

(10)

 

 

(8)

 

 

(11)

Other Income, Net

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

51 

 

 

284 

 

 

259 

 

 

635 

Provision (Benefit) for Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

Current

 

–   

 

 

–   

 

 

−  

 

 

–  

Deferred

 

–   

 

 

–   

 

 

−  

 

 

 –  



 

–   

 

 

–   

 

 

−  

 

 

–  

Net Income

$

51 

 

$

284 

 

$

259 

 

$

635 

Mandatory convertible preferred stock dividend

 

–   

 

 

27 

 

 

−  

 

 

54 

Participating securities - mandatory convertible preferred stock

 

–   

 

 

33 

 

 

 

 

76 

Net Income Attributable to Common Stock

$

51 

 

$

224 

 

$

257 

 

$

505 



 

 

 

 

 

 

 

   

 

 

   

Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.09 

 

$

0.45 

 

$

0.45 

 

$

1.02 

Diluted

$

0.09 

 

$

0.45 

 

$

0.44 

 

$

1.02 



 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

581,159,200 

 

 

496,419,815 

 

 

576,255,744 

 

 

494,753,391 

Diluted

 

582,878,106 

 

 

498,224,599 

 

 

578,222,740 

 

 

496,627,843 



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,

(in millions)

2018 (1)

 

2017

 

2018 (1)

 

2017

Net income

$

51 

 

$

284 

 

$

259 

 

$

635 



 

 

 

 

 

 

 

 

 

 

 

Change in value of pension and other postretirement liabilities:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and net loss included in net periodic pension cost (2)

 

–  

 

 

 

 

–  

 

 



 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

51 

 

$

285 

 

$

259 

 

$

636 

(1)

In 2018, deferred tax activity incurred in other comprehensive income was offset by a valuation allowance.

(2)

Net of less than $1 million in taxes for the three and six months ended June 30, 2018 and 2017.



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,



2018

 

2017

ASSETS

(in millions)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

37 

 

$

916 

Accounts receivable, net

 

416 

 

 

428 

Derivative assets

 

71 

 

 

130 

Other current assets

 

43 

 

 

35 

Total current assets

 

567 

 

 

1,509 

Natural gas and oil properties, using the full cost method, including $1,835 million as of June 30, 2018 and $1,817 million as of December 31, 2017 excluded from amortization

 

24,611 

 

 

23,890 

Gathering systems

 

1,322 

 

 

1,315 

Other

 

576 

 

 

564 

Less: Accumulated depreciation, depletion and amortization

 

(20,276)

 

 

(19,997)

Total property and equipment, net

 

6,233 

 

 

5,772 

Other long-term assets

 

242 

 

 

240 

TOTAL ASSETS

$

7,042 

 

$

7,521 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

642 

 

$

533 

Taxes payable

 

58 

 

 

62 

Interest payable

 

68 

 

 

70 

Dividends payable

 

–  

 

 

27 

Derivative liabilities

 

66 

 

 

64 

Other current liabilities

 

24 

 

 

24 

Total current liabilities

 

858 

 

 

780 

Long-term debt

 

3,570 

 

 

4,391 

Pension and other postretirement liabilities

 

55 

 

 

58 

Other long-term liabilities

 

309 

 

 

313 

Total long-term liabilities

 

3,934 

 

 

4,762 

Commitments and contingencies (Note 11)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value; 1,250,000,000 shares authorized; issued 586,430,101 shares as of June 30, 2018 and 512,134,311 as of December 31, 2017

 

 

 

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 December 31, 2017, converted to common stock on January 12, 2018

 

–  

 

 

–  

Additional paid-in capital

 

4,709 

 

 

4,698 

Accumulated deficit

 

(2,420)

 

 

(2,679)

Accumulated other comprehensive loss

 

(44)

 

 

(44)

Common stock in treasury, 31,269  shares as of June 30, 2018 and December 31, 2017

 

(1)

 

 

(1)

