20170930 10Q Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



 

 



 

 

 

Form 10-Q



 

 

 

(Mark One)

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

Exchange Act of 1934

For the quarterly period ended September 30, 2017



 

 

 

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, 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 October 24, 2017

Common Stock, Par Value $0.01

512,425,656





 

 

 


 

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SOUTHWESTERN ENERGY COMPANY



INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017



 

 

PART I – FINANCIAL INFORMATION

 



 

 

Item 1.

Financial Statements

3



Condensed Consolidated Statements of Operations

3



Condensed Consolidated Statements of Comprehensive Income

4



Condensed Consolidated Balance Sheets

5



Condensed Consolidated Statements of Cash Flows



Condensed Consolidated Statements of Changes in Equity

7



Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

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

27



Results of Operations

28



Liquidity and Capital Resources

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

40



 

 

PART II – OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3.

Defaults Upon Senior Securities

40

Item 4.

Mine Safety Disclosures

40

Item 5.

Other Information

40

Item 6.

Exhibits

41





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 profitably 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;

·

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

·

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 nine months ended



September 30,

 

September 30,



2017

 

2016

 

2017

 

2016



(in millions, except share/per share amounts)

Operating Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gas sales

$

394 

 

$

340 

 

$

1,368 

 

$

906 

Oil sales

 

27 

 

 

19 

 

 

73 

 

 

50 

NGL sales

 

55 

 

 

22 

 

 

132 

 

 

59 

Marketing

 

233 

 

 

237 

 

 

736 

 

 

631 

Gas gathering

 

28 

 

 

33 

 

 

85 

 

 

106 



 

737 

 

 

651 

 

 

2,394 

 

 

1,752 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Marketing purchases

 

236 

 

 

234 

 

 

740 

 

 

627 

Operating expenses

 

170 

 

 

139 

 

 

481 

 

 

455 

General and administrative expenses

 

62 

 

 

61 

 

 

170 

 

 

171 

Restructuring charges

 

–  

 

 

 

 

 –  

 

 

77 

Depreciation, depletion and amortization

 

135 

 

 

99 

 

 

364 

 

 

349 

Impairment of natural gas and oil properties

 

–  

 

 

817 

 

 

–  

 

 

2,321 

Taxes, other than income taxes

 

24 

 

 

24 

 

 

75 

 

 

69 



 

627 

 

 

1,376 

 

 

1,830 

 

 

4,069 

Operating Income (Loss)

 

110 

 

 

(725)

 

 

564 

 

 

(2,317)

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

Interest on debt

 

58 

 

 

59 

 

 

175 

 

 

168 

Other interest charges

 

 

 

 

 

 

 

12 

Interest capitalized

 

(29)

 

 

(41)

 

 

(85)

 

 

(123)



 

31 

 

 

26 

 

 

97 

 

 

57 



 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) on Derivatives

 

45 

 

 

71 

 

 

295 

 

 

(28)

Loss on Early Extinguishment of Debt

 

(59)

 

 

(51)

 

 

(70)

 

 

(51)

Other Income (Loss), Net

 

(2)

 

 

 

 

 

 

–  



 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

63 

 

 

(728)

 

 

698 

 

 

(2,453)

Benefit for Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

Current

 

(10)

 

 

–  

 

 

(10)

 

 

–  

Deferred

 

(4)

 

 

(20)

 

 

(4)

 

 

(20)



 

(14)

 

 

(20)

 

 

(14)

 

 

(20)

Net Income (Loss)

$

77 

 

$

(708)

 

$

712 

 

$

(2,433)

Mandatory convertible preferred stock dividend

 

27 

 

 

27 

 

 

81 

 

 

81 

Participating securities - mandatory convertible preferred stock

 

 

 

–  

 

 

83 

 

 

–  

Net Income (Loss) Attributable to Common Stock

$

43 

 

$

(735)

 

$

548 

 

$

(2,514)



 

 

 

 

 

 

 

   

 

 

   

Earnings (Loss) Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.09 

 

$

(1.52)

 

$

1.11 

 

$

(6.02)

Diluted

$

0.09 

 

$

(1.52)

 

$

1.10 

 

$

(6.02)



 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

499,812,926 

 

 

482,485,150 

 

 

496,458,435 

 

 

417,222,661 

Diluted

 

502,290,779 

 

 

482,485,150 

 

 

498,527,671 

 

 

417,222,661 











The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.

