UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
Exchange Act of 1934
For the quarterly period ended June 30, 2020
Or
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number: 001-08246
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 every Interactive Data File required to be submitted 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 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.
☒ | 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 28, 2020 | |||||||
SOUTHWESTERN ENERGY COMPANY
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020
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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.
1
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 (this “Quarterly Report”) 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,” “model,” “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 and the impact of reduced demand for our production and products in which our production is a component due to governmental and societal actions taken in response to the COVID-19 pandemic;
•our ability to fund our planned capital investments;
•a change in our credit rating, an increase in interest rates and any adverse impacts from the discontinuation of the London Interbank Offered Rate (“LIBOR”);
•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, including the impact of COVID-19;
•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 government regulation, including changes in law, the ability to obtain and maintain permits, any increase in severance or similar taxes, and legislation or regulation relating to hydraulic fracturing, climate and over-the-counter derivatives;
•the impact of the adverse outcome of any material litigation against us or judicial decisions that affect us or our industry generally;
•the effects of weather;
•increased competition;
•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 update publicly 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
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
(in millions, except share/per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Operating Revenues: | |||||||||||||||||||||||
Gas sales | $ | $ | $ | $ | |||||||||||||||||||
Oil sales | |||||||||||||||||||||||
NGL sales | |||||||||||||||||||||||
Marketing | |||||||||||||||||||||||
Other | |||||||||||||||||||||||
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Operating Costs and Expenses: | |||||||||||||||||||||||
Marketing purchases | |||||||||||||||||||||||
Operating expenses | |||||||||||||||||||||||
General and administrative expenses | |||||||||||||||||||||||
Loss on sale of operating assets | |||||||||||||||||||||||
Restructuring charges | |||||||||||||||||||||||
Depreciation, depletion and amortization | |||||||||||||||||||||||
Impairments | |||||||||||||||||||||||
Taxes, other than income taxes | |||||||||||||||||||||||
| |||||||||||||||||||||||
Operating Income (Loss) | ( | ( | |||||||||||||||||||||
Interest Expense: | |||||||||||||||||||||||
Interest on debt | |||||||||||||||||||||||
Other interest charges | |||||||||||||||||||||||
Interest capitalized | ( | ( | ( | ( | |||||||||||||||||||
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Gain (Loss) on Derivatives | ( | ||||||||||||||||||||||
Gain on Early Extinguishment of Debt | |||||||||||||||||||||||
Other Income (Loss), Net | ( | ( | |||||||||||||||||||||
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Income (Loss) Before Income Taxes | ( | ( | |||||||||||||||||||||
Provision (Benefit) for Income Taxes: | |||||||||||||||||||||||
Current | ( | ||||||||||||||||||||||
Deferred | ( | ||||||||||||||||||||||
| ( | ||||||||||||||||||||||
Net Income (Loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
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Earnings (Loss) Per Common Share: | |||||||||||||||||||||||
Basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
Diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||
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Weighted Average Common Shares Outstanding: | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Diluted |
The accompanying notes are an integral part of these consolidated financial statements.
3
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Net income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
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Change in value of pension and other postretirement liabilities: | |||||||||||||||||||||||
Amortization of prior service cost and net loss included in net periodic pension cost (1) | |||||||||||||||||||||||
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Comprehensive income (loss) | $ | ( | $ | $ | ( | $ |
(1)Tax benefits for the three months ended June 30, 2020 were immaterial. Net of $1 million in tax benefits for the six months ended June 30, 2020 and the three and six months ended June 30, 2019, respectively. In 2019, primarily related to settlement of pension assets.
The accompanying notes are an integral part of these consolidated financial statements.