Total equity

 

2,250 

 

 

1,979 

TOTAL LIABILITIES AND EQUITY

$

7,042 

 

$

7,521 



 

 

 

 

 

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 six months ended



June 30,



2018

 

2017



(in millions)

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

$

259 

 

$

635 

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

 

 

 

 

 

Depreciation, depletion and amortization

 

285 

 

 

229 

Amortization of debt issuance costs

 

 

 

(Gain) loss on derivatives, unsettled

 

54 

 

 

(319)

Stock-based compensation

 

 

 

12 

Loss on early extinguishment of debt

 

 

 

11 

Other

 

 

 

(4)

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

12 

 

 

12 

Accounts payable

 

53 

 

 

Taxes payable

 

(4)

 

 

Interest payable

 

(1)

 

 

(4)

Inventories

 

(7)

 

 

(2)

Other assets and liabilities

 

(9)

 

 

(3)

Net cash provided by operating activities

 

664 

 

 

578 



 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Capital investments

 

(684)

 

 

(619)

Proceeds from sale of property and equipment

 

 

 

12 

Other

 

 

 

Net cash used in investing activities

 

(675)

 

 

(606)



 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Payments on long-term debt

 

(1,191)

 

 

(287)

Payments on revolving credit facility

 

(645)

 

 

–  

Borrowings under revolving credit facility

 

1,005 

 

 

–  

Change in bank drafts outstanding

 

–  

 

 

Debt issuance costs

 

(9)

 

 

–  

Preferred stock dividend

 

(27)

 

 

–  

Cash paid for tax withholding

 

(1)

 

 

–  

Net cash used in financing activities

 

(868)

 

 

(284)



 

 

 

 

 

Decrease in cash and cash equivalents

 

(879)

 

 

(312)

Cash and cash equivalents at beginning of year

 

916 

 

 

1,423 

Cash and cash equivalents at end of period

$

37 

 

$

1,111 



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

 

 

Additional

 

 

 

 

 

Accumulated Other

 

 

Common

 

 

 



Shares

 

 

 

 

Shares

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stock in

 

 

 



Issued

 

 

Amount

 

Issued

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Treasury

 

 

Total



(in millions, except share amounts)

Balance at December 31, 2017

512,134,311 

 

$

 

1,725,000 

 

$

4,698 

 

$

(2,679)

 

$

(44)

 

$

(1)

 

$

1,979 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

–  

 

 

–  

 

–  

 

 

–  

 

 

259 

 

 

–  

 

 

–  

 

 

259 

Other comprehensive income

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Total comprehensive income

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

259 

Stock-based compensation

–  

 

 

–  

 

–  

 

 

13 

 

 

–  

 

 

–  

 

 

–  

 

 

13 

Conversion of preferred stock

74,998,614 

 

 

 

(1,725,000)

 

 

(1)

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Issuance of restricted stock

312,819 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(882,633)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Performance units vested

214,866 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Tax withholding – stock compensation

(347,876)

 

 

–  

 

–  

 

 

(1)

 

 

–  

 

 

–  

 

 

–  

 

 

(1)

Balance at June 30, 2018

586,430,101 

 

$

 

–  

 

$

4,709 

 

$

(2,420)

 

$

(44)

 

$

(1)

 

$

2,250 



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, oil and NGL 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.



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 on Form 10-K for the year ended December 31, 2017 (“2017 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 2017 Annual Report.



Certain reclassifications have been made to the prior year financial statements to conform to the 2018 presentation.  The effects of the reclassifications were not material to the Company’s unaudited condensed consolidated financial statements.



(2) REVENUE RECOGNITION



Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no material adjustment was required as a result of adopting ASC 606.  Results for reporting periods beginning on January 1, 2018 are presented under the new revenue standard.  The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The Company performed an analysis of the impact of adopting ASC 606 across all revenue streams and did not identify any changes to its revenue recognition policies that would result in a material impact to its consolidated financial statements.