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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 



For the three months ended

 

For the nine months ended



September 30,

 

September 30,



2017

 

2016

 

2017

 

2016



(in millions)

Net income (loss)

$

77 

 

$

(708)

 

$

712 

 

$

(2,433)



 

 

 

 

 

 

 

 

 

 

 

Change in value of pension and other postretirement liabilities:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and net loss included in net periodic pension cost (1)

 

 

 

 

 

 

 

Net gain incurred in period  (1)

 

–  

 

 

 

 

–  

 

 



 

 

 

 

 

 

 

 

 

 

 

Change in currency translation adjustment

 

–  

 

 

–  

 

 

–  

 

 



 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

78 

 

$

(706)

 

$

714 

 

$

(2,424)

(1)

Net of tax for the three and nine months ended September  30, 2017 and 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)



 

 

 

 

 



September 30,

 

December 31,



2017

 

2016

ASSETS

(in millions)

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

989 

 

$

1,423 

Accounts receivable, net

 

360 

 

 

363 

Derivative assets

 

91 

 

 

51 

Other current assets

 

36 

 

 

35 

Total current assets

 

1,476 

 

 

1,872 

Natural gas and oil properties, using the full cost method, including $1,919 million as of September 30, 2017 and $2,105 million as of December 31, 2016 excluded from amortization

 

23,575 

 

 

22,653 

Gathering systems

 

1,311 

 

 

1,299 

Other

 

568 

 

 

537 

Less: Accumulated depreciation, depletion and amortization

 

(19,904)

 

 

(19,534)

Total property and equipment, net

 

5,550 

 

 

4,955 

Other long-term assets

 

176 

 

 

249 

TOTAL ASSETS

$

7,202 

 

$

7,076 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term debt

$

40 

 

$

41 

Accounts payable

 

502 

 

 

473 

Taxes payable

 

55 

 

 

59 

Interest payable

 

21 

 

 

74 

Dividends payable

 

27 

 

 

27 

Derivative liabilities

 

97 

 

 

355 

Other current liabilities

 

42 

 

 

35 

Total current liabilities

 

784 

 

 

1,064 

Long-term debt

 

4,396 

 

 

4,612 

Pension and other postretirement liabilities

 

46 

 

 

49 

Other long-term liabilities

 

324 

 

 

434 

Total long-term liabilities

 

4,766 

 

 

5,095 

Commitments and contingencies (Note 10)

 

 

 

 

 

Equity:

 

 

 

 

 

Common stock, $0.01 par value;  1,250,000,000 shares authorized; issued 509,142,659 shares as of September 30, 2017 (does not include  3,346,703 shares issued on October 16, 2017 on account of a dividend declared on September 15, 2017) and 495,248,369 as of December 31, 2016

 

 

 

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 September 30, 2017 and December 31, 2016, conversion in January 2018

 

–  

 

 

–  

Additional paid-in capital

 

4,698 

 

 

4,677 

Accumulated deficit

 

(3,013)

 

 

(3,725)

Accumulated other comprehensive loss

 

(37)

 

 

(39)

Common stock in treasury, 31,269  shares as of September 30, 2017 and December 31, 2016

 

(1)

 

 

(1)

Total equity

 

1,652 

 

 

917 

TOTAL LIABILITIES AND EQUITY

$

7,202 

 

$

7,076 



 

 

 

 

 

The accompanying notes are an integral part of these

unaudited condensed consolidated financial statements.





