SWN Q3 2013 10-Q

 

 

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

 

 

 

 

 

Form 10-Q

 

 

 

 

(Mark One)

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

Exchange Act of 1934

For the quarterly period ended September 30, 2013

 

 

 

 

Or

 

 

 

 

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

Exchange Act of 1934

For the transition period from __________ to __________

 

 

 

 

Commission file number:  1-08246

 

 

Southwestern Energy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

71-0205415

(State or other jurisdiction of incorporation or organization)

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

 

 

 

 

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

77032

(Address of principal executive offices)

(Zip Code)

 

 

 

 

(281) 618-4700

(Registrant’s telephone number, including area code)

 

 

 

 

Not Applicable

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

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

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

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

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

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

Class

Outstanding as of October 29, 2013

Common Stock, Par Value $0.01

351,752,517

 


 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY

 

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

Item 2.

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

32

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

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5.

Other Information

46

Item 6.

Exhibits

46

 

 

 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

·

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

·

our ability to fund our planned capital investments;

·

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

·

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

1


 

 

 

·

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

·

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

·

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

·

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

·

our future property acquisition or divestiture activities;

·

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

·

the effects of weather;

·

increased competition and regulation;

·

the financial impact of accounting regulations and critical accounting policies;

·

the comparative cost of alternative fuels;

·

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

·

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

·

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

 

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

 

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

 

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

2


 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

 

(in thousands, except share/per share amounts)

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gas sales

$

617,427 

 

$

497,219 

 

$

1,736,101 

 

$

1,394,745 

Gas marketing

 

201,112 

 

 

148,764 

 

 

581,932 

 

 

423,503 

Oil sales

 

4,397 

 

 

1,889 

 

 

12,431 

 

 

6,097 

Gas gathering

 

45,430 

 

 

43,855 

 

 

133,592 

 

 

128,293 

 

 

868,366 

 

 

691,727 

 

 

2,464,056 

 

 

1,952,638 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Gas purchases – midstream services

 

195,271 

 

 

149,651 

 

 

575,337 

 

 

423,941 

Operating expenses

 

90,269 

 

 

61,906 

 

 

236,648 

 

 

179,478 

General and administrative expenses

 

50,969 

 

 

36,121 

 

 

135,754 

 

 

129,879 

Depreciation, depletion and amortization

 

204,934 

 

 

203,935 

 

 

571,268 

 

 

605,392 

Impairment of natural gas and oil properties

 

–  

 

 

289,821 

 

 

–  

 

 

1,090,473 

Taxes, other than income taxes

 

17,694 

 

 

16,252 

 

 

58,543 

 

 

51,154 

 

 

559,137 

 

 

757,686 

 

 

1,577,550 

 

 

2,480,317 

Operating Income (Loss)

 

309,229 

 

 

(65,959)

 

 

886,506 

 

 

(527,679)

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

25,435 

 

 

25,463 

 

 

74,581 

 

 

69,154 

Other interest charges

 

1,049 

 

 

1,058 

 

 

3,203 

 

 

3,096 

Interest capitalized

 

(15,466)

 

 

(15,915)

 

 

(48,467)

 

 

(45,945)

 

 

11,018 

 

 

10,606 

 

 

29,317 

 

 

26,305 

 

 

 

 

 

 

 

 

 

 

 

 

Other Gain (Loss), Net

 

(319)

 

 

238 

 

 

(498)

 

 

2,615 

Gain (Loss) on Derivatives

 

12,124 

 

 

(5,879)

 

 

75,779 

 

 

(10,593)

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

310,016 

 

 

(82,206)

 

 

932,470 

 

 

(561,962)

Provision for Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

Current

 

(16,068)

 

 

101 

 

 

402 

 

 

369 

Deferred

 

140,217 

 

 

(28,254)

 

 

373,055 

 

 

(210,850)

 

 

124,149 

 

 

(28,153)

 

 

373,457 

 

 

(210,481)

Net Income (Loss)

$

185,867 

 

$

(54,053)

 

$

559,013 

 

$

(351,481)

 

 

 

 

 

 

 

 

   

 

 

   

Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.53 

 

$

(0.16)

 

$

1.60 

 

$

(1.01)

Diluted

$

0.53 

 

$

(0.16)

 

$

1.59 

 

$

(1.01)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

350,517,337 

 

 

348,649,630 

 

 

350,334,634 

 

 

348,272,192 

Diluted

 

351,222,830 

 

 

348,649,630 

 

 

351,014,974 

 

 

348,272,192 

See the accompanying notes which are an integral part of these

unaudited condensed consolidated financial statements.