Revenues from Contracts with Customers



Natural gas and liquids.  Natural gas, oil and natural gas liquid (“NGL”) sales are recognized when control of the product is transferred to the customer at a designated delivery point.  The pricing provisions of the Company’s contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, quality of the product and prevailing supply and demand conditions in the geographic areas in which the Company operates.  Under the Company’s sales contracts, the delivery of each unit of natural gas, oil and NGLs represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled.  There is no significant financing component to the Company’s revenues as payment terms are typically within 30 to 60 days of control transfer.  Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date.  As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.

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The Company records revenue from its natural gas and liquids production in the amount of its net revenue interest in sales from its properties.  Accordingly, natural gas and liquid sales are not recognized for deliveries in excess of the Company’s net revenue interest, while natural gas and liquid sales are recognized for any under-delivered volumes.  Production imbalances are recorded as receivables and payables and not contract assets or contract liabilities as the imbalances are between the Company and other working interest owners, not the end customer.



Marketing.    The Company, through its marketing affiliate, generally markets natural gas, oil and NGLs for its affiliated E&P companies as well as other joint interest owners who choose to market with Southwestern.  In addition, the Company markets some products purchased from third parties.  Marketing revenues for natural gas, crude oil and NGL sales are recognized when control of the product is transferred to the customer at a designated delivery point.  The pricing provisions of the Company’s contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, quality of the product and prevailing supply and demand conditions.  Under the Company’s marketing contracts, the delivery of each unit of natural gas, oil and NGLs represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled.  Customers are invoiced and revenues are recorded each month as natural gas, oil and NGLs are delivered, and payment terms are typically within 30 to 60 days of control transfer.  Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date.  As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.



Gas gathering.    In certain areas, the Company, through its gathering affiliate, gathers natural gas pursuant to a variety of contracts with customers, including an affiliated E&P company.  The performance obligations for gas gathering services include delivery of each unit of natural gas to the designated delivery point, which may include treating of certain natural gas units to meet interstate pipeline specifications.  Revenue is recognized at the point in time when performance obligations are fulfilled.  Under the Company’s gathering contracts, customers are invoiced and revenue is recognized each month based on the volume of natural gas transported and treated at a contractually agreed upon price per unit.  Payment terms are typically within 30 to 60 days of completion of the performance obligations.  Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date.  As a result, the Company recognizes revenue in the amount to which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.  Any imbalances are settled on a monthly basis by cashing-out with the respective shipper.  Accordingly, there are no contract assets or contract liabilities related to the Company’s gas gathering revenues.



Disaggregation of Revenues



The Company presents a disaggregation of E&P revenues by product on the unaudited condensed consolidated statements of operations net of intersegment revenues.  The following table reconciles operating revenues as presented on the unaudited condensed consolidated statements of operations to the operating revenues by segment:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Intersegment

 

 

 

(in millions)

 

 

E&P

 

 

Midstream

 

 

Revenues

 

 

Total

Three months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Gas sales

 

$

400 

 

$

–  

 

$

 

$

407 

Oil sales

 

 

44 

 

 

–  

 

 

–  

 

 

44 

NGL sales

 

 

75 

 

 

–  

 

 

–  

 

 

75 

Marketing

 

 

–  

 

 

728 

 

 

(463)

 

 

265 

Gas gathering

 

 

–  

 

 

69 

 

 

(45)

 

 

24 

Other (1)

 

 

 

 

−  

 

 

–  

 

 

Total

 

$

520 

 

$

797 

 

$

(501)

 

$

816 



 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Gas sales

 

$

466 

 

$

–  

 

$

 

$

471 

Oil sales

 

 

23 

 

 

–  

 

 

–  

 

 

23 

NGL sales

 

 

37 

 

 

–  

 

 

–  

 

 

37 

Marketing

 

 

–  

 

 

740 

 

 

(490)

 

 

250 

Gas gathering

 

 

–  

 

 