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SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



 

 

 

 

 



For the nine months ended



September 30,



2017

 

2016



(in millions)

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

$

712 

 

$

(2,433)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

364 

 

 

349 

Impairment of natural gas and oil properties

 

–  

 

 

2,321 

Amortization of debt issuance costs

 

 

 

12 

Deferred income taxes

 

(4)

 

 

(20)

(Gain) loss on derivatives, unsettled

 

(350)

 

 

48 

Stock-based compensation

 

19 

 

 

24 

Restructuring charges

 

–  

 

 

30 

Loss on early extinguishment of debt

 

70 

 

 

51 

Other

 

(2)

 

 

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

 

 

53 

Accounts payable

 

16 

 

 

(72)

Taxes payable

 

(3)

 

 

(17)

Interest payable

 

(28)

 

 

(14)

Other assets and liabilities

 

(15)

 

 

−  

Net cash provided by operating activities

 

789 

 

 

337 



 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Capital investments

 

(943)

 

 

(391)

Proceeds from sale of property and equipment

 

17 

 

 

434 

Other

 

 

 

 –  

Net cash provided by (used in) investing activities

 

(921)

 

 

43 



 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Payments on short-term debt

 

(287)

 

 

(1)

Payments on long-term debt

 

(1,139)

 

 

(1,175)

Payments on revolving credit facility

 

–  

 

 

(3,268)

Borrowings under revolving credit facility

 

–  

 

 

3,152 

Payments on commercial paper

 

–  

 

 

(242)

Borrowings under commercial paper

 

–  

 

 

242 

Change in bank drafts outstanding

 

–  

 

 

(19)

Proceeds from issuance of long-term debt

 

1,150 

 

 

1,191 

Debt issuance costs

 

(18)

 

 

(17)

Proceeds from issuance of common stock

 

 –  

 

 

1,247 

Preferred stock dividend

 

(8)

 

 

(27)

Other

 

–  

 

 

(4)

Net cash provided by (used in) financing activities

 

(302)

 

 

1,079 



 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(434)

 

 

1,459 

Cash and cash equivalents at beginning of year

 

1,423 

 

 

15 

Cash and cash equivalents at end of period

$

989 

 

$

1,474 



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 (1)

 

Income (Loss)

 

Treasury

 

Total



(in millions, except share amounts)

Balance at December 31, 2016

495,248,369 

 

$

 

1,725,000 

 

$

4,677 

 

$

(3,725)

 

$

(39)

 

$

(1)

 

$

917 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

–  

 

 

–  

 

–  

 

 

–  

 

 

712 

 

 

–  

 

 

–  

 

 

712 

Other comprehensive income

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

 

 

–  

 

 

Total comprehensive income

–  

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

714 

Stock-based compensation

–  

 

 

–  

 

–  

 

 

29 

 

 

–  

 

 

–  

 

 

–  

 

 

29 

Preferred stock dividend (2)

9,445,013 

 

 

–  

 

–  

 

 

(8)

 

 

–  

 

 

–  

 

 

–  

 

 

(8)

Issuance of restricted stock

5,036,122 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Cancellation of restricted stock

(609,130)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Performance units vested

121,208 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Tax withholding – stock compensation

(98,995)

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Issuance of stock awards

72 

 

 

–  

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Balance at September 30, 2017

509,142,659 

 

$

 

1,725,000 

 

$

4,698 

 

$

(3,013)

 

$

(37)

 

$

(1)

 

$

1,652 



(1)

Includes a net cumulative-effect adjustment of  $59 million related to the recognition of previously unrecognized windfall tax benefits resulting from the adoption of ASU 2016-09 as of the beginning of 2017.  This adjustment increased net deferred tax assets and the related income tax valuation allowance by the same amount.



(2)

Does not include  3,346,703 shares issued on October 16, 2017 and distributed to holders of the Company's mandatory convertible preferred stock.



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 Services”).  Southwestern conducts most of its businesses through subsidiaries and operates principally in two segments: E&P and Midstream Services.



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, 2016 (“2016 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 2016 Annual Report.