4
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, 2020 | December 31, 2019 | |||||||||
ASSETS | (in millions) | ||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
Derivative assets | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Natural gas and oil properties, using the full cost method, including $ | |||||||||||
Other | |||||||||||
Less: Accumulated depreciation, depletion and amortization | ( | ( | |||||||||
Total property and equipment, net | |||||||||||
Operating lease assets | |||||||||||
Deferred tax assets | |||||||||||
Other long-term assets | |||||||||||
Total long-term assets | |||||||||||
TOTAL ASSETS | $ | $ | |||||||||
LIABILITIES AND EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Taxes payable | |||||||||||
Interest payable | |||||||||||
Derivative liabilities | |||||||||||
Current operating lease liabilities | |||||||||||
Other current liabilities | |||||||||||
Total current liabilities | |||||||||||
Long-term debt | |||||||||||
Long-term operating lease liabilities | |||||||||||
Pension and other postretirement liabilities | |||||||||||
Other long-term liabilities | |||||||||||
Total long-term liabilities | |||||||||||
Equity: | |||||||||||
Common stock, $ | |||||||||||
Additional paid-in capital | |||||||||||
Accumulated deficit | ( | ( | |||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Common stock in treasury, | ( | ( | |||||||||
Total equity | |||||||||||
TOTAL LIABILITIES AND EQUITY | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
5
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the six months ended June 30, | ||||||||||
(in millions) | 2020 | 2019 | |||||||||
Cash Flows From Operating Activities: | |||||||||||
Net income (loss) | $ | ( | $ | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation, depletion and amortization | |||||||||||
Amortization of debt issuance costs | |||||||||||
Impairments | |||||||||||
Deferred income taxes | ( | ||||||||||
Gain on derivatives, unsettled | ( | ( | |||||||||
Stock-based compensation | |||||||||||
Gain on early extinguishment of debt | ( | ||||||||||
Loss on sale of assets | |||||||||||
Other | |||||||||||
Change in assets and liabilities: | |||||||||||
Accounts receivable | |||||||||||
Accounts payable | ( | ( | |||||||||
Taxes payable | ( | ( | |||||||||
Interest payable | ( | ||||||||||
Inventories | |||||||||||
Other assets and liabilities | ( | ||||||||||
Net cash provided by operating activities | |||||||||||
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Cash Flows From Investing Activities: | |||||||||||
Capital investments | ( | ( | |||||||||
Proceeds from sale of property and equipment | |||||||||||
Net cash used in investing activities | ( | ( | |||||||||
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Cash Flows From Financing Activities: | |||||||||||
Payments on long-term debt | ( | ||||||||||
Payments on revolving credit facility | ( | ||||||||||
Borrowings under revolving credit facility | |||||||||||
Change in bank drafts outstanding | ( | ( | |||||||||
Purchase of treasury stock | ( | ||||||||||
Cash paid for tax withholding | ( | ( | |||||||||
Net cash provided by (used in) financing activities | ( | ||||||||||
| |||||||||||
Increase (decrease) in cash and cash equivalents | ( | ||||||||||
Cash and cash equivalents at beginning of year | |||||||||||
Cash and cash equivalents at end of period | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
6
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Common Stock in Treasury | Total | ||||||||||||||||||||||||||||||||||||||||||
Shares Issued | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
(in millions, except share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Total comprehensive loss | — | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Restricted units granted | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Tax withholding – stock compensation | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss | — | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Restricted units granted | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Tax withholding – stock compensation | ( | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Common Stock in Treasury | Total | ||||||||||||||||||||||||||||||||||||||||||
Shares Issued | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
(in millions, except share amounts) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Treasury stock | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
Performance units vested | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Tax withholding – stock compensation | ( | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Cancellation of restricted stock | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Tax withholding – stock compensation | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED 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 marketing business (“Marketing”), which was previously referred to as “Midstream” when it included the operation of gathering systems. Southwestern conducts most of its business through subsidiaries and operates principally in two segments: E&P and Marketing.
E&P. Southwestern’s primary business is the exploration for and production of natural gas, oil and NGLs, with ongoing operations focused on the development of unconventional natural gas and oil reservoirs located in Pennsylvania and West Virginia. The Company’s operations in northeast Pennsylvania, herein referred to as “Northeast Appalachia,” are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Operations in West Virginia and southwest Pennsylvania, herein referred to as “Southwest Appalachia,” are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs. Collectively, Southwestern refers to its properties located in Pennsylvania and West Virginia as “Appalachia.” The Company also operates drilling rigs located in Pennsylvania and West Virginia, and provides certain oilfield products and services, principally serving the Company’s E&P activities through vertical integration.
Marketing. Southwestern’s marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil and NGLs primarily produced in its E&P operations.
The accompanying 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 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 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, 2019 (“2019 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 2019 Annual Report.
(2) RESTRUCTURING CHARGES
On February 4, 2020, the Company notified employees of a workforce reduction plan as a result of a strategic realignment of the Company’s organizational structure. This reduction was substantially complete by the end of the first quarter of 2020. Affected employees were offered a severance package, which included a one-time payment depending on length of service and, if applicable, the current value of unvested long-term incentive awards that were forfeited. These costs were recognized as restructuring charges for the three and six months ended June 30, 2020, and a liability of approximately $1 million has been accrued as of June 30, 2020 related to future payments associated with the February 2020 restructuring.