3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

For the nine months ended

 

September 30,

 

 

September 30,

 

2013

 

2012

 

 

2013

 

 

2012

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

185,867 

 

$

(54,053)

 

$

559,013 

 

$

(351,481)

 

 

 

 

 

 

 

 

 

 

 

 

Change in derivatives:

 

 

 

 

 

 

 

 

 

 

 

Settlements (1) 

 

(55,968)

 

 

(94,996)

 

 

(130,942)

 

 

(310,882)

Ineffectiveness (2)

 

872 

 

 

322 

 

 

1,310 

 

 

(1,215)

Change in fair value of derivative instruments (3)

 

7,509 

 

 

(36,468)

 

 

29,600 

 

 

93,985 

Total change in derivatives

 

(47,587)

 

 

(131,142)

 

 

(100,032)

 

 

(218,112)

 

 

 

 

 

 

 

 

 

 

 

 

Change in value of pension and other postretirement liabilities:

 

 

 

 

 

 

 

 

 

 

 

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

 

266 

 

 

254 

 

 

800 

 

 

762 

 

 

 

 

 

 

 

 

 

 

 

 

Change in currency translation adjustment

 

633 

 

 

997 

 

 

(1,814)

 

 

962 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

139,179 

 

$

(183,944)

 

$

457,967 

 

$

(567,869)

 

 

(1)

Net of ($37.3), ($62.2),  ($87.3) and ($202.6) million in taxes for the three months ended September 30, 2013 and 2012, and nine months ended September 30, 2013 and 2012, respectively. 

 

(2)

Net of $0.6,  $0.2,  $0.9 and ($0.8) million in taxes for the three months ended September 30, 2013 and 2012, and nine months ended September 30, 2013 and 2012, respectively. 

 

(3)

Net of $5.0,  ($22.1),  $19.7, and $62.7 million in taxes for the three months ended September 30, 2013 and 2012, and nine months ended September 30, 2013 and 2012, respectively.

 

(4)

Net of $0.2,  $0.2,  $0.5, and $0.5 million in taxes for the three months ended September 30, 2013 and 2012, and nine months ended September 30, 2013 and 2012, respectively. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes which are an integral part of these

unaudited condensed consolidated financial statements.

4


 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

ASSETS

(in thousands)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

18,950 

 

$

53,583 

Restricted cash

 

–  

 

 

8,542 

Accounts receivable

 

444,723 

 

 

377,638 

Inventories

 

43,225 

 

 

28,141 

Hedging asset

 

197,647 

 

 

282,693 

Other current assets

 

35,430 

 

 

58,315 

Total current assets

 

739,975 

 

 

808,912 

Natural gas and oil properties, using the full cost method, including $1,101.5

  million in 2013 and $1,023.9 million in 2012 excluded from amortization

 

12,863,859 

 

 

11,283,114 

Gathering systems

 

1,282,652 

 

 

1,148,261 

Other

 

677,042 

 

 

597,064 

Less: Accumulated depreciation, depletion and amortization

 

(7,786,820)

 

 

(7,191,463)

Total property and equipment, net

 

7,036,733 

 

 

5,836,976 

Other long-term assets

 

117,680 

 

 

91,639 

TOTAL ASSETS

$

7,894,388 

 

$

6,737,527 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

601,414 

 

$

459,569 

Taxes payable

 

48,263 

 

 

62,980 

Interest payable

 

14,049 

 

 

34,431 

Advances from partners

 

3,438 

 

 

68,919 

Current deferred income taxes

 

75,954 

 

 

106,123 

Other current liabilities

 

66,693 

 

 

35,749 

Total current liabilities

 