(2) CASH AND CASH EQUIVALENTS



The following table presents a summary of cash and cash equivalents as of September 30, 2017 and December 31, 2016:



 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,



2017

 

2016



(in millions)

Cash

$

259 

 

$

254 

Marketable securities (1)

 

680 

 

 

1,169 

Other cash equivalents (2)

 

50 

 

 

−  

Total cash and cash equivalents

$

989 

 

$

1,423 



(1)

Consists of government stable value money market funds.



(2)

Consists of time deposits.



(3) REDUCTION IN WORKFORCE



In January 2016, the Company announced a 40% workforce reduction 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 nine months ended September 30, 2016:





 

 

 

 

 

 



 

For the three

months ended

 

For the nine

months ended



 

September 30, 2016

 

September 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)

 

$

 

$

77 



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(1)

Includes $1 million related to executive management restructuring for the nine months ended September 30, 2016.  



(2)

Includes $3 million related to executive management restructuring for the nine months ended September 30, 2016.



(3)

Includes non-cash charges related to the curtailment and settlement of the pension and other postretirement benefit plans.  See Note 11 for additional details regarding the Company’s pension and other postretirement benefit plans.



(4)

Total restructuring charges were $2 million for the Company’s E&P segment for the three months ended September 30, 2016.  For the nine months ended September 30, 2016, restructuring charges were $74 million and $3 million for the Company’s E&P and Midstream Services segments, respectively.



Severance payments and other separation costs related to restructuring were substantially completed by the end of 2016.







(4) NATURAL GAS AND OIL PROPERTIES



The Company utilizes the full cost method of accounting for costs related to the exploration, development and acquisition of natural gas and oil 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  $3.00 per MMBtu, West Texas Intermediate oil of $46.27 per barrel and NGLs of $12.47  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 and did not result in a ceiling test impairment at September 30, 2017.  The Company had no hedge positions that were designated for hedge accounting as of September 30, 2017.  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 $2.28 per MMBtu, West Texas Intermediate oil of $38.17 per barrel and NGLs of $6.46 per barrel, adjusted for differentials, the net book value of the Company’s United States natural gas and oil properties resulted in a non-cash ceiling test impairment of $817 million for the three months ended September 30, 2016.  The Company had no hedge positions that were designated for hedge accounting as of September 30, 2016.  In the first and second quarters of 2016, the Company recognized non-cash ceiling test impairments of $1,034 million and $470 million, respectively. 



(5) EARNINGS PER SHARE



Basic earnings per common share is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding during 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 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 from the common stock offering were approximately $1,247 million, after underwriting discount and offering expenses.  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 have been used for general corporate purposes.



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The depositary shares issued in January 2015 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 (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.



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 September 15, 2017, the Company declared its quarterly dividend, payable to holders of the mandatory convertible preferred stock, and announced that it would pay the quarterly dividend in stock, in lieu of cash, to the extent permitted by the certificate of designations for the Series B preferred stock. The Company issued 3,346,703 shares of common stock on October 16, 2017 in partial payment for the dividend, the remaining $7.9 million paid in cash.



The following table presents the computation of earnings per share for the three and nine months ended September 30, 2017 and 2016:













 

 

 

 

 

 

 

 

 

 

 



For the three months ended

 

For the nine months ended



September 30,

 

September 30,



2017

 

2016

 

2017

 

2016



(in millions, except share/per share amounts)

Net income (loss)

$

77 

 

$

(708)

 

$

712 

 

$

(2,433)

Mandatory convertible preferred stock dividend

 

27 

 

 

27 

 

 

81 

 

 

81 

Participating securities - mandatory convertible preferred stock

 

 

 

–  

 

 

83 

 

 

–  

Net income (loss) attributable to common stock

$

43 

 

$

(735)

 

$

548 

 

$

(2,514)



 

 

 

 

 

 

 

 

 

 

 

Number of common shares:

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding

 

499,812,926 

 

 

482,485,150 

 

 

496,458,435 

 

 

417,222,661 

Issued upon assumed exercise of outstanding stock options

 

–  

 

 

–  

 

 

−  

 

 

–  

Effect of issuance of non-vested restricted common stock

 

1,202,585 

 