82 

 

 

(52)

 

 

30 

Total

 

$

526 

 

$

822 

 

$

(537)

 

$

811 



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Intersegment

 

 

 

(in millions)

 

 

E&P

 

 

Midstream

 

 

Revenues

 

 

Total

Six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Gas sales

 

$

935 

 

$

–  

 

$

12 

 

$

947 

Oil sales

 

 

78 

 

 

–  

 

 

 

 

79 

NGL sales

 

 

140 

 

 

–  

 

 

 –  

 

 

140 

Marketing

 

 

–  

 

 

1,557 

 

 

(1,039)

 

 

518 

Gas gathering

 

 

–  

 

 

136 

 

 

(88)

 

 

48 

Other (1)

 

 

 

 

 –  

 

 

−  

 

 

Total

 

$

1,157 

 

$

1,693 

 

$

(1,114)

 

$

1,736 



 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Gas sales

 

$

966 

 

$

–  

 

$

 

$

974 

Oil sales

 

 

46 

 

 

–  

 

 

–  

 

 

46 

NGL sales

 

 

77 

 

 

–  

 

 

–  

 

 

77 

Marketing

 

 

–  

 

 

1,517 

 

 

(1,014)

 

 

503 

Gas gathering

 

 

–  

 

 

163 

 

 

(106)

 

 

57 

Total

 

$

1,089 

 

$

1,680 

 

$

(1,112)

 

$

1,657 



(1)

Other E&P revenues consists primarily of water sales to third-party operators.



Associated E&P revenues are also disaggregated for analysis on a geographic basis by the core areas in which the Company operates, which are in Pennsylvania, West Virginia and Arkansas.  Operations in northeast Pennsylvania are referred to as “Northeast Appalachia,” operations in West Virginia and southwest Pennsylvania are referred to as “Southwest Appalachia” and operations in Arkansas are referred to as the “Fayetteville Shale.”







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended June 30,

 

For the six months ended June 30,

(in millions)

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Northeast Appalachia

 

$

213 

 

$

216 

 

$

540 

 

$

469 

Southwest Appalachia

 

 

166 

 

 

110 

 

 

322 

 

 

214 

Fayetteville Shale

 

 

139 

 

 

198 

 

 

291 

 

 

403 

Other

 

 

 

 

 

 

 

 

Total

 

$

520 

 

$

526 

 

$

1,157 

 

$

1,089 



Receivables from Contracts with Customers



The following table reconciles the Company’s receivables from contracts with customers to consolidated accounts receivable as presented on the unaudited condensed consolidated balance sheet:





 

 

 

 

 

 



 

 

 

 

 

 

(in millions)

 

 

June 30, 2018

 

 

December 31, 2017

Receivables from contracts with customers

 

$

305 

 

$

322 

Other accounts receivable

 

 

111 

 

 

106 

Total accounts receivable

 

$

416 

 

$

428 



Amounts recognized against the Company’s allowance for doubtful accounts related to receivables arising from contracts with customers were immaterial for the three and six months ended June 30, 2018 and 2017.  The Company has no contract assets or contract liabilities associated with its revenues from contracts with customers.



(3) REDUCTION IN WORKFORCE



On June 27, 2018, the Company notified affected employees of a workforce reduction plan, which resulted primarily from a previously announced study of structural, process and organizational changes to enhance shareholder value and continues with respect to other aspects the Company’s business activities.  Affected employees were offered a severance package, which included a one-time cash payment depending on length of service and, if applicable, current value of a portion of equity awards that were forfeited.  The plan has been substantially implemented.  The following table presents a summary of the restructuring charges for the three and six months ended June 30, 2018:

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For the three and six months ended

(in millions)

June 30, 2018

Severance (including payroll taxes) (1)

$

17 

Professional fees

 

Total restructuring charges (2)

$

18 



(1)

Includes approximately $2 million in cash severance payments related to the approximate fair value of a portion of unvested stock-based awards that were subsequently cancelled and approximately $358,000 in non-cash stock-based compensation.