809,811 

 

 

767,771 

Long-term debt

 

1,911,165 

 

 

1,668,273 

Deferred income taxes

 

1,388,833 

 

 

1,049,138 

Pension and other postretirement liabilities

 

34,963 

 

 

33,174 

Other long-term liabilities

 

229,627 

 

 

183,299 

Total long-term liabilities

 

3,564,588 

 

 

2,933,884 

Commitments and contingencies (Note 11)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value; authorized 1,250,000,000 shares; issued 351,768,352

  shares in 2013 and 351,100,391 in 2012

 

3,517 

 

 

3,511 

Additional paid-in capital

 

960,058 

 

 

934,939 

Retained earnings

 

2,508,163 

 

 

1,949,150 

Accumulated other comprehensive income

 

48,758 

 

 

149,804 

Common stock in treasury, 14,625 shares in 2013 and 64,715 in 2012

 

(507)

 

 

(1,532)

Total equity

 

3,519,989 

 

 

3,035,872 

TOTAL LIABILITIES AND EQUITY

$

7,894,388 

 

$

6,737,527 

 

 

 

 

 

 

See the accompanying notes which are an integral part of these

unaudited condensed consolidated financial statements.

 

5


 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

For the nine months ended

 

September 30,

 

2013

 

2012

 

(in thousands)

Cash Flows From Operating Activities

 

 

 

 

 

Net income (loss)

$

559,013 

 

$

(351,481)

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

 

 

 

 

 

Depreciation, depletion and amortization

 

574,221 

 

 

608,167 

Impairment of natural gas and oil properties

 

–  

 

 

1,090,473 

Deferred income taxes

 

373,055 

 

 

(210,850)

Mark to market gain on derivatives

 

(72,664)

 

 

(892)

Stock-based compensation

 

8,883 

 

 

8,226 

Other

 

3,038 

 

 

(1,686)

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(67,070)

 

 

44,148 

Inventories

 

(13,449)

 

 

16,608 

Accounts payable

 

45,189 

 

 

(11,050)

Taxes payable

 

(14,717)

 

 

(3,789)

Interest payable

 

(7,682)

 

 

(2,306)

Advances from partners

 

(65,481)

 

 

26,155 

Other assets and liabilities

 

55,182 

 

 

(19,246)

Net cash provided by operating activities

 

1,377,518 

 

 

1,192,477 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Capital investments

 

(1,727,543)

 

 

(1,623,751)

Proceeds from sale of property and equipment

 

3,081 

 

 

201,161 

Transfers to restricted cash

 

–  

 

 

(167,774)

Transfers from restricted cash

 

8,542 

 

 

40,700 

Other

 

4,700 

 

 

5,239 

Net cash used in investing activities

 

(1,711,220)

 

 

(1,544,425)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Payments on current portion of long-term debt

 

(600)

 

 

(600)

Payments on revolving long-term debt

 

(2,134,550)

 

 

(1,774,000)

Borrowings under revolving long-term debt

 

2,377,950 

 

 

1,129,000 

Change in bank drafts outstanding

 

49,106 

 

 

1,627 

Proceeds from issuance of long-term debt

 

–  

 

 

998,780 

Debt issuance costs

 

–  

 

 

(8,338)

Proceeds from exercise of common stock options

 

6,751 

 

 

8,422 

Net cash provided by financing activities

 

298,657 

 

 

354,891 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

412 

 

 

(10)

Increase (decrease) in cash and cash equivalents

 

(34,633)

 

 

2,933 

Cash and cash equivalents at beginning of year

 

53,583 

 

 

15,627 

Cash and cash equivalents at end of period

$

18,950 

 

$

18,560 

See the accompanying notes which are an integral part of

these unaudited condensed consolidated financial statements.