 

–  

 

 

883,512 

 

 

–  

Effect of issuance of non-vested performance units

 

1,275,268 

 

 

–  

 

 

1,185,724 

 

 

–  

Effect of issuance of mandatory convertible preferred stock

 

–  

 

 

–  

 

 

–  

 

 

–  

Weighted average and potential dilutive outstanding

 

502,290,779 

 

 

482,485,150 

 

 

498,527,671 

 

 

417,222,661 



 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.09 

 

$

(1.52)

 

$

1.11 

 

$

(6.02)

Diluted

$

0.09 

 

$

(1.52)

 

$

1.10 

 

$

(6.02)



The following table presents the common stock shares equivalent excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2017 and 2016, as they would have had an antidilutive effect:





 

 

 

 

 

 

 



For the three months ended

 

For the nine months ended



September 30,

 

September 30,



2017

 

2016

 

2017

 

2016

Unvested stock options

180,932 

 

3,409,596 

 

60,973 

 

3,714,095 

Unvested share-based payment

5,703,086 

 

599,372 

 

5,356,166 

 

993,576 

Performance units

1,036,422 

 

935,330 

 

1,036,422 

 

762,171 

Mandatory convertible preferred stock

74,999,895 

 

74,999,895 

 

74,999,895 

 

74,999,895 

Total

81,920,335 

 

79,944,193 

 

81,453,456 

 

80,469,737 





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(6) 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 September 30, 2017 and December 31, 2016, the Company’s derivative financial instruments consisted of fixed price swaps, two-way costless collars, three-way costless collars, basis swaps, put and 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.



 

Purchased put options

The Company purchases put options based on an index price from the counterparty by payment of a cash premium.  If the index price is lower than the put’s strike price at the time of settlement, the Company receives from the counterparty such difference between the index price and the purchased put strike price.  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) based on an index price which, in aggregate, have no net cost.  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 and ceiling prices, 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 purchased put option, a sold call option and a sold put option based on an index price which, in aggregate, have no net cost.  At the contract settlement date, (1) if the index price is higher than the sold call strike price, the Company pays the counterparty the difference between the index price and sold call strike price, (2) if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party, (3) if the index price is between the sold put strike price and the purchased put strike price, the Company will receive the difference between the purchased put strike price and the index price, and (4) if the index price is below the sold put strike 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.



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The Company utilizes counterparties for its derivative instruments that it believes are creditworthy 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, there can be no assurance that a counterparty will be able to meet its obligations to the Company.



The following table provides information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect the Company’s exposure.  None of the financial instruments below are designated for hedge accounting treatment.  The table presents the notional amount in Bcf, the weighted average contract prices and the fair value by expected maturity dates as of September 30, 2017:











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Weighted Average Price per MMBtu

 

 

 



Volume (Bcf)

 

Swaps

 

Sold Puts

 

Purchased Puts

 

Sold Calls

 

Basis Differential

 

Fair Value at September 30, 2017 (in millions)

Financial protection on production

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

73 

 

$

3.06 

 

$

–  

 

$

–  

 

$

–  

 

$

 –  

 

$

Two-way costless-collars

31 

 

 

  

 

 

–  

 

 

2.96 

 

 

3.38 

 

 

–  

 

 

Three-way costless-collars

34 

 

 

  

 

 

2.29 

 

 

2.97 

 

 

3.30 

 

 

–  

 

 

–  

Total

138 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swaps

178 

 

$

3.02 

 

$

  

 

$

  

 

$

–  

 

$

–  

 

$

(4)

Two-way costless-collars

23 

 

 

–  

 

 

  

 

 

2.97 

 

 

3.56 

 

 

–  

 

 

(1)

Three-way costless-collars

272 

 

 

–  

 

 

2.40 

 

 

2.97 

 

 

3.37 

 

 

–  

 

 

Total

473 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-way costless-collars

108 

 

$

–  

 

$

2.50 

 

$

2.95 

 

$

3.32 

 

$

–  

 

$

(1)

Total

108 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basis Swaps