In December 2018, the Company closed the sale of the equity in certain of its subsidiaries that owned and operated its Fayetteville Shale E&P and related midstream gathering assets in Arkansas (the “Fayetteville Shale sale”). As part of the transaction, most employees associated with those assets became employees of the buyer although the employment of some was terminated. Due to the scale of the assets that were sold, the temporary employment of certain employees was extended through a transition period into 2019. All affected employees were offered a severance package, which included a one-time cash payment depending on length of service and, if applicable, the current value of equity awards that were forfeited. The Company also incurred charges related to office consolidation. A portion of these costs along with the aforementioned severance costs were recognized as restructuring charges in the first quarter of 2019.
8
The following table presents a summary of the restructuring charges included in Operating Income (Loss) for the three and six months ended June 30, 2020 and 2019:
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Severance (including payroll taxes) | $ | $ | $ | $ | |||||||||||||||||||
Office consolidation | |||||||||||||||||||||||
Total restructuring charges (1) | $ | $ | $ | $ |
(1)Total restructuring charges were $2 million and $12 million for the Company’s E&P segment for the three and six months ended June 30, 2020, respectively, and $2 million and $5 million for the three and six months ended June 30, 2019, respectively.
The following table presents a reconciliation of the liability associated with the Company’s restructuring activities at June 30, 2020, which is reflected in accounts payable on the consolidated balance sheet:
(in millions) | |||||
Liability at December 31, 2019 | $ | ||||
Additions | |||||
Distributions | ( | ||||
Liability at June 30, 2020 | $ |
(3) REVENUE RECOGNITION
Revenues from Contracts with Customers
Natural gas and liquids. Natural gas, 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 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 for which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.
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 generally 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, markets natural gas, oil and NGLs for its affiliated E&P company as well as other joint interest owners that choose to market with the Company. In addition, the Company markets some products purchased from third parties. Marketing revenues for natural gas, 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 market indices 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 for which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.
9
Disaggregation of Revenues
The Company presents a disaggregation of E&P revenues by product on the consolidated statements of operations net of intersegment revenues. The following table reconciles operating revenues as presented on the consolidated statements of operations to the operating revenues by segment:
(in millions) | E&P | Marketing | Intersegment Revenues | Total | |||||||||||||||||||
Three months ended June 30, 2020 | |||||||||||||||||||||||
Gas sales | $ | $ | $ | $ | |||||||||||||||||||
Oil sales | |||||||||||||||||||||||
NGL sales | |||||||||||||||||||||||
Marketing | ( | ||||||||||||||||||||||
Total | $ | $ | $ | ( | $ | ||||||||||||||||||
Three months ended June 30, 2019 | |||||||||||||||||||||||
Gas sales | $ | $ | $ | $ | |||||||||||||||||||
Oil sales | |||||||||||||||||||||||
NGL sales | |||||||||||||||||||||||
Marketing | ( | ||||||||||||||||||||||
Total | $ | $ | $ | ( | $ |
(in millions) | E&P | Marketing | Intersegment Revenues | Total | |||||||||||||||||||
Six months ended June 30, 2020 | |||||||||||||||||||||||
Gas sales | $ | $ | $ | $ | |||||||||||||||||||
Oil sales | |||||||||||||||||||||||
NGL sales | |||||||||||||||||||||||
Marketing | ( | ||||||||||||||||||||||
Other (1) | |||||||||||||||||||||||
Total | $ | $ | $ | ( | $ | ||||||||||||||||||
Six months ended June 30, 2019 | |||||||||||||||||||||||
Gas sales | $ | $ | $ | $ | |||||||||||||||||||
Oil sales | |||||||||||||||||||||||
NGL sales | |||||||||||||||||||||||
Marketing | ( | ||||||||||||||||||||||
Other (2) | |||||||||||||||||||||||
Total | $ | $ | $ | ( | $ |
(1)For the six months ended June 30, 2020, other E&P revenues consists primarily of gains on purchaser imbalances associated with certain NGLs.
(2)For the six months ended June 30, 2019, other E&P revenues consists primarily of water sales to third-party operators, and other Marketing revenues consists primarily of sales of gas from storage.
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 and West Virginia.
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Northeast Appalachia | $ | $ | $ | $ | |||||||||||||||||||
Southwest Appalachia | |||||||||||||||||||||||
Other | |||||||||||||||||||||||
Total | $ | $ | $ | $ |
10
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 consolidated balance sheet:
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||
Receivables from contracts with customers | $ | $ | |||||||||
Other accounts receivable | |||||||||||
Total accounts receivable | $ | $ |
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, 2020 and 2019. The Company has no contract assets or contract liabilities associated with its revenues from contracts with customers.
(4) CASH AND CASH EQUIVALENTS
The following table presents a summary of cash and cash equivalents as of June 30, 2020 and December 31, 2019:
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||
Cash | $ | $ | |||||||||
Marketable securities (1) | |||||||||||
Total | $ | $ |
(1)Consists of government stable value money market funds.