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

Other

 

Common

 

 

 

 

Shares

 

 

 

 

Paid-In

 

Retained

 

Comprehensive

 

Stock in

 

 

 

 

Issued

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Treasury

 

Total

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

351,100 

 

$

3,511 

 

$

934,939 

 

$

1,949,150 

 

$

149,804 

 

$

(1,532)

 

$

3,035,872 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

–  

 

 

–  

 

 

–  

 

 

559,013 

 

 

–  

 

 

–  

 

 

559,013 

Other comprehensive loss

–  

 

 

–  

 

 

–  

 

 

–  

 

 

(101,046)

 

 

–  

 

 

(101,046)

Total comprehensive income

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

457,967 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

–  

 

 

–  

 

 

17,426 

 

 

–  

 

 

–  

 

 

–  

 

 

17,426 

Exercise of stock options

706 

 

 

 

 

6,768 

 

 

–  

 

 

–  

 

 

–  

 

 

6,775 

Issuance of restricted stock

21 

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(59)

 

 

(1)

 

 

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Treasury stock – non-qualified plan

–  

 

 

–  

 

 

924 

 

 

–  

 

 

–  

 

 

1,025 

 

 

1,949 

Balance at September 30, 2013

351,768 

 

$

3,517 

 

$

960,058 

 

$

2,508,163 

 

$

48,758 

 

$

(507)

 

$

3,519,989 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes which are an integral part of these 

unaudited condensed consolidated financial statements.

7


 

 

 

SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

 

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

 

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

 

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

 

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

 

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

 

 

 

(2) ACQUISITIONS AND DIVESTITURES

 

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

 

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

8


 

 

 

(3) PREPAID EXPENSES

 

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

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

 

 

(in thousands)

 

 

 

 

 

 

Prepaid drilling costs

$

15,622 

 

$

30,101 

Prepaid insurance

 

9,536 

 

 

9,507 

Total

$

25,158 

 

$

39,608 

 

(4) INVENTORY

 

Inventory recorded in current assets includes $3.7 million at September  30, 2013 and $5.6 million at December 31, 2012 for natural gas in underground storage owned by the Company’s E&P segment, and $39.5 million at September  30, 2013 and $22.5 million at December 31, 2012 for tubular and other equipment used in the E&P segment.

 

Other long-term assets include $15.8 million at September  30, 2013 and $13.8 million at December 31, 2012, respectively, for inventory held by the Midstream Services segment consisting primarily of pipe that will be used to construct gathering systems for the Fayetteville Shale play.

 

(5) NATURAL GAS AND OIL PROPERTIES

 

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

 

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $3.60 per MMBtu and $91.56 per barrel for West Texas Intermediate oil, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties did not exceed the ceiling amount and did not result in a ceiling test impairment at September 30, 2013. Cash flow hedges of natural gas production in place increased the ceiling value by $79.2 million, net of tax, at September 30, 2013Decreases in average quoted prices from September 30, 2013 levels as well as changes in production rates, levels of reserves, capitalized costs, the evaluation of costs excluded from amortization, future development costs, service costs and taxes could result in future ceiling test impairments.

 

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $2.83 per MMBtu and $91.48 per barrel for West Texas Intermediate oil, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $185.7 million (net of tax) at September 30, 2012 and resulted in a non-cash ceiling test impairment.  Cash flow hedges of natural gas production in place increased the ceiling by $330.6 million at September 30, 2012. In the second quarter of 2012, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $496.4 million (net of tax) at June 30, 2012 and resulted in a non-cash ceiling test impairment.

9


 

 

 

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

 

(6) EARNINGS PER SHARE

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

September 30,

 

September 30,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) (in thousands)

$

185,867 

 

$

(54,053)

 

$

559,013 

 

$

(351,481)

 

 

 

 

 

 

 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding

 

350,517,337 

 

 

348,649,630 

 

 

350,334,634 

 

 

348,272,192 

Issued upon assumed exercise of outstanding stock options

 

373,152 

 

 

–  

 

 

442,678 

 

 

–  

Effect of issuance of nonvested restricted common stock

 

332,341 

 

 

–  

 

 

237,662 

 

 

–  

Weighted average and potential dilutive outstanding(1)

 

351,222,830 

 

 

348,649,630 

 

 

351,014,974 

 

 

348,272,192 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.53 

 

$

(0.16)

 

$

1.60 

 

$

(1.01)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

$

0.53 

 

$

(0.16)

 

$

1.59 

 

$

(1.01)

 