(2)

Total restructuring charges were $16 million and $2 million for the Company’s E&P and Midstream segments, respectively.



As of June 30, 2018, the Company recorded a liability of $18 million for severance payments (including payroll taxes) which is reflected in accounts payable on the unaudited condensed consolidated balance sheet.  Most of this liability is being paid in the third quarter of 2018.



(4) CASH AND CASH EQUIVALENTS



The following table presents a summary of cash and cash equivalents as of June 30, 2018 and December 31, 2017:





 

 

 

 

 

 



 

 

 

 

 

 

(in millions)

 

June 30, 2018

 

 

December 31, 2017

 

Cash

$

20 

 

$

261 

 

Marketable securities (1)

 

17 

 

 

605 

 

Other cash equivalents

 

–  

 

 

50 

(2)

Total

$

37 

 

$

916 

 

(1)

Primarily consists of government stable value money market funds.

(2)

Consists of time deposits.

 

(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).  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.



Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $2.92 per MMBtu, West Texas Intermediate oil of $54.15 per barrel and NGLs of $15.56 per barrel, adjusted for differentials, the Company’s net book value of its United States natural gas and oil properties did not exceed the ceiling amount at June 30, 2018.  The Company had no hedge positions that were designated for hedge accounting as of June 30, 2018.  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 $3.01 per MMBtu, West Texas Intermediate oil of $45.42 per barrel and NGLs of $10.90 per barrel, adjusted for differentials, the Company’s net book value of its United States natural gas and oil properties did not exceed the ceiling amount at June 30, 2017.  The Company had no hedge positions that were designated for hedge accounting as of June 30, 2017.





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(6)  EARNINGS PER SHARE



Basic earnings per common share is computed by dividing net income 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, 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 issued 34,500,000 depositary shares that entitled the holder to a proportional fractional interest in the rights and preferences of the mandatory convertible preferred stock, including conversion, dividend, liquidation and voting rights.  The mandatory convertible preferred stock had 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, therefore, was considered a participating security.  Accordingly, it has been 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, earnings are allocated to participating securities 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 January 12, 2018, all outstanding shares of mandatory convertible preferred stock converted to 74,998,614 shares of the Company’s common stock.

 

On December 18, 2017, the Company declared the quarterly dividend, which was paid to holders of the mandatory convertible preferred stock in cash on January 16, 2018.  Dividends declared in the first, second and third quarters of 2017 were settled partially in common stock for a total of 10,040,306 shares.

 

The following table presents the computation of earnings per share for the three and six months ended June 30, 2018 and 2017:





 

 

 

 

 

 

 

 

 

 

 



For the three months ended

June 30,

 

For the six months ended

June 30,

(in millions, except share/per share amounts)

2018

 

2017

 

2018

 

2017

Net income

$

51 

 

$

284 

 

$

259 

 

$

635 

Mandatory convertible preferred stock dividend

 

–  

 

 

27 

 

 

–  

 

 

54 

Participating securities - mandatory convertible preferred stock

 

−  

 

 

33 

 

 

 

 

76 

Net income attributable to common stock

$

51 

 

$

224 

 

$

257 

 

$

505 



 

 

 

 

 

 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding

 

581,159,200 

 

 

496,419,815 

 

 

576,255,744 

 

 

494,753,391 

Issued upon assumed exercise of outstanding stock options

 

–  

 

 

–  

 

 

–  

 

 

3,317 

Effect of issuance of non-vested restricted common stock

 

480,580 

 

 

761,311 

 

 

683,562 

 

 

707,576 

Effect of issuance of non-vested performance units

 

1,238,326 

 

 

1,043,473 

 

 

1,283,434 

 

 

1,163,559 

Weighted average and potential dilutive outstanding

 

582,878,106 

 

 

498,224,599 

 

 

578,222,740 

 

 

496,627,843