 (1) Options for 1,550,838 shares and 15,703 shares of restricted stock were excluded from the calculation for the three months ended September 30, 2013 because they would have had an antidilutive effect.  Due to the net loss for the three months ended September 30, 2012, options for 1,664,232 shares and 560,848 shares of restricted stock were antidilutive and excluded from the calculation.  Options for 1,848,566 shares and 169,261 shares of restricted stock were excluded from the calculation for the nine months ended September 30, 2013 because they would have had an antidilutive effect.  Due to the net loss for the nine months ended September 30, 2012, options for 1,685,398 shares and 580,227 shares of restricted stock were antidilutive and excluded from the calculation.

 

10


 

 

 

 

(7) DERIVATIVES AND RISK MANAGEMENT

 

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

 

 

 

Fixed price swaps

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

 

 

Floating price swaps

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

 

 

Costless-collars

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

 

 

Basis swaps

 

 

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

 

 

Fixed price call options

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

 

 

Interest rate swaps

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

 

GAAP requires that all derivatives be recognized in the balance sheet as either an asset or liability and be measured at fair value. Under GAAP, certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as either a cash flow or a fair value hedge. Accounting for qualifying hedges requires a derivative’s gains and losses to be recorded either in earnings as a component of the sale of natural gas and oil or as a component of other comprehensive income. Gains and losses on derivatives that are not elected for hedge accounting treatment or that do not meet hedge accounting requirements are recorded in earnings as a component of gain (loss) on derivatives.  Within the gain (loss) on derivatives component of the statement of operations are mark to market gain (loss) on derivatives and mark to market gain (loss) on derivatives, settled.  The Company calculates mark to market gain (loss) on derivatives, settled, as the summation of gains and losses on positions that have settled within the period reported.

 

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

 

 

11


 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

September 30, 2013

 

December 31, 2012

 

 

Balance Sheet Classification

 

Fair Value

 

Balance Sheet Classification

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

 

Hedging asset

 

$

115,039 

 

Hedging asset

 

$

279,443 

Fixed price swaps

 

Other long-term assets

 

 

5,951 

 

Other long-term assets

 

 

8,550 

Total derivatives designated as hedging instruments

 

 

 

$

120,990 

 

 

 

$

287,993 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Basis swaps

 

Hedging asset

 

$

5,104 

 

Hedging asset

 

$

3,250 

Fixed price swaps

 

Hedging asset

 

 

77,504 

 

Hedging asset

 

 

–  

Basis swaps

 

Other long-term assets

 

 

679 

 

Other long-term assets

 

 

901 

Fixed price swaps

 

Other long-term assets

 

 

19,103 

 

Other long-term assets

 

 

–  

Interest rate swaps

 

Other long-term assets

 

 

5,797 

 

Other long-term assets

 

 

–  

Total derivatives not designated as hedging

    instruments

 

 

 

$

108,187 

 

 

 

$

4,151 

 

 

 

 

 

 

 

 

 

 

 

Total derivative assets

 

 

 

$

229,177 

 

 

 

$

292,144 

 

 

 

 

 

Derivative Liabilities

 

 

September 30, 2013

 

December 31, 2012

 

 

Balance Sheet Classification

 

Fair Value

 

Balance Sheet Classification

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Basis swaps

 

Other current liabilities

 

$

164 

 

Other current liabilities

 

$

138 

Fixed price call options

 

Other long-term liabilities

 

 

30,980 

 

Other long-term liabilities

 

 

4,128 

Interest rate swaps

 

Other current liabilities

 

 

912 

 

Other current liabilities

 

 

–  

Interest rate swaps

 

Other long-term liabilities

 

 

3,582 

 

Other long-term liabilities

 

 

–  

Total derivatives not designated as hedging

    instruments

 

 

 

$

35,638 

 

 

 

$

4,266 

 

 

 

 

 

 

 

 

 

 

 

Total derivative liabilities

 

 

 

$

35,638 

 

 

 

$

4,266 

 

As of September  30, 2013, the Company had derivatives designated as cash flow hedges and derivatives not designated as hedges on the following volumes of natural gas production (in Bcf):

 

 

 

 

 

Year

Fixed price swaps

Fixed price swaps not designated for

hedge accounting

Total

2013

84.4

-

 84.4

2014

51.1

181.6

232.7

 

12


 

 

 

 

 

Cash Flow Hedges

 

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

 

As of September  30, 2013, the Company recorded a net gain in accumulated other comprehensive income related to its hedging activities of $72.1 million. This amount is net of a deferred income tax liability recorded as of September  30, 2013 of $48.1 million. The amount recorded in accumulated other comprehensive income will be relieved over time and recognized in the statement of operations as the physical transactions being hedged occur. Assuming the market prices of natural gas futures as of September  30, 2013 remain unchanged, the Company would expect to transfer an aggregate after-tax net gain of $68.6 million from accumulated other comprehensive income to earnings during the next 12 months. Gains or losses from derivative instruments designated as cash flow hedges are reflected as adjustments to gas sales in the unaudited condensed consolidated statements of operations. Volatility in earnings and other comprehensive income may occur in the future as a result of the Company’s derivative activities.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in
Other Comprehensive Income

 

 

 

 

(Effective Portion)

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

 

September 30,

 

September 30,

Derivative Instrument

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Fixed price swaps

 

 

 

$

12,515 

 

$

(55,039)

 

$

51,234 

 

$

116,089 

Costless-collars

 

 

 

$

–  

 

$

(3,497)

 

$

–  

 

$

40,644 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification of Gain

 

Gain Reclassified from Accumulated Other

 

 

Reclassified from

 

Comprehensive Income into Earnings

 

 

Accumulated Other

 

(Effective Portion)

 

 

Comprehensive Income

 

For the three months ended

 

For the nine months ended

 

 

into Earnings

 

September 30,

 

September 30,

Derivative Instrument

 

(Effective Portion)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Fixed price swaps

 

Gas sales

 

$

93,280 

 

$

102,789 

 

$

218,236 

 

$

337,994 

Costless-collars

 

Gas sales

 

$

–  

 

$

54,489 

 

$

–  

 

$

175,531 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in
Earnings

 

 

 

 

(Ineffective Portion)

 

 

Classification of Gain (Loss)

 

For the three months ended

 

For the nine months ended

 

 

Recognized in Earnings

 

September 30,

 

September 30,

Derivative Instrument

 

(Ineffective Portion)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Fixed price swaps

 

Gas sales

 

$

(1,452)

 

$

(165)

 

$

(2,183)

 

$

1,831 

Costless-collars

 

Gas sales

 

$

–  

 

$

(373)

 

$

–  

 

$

167 

 

13


 

 

 

Fair Value Hedges and Other Derivative Contracts

 

For fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings immediately.    

 

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

 

As of September  30, 2013, the Company had basis swaps on natural gas production that did not qualify for hedge accounting treatment of 6.5 Bcf, 16.7 Bcf, and 0.9 Bcf in 2013, 2014, and 2015, respectively.

 

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

 

The Company is a party to an interest rate swap with counterparty banks. The interest rate swap was entered into in order to mitigate the Company’s exposure to volatility in interest rates related to its building lease. The interest rate swap has a notional amount of $170.0 million and expires on June 20, 2020. The Company did not designate the interest rate swap for hedge accounting.  Changes in the fair value of the interest rate swap are included in gain (loss) on derivatives in the unaudited condensed consolidated statements of operations.  The Company had no interest rate swaps in 2012. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark to Market Gain (Loss)

 

 

 

 

on Derivatives

 

 

 

 

Recognized in Earnings

 

 

Income Statement

 

For the three months ended

 

For the nine months ended

 

 

Classification of Mark to Market Gain (Loss)

 

September 30,

 

September 30,

Derivative Instrument

 

on Derivatives

 

2013

 

2012

 

2013

 

2012

 

 

 

 

(in thousands)

Basis swaps

 

Gain (Loss) on Derivatives

 

$

(5,279)

 

$

(1,275)

 

$

1,606 

 

$

(270)

Fixed price call options

 

Gain (Loss) on Derivatives

 

$

7,876 

 

$

–