(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. The Company had no hedge positions that were designated for hedge accounting as of June 30, 2020. Prices used to calculate the ceiling value of reserves were as follows:
June 30, 2020 | June 30, 2019 | ||||||||||
Natural gas (per MMBtu) | $ | $ | |||||||||
Oil (per Bbl) | $ | $ | |||||||||
NGLs (per Bbl) | $ | $ |
Using the average quoted prices above, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by $650 million at June 30, 2020, resulting in a non-cash ceiling test impairment. In the first quarter of 2020, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $1.48 billion and resulted in a non-cash ceiling test impairment. 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. Given the decline in commodity prices in late 2019 and the first half of 2020, the Company expects that an additional non-cash impairment of its assets will likely occur in the third quarter of 2020 and perhaps later.
For the three and six months ended June 30, 2020, the Company recognized a $5 million impairment related to other non-core assets not included in natural gas and oil properties.
The Company’s net book value of its United States natural gas and oil properties did not exceed the ceiling amount at June 30, 2019, and the Company had no derivative positions that were designated for hedge accounting as of June 30, 2019. In June 2019, the Company sold non-core acreage for $25 million. There was no production or proved reserves associated with this acreage.
11
(6) EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income 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 the first quarter of 2019, the Company repurchased 5,260,687 shares of its outstanding common stock as part of a share repurchase program for approximately $21 million at an average price of $3.84 per share.
The following table presents the computation of earnings per share for the three and six months ended June 30, 2020 and 2019:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
(in millions, except share/per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Net income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| |||||||||||||||||||||||
Number of common shares: | |||||||||||||||||||||||
Weighted average outstanding | |||||||||||||||||||||||
Issued upon assumed exercise of outstanding stock options | |||||||||||||||||||||||
Effect of issuance of non-vested restricted common stock | |||||||||||||||||||||||
Effect of issuance of non-vested restricted units | — | — | — | — | |||||||||||||||||||
Effect of issuance of non-vested performance units | |||||||||||||||||||||||
Weighted average and potential dilutive outstanding | |||||||||||||||||||||||
| |||||||||||||||||||||||
Earnings per common share | |||||||||||||||||||||||
Basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
Diluted | $ | ( | $ | $ | ( | $ |
The following table presents the common stock shares equivalent excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2020 and 2019, as they would have had an antidilutive effect:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Unexercised stock options | |||||||||||||||||||||||
Unvested share-based payment | |||||||||||||||||||||||
Restricted stock units | |||||||||||||||||||||||
Performance units | |||||||||||||||||||||||
Total |
12
(7) DERIVATIVES AND RISK MANAGEMENT
The Company is exposed to volatility in market prices and basis differentials for natural gas, oil and NGLs which impacts the predictability of its cash flows related to the sale of those commodities. These risks are managed by the Company’s use of certain derivative financial instruments. As of June 30, 2020, the Company’s derivative financial instruments consisted of fixed price swaps, two-way costless collars, three-way costless collars, basis swaps and call options. The Company’s interest rate swaps expired in June 2020. A description of the Company’s derivative financial instruments is provided below:
Fixed price swaps | If the Company sells a fixed price swap, the Company receives a fixed price for the contract and pays a floating market price to the counterparty. If the Company purchases a fixed price swap, the Company receives a floating market price for the contract and pays a fixed price to the counterparty. | ||||
| |||||
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 that, 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. If the Company sells a basis swap, 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. If the Company purchases a basis swap, the Company pays the counterparty if the price differential is greater than the stated terms of the contract and receives a payment from the counterparty if the price differential is less than the stated terms of the contract. | ||||
| |||||
Call options | The Company purchases and sells call options in exchange for a premium. If the Company purchases a call option, the Company receives from the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. If the Company sells a call option, the Company pays the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. | ||||
| |||||
Interest rate swaps | Interest rate swaps were used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments was to manage the Company’s existing or anticipated exposure to unfavorable interest rate changes. The Company’s interest rate swaps expired in June 2020. |
The Company contracts with counterparties for its derivative instruments that it believes are creditworthy at the time the transactions are entered into, and the Company actively monitors the credit ratings and credit default swap rates of these counterparties where applicable. However, there can be no assurance that a counterparty will be able to meet its obligations to the Company. The fair value of the Company’s derivative assets and liabilities includes a non-performance risk factor. See Note 9 for additional details regarding the Company’s fair value measurements of its derivative positions. The Company presents its derivative positions on a gross basis and does not net the asset and liability positions.
13
The following tables provide 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 tables present the notional amount, the weighted average contract prices and the fair value by expected maturity dates as of June 30, 2020:
Financial Protection on Production | ||||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Price per MMBtu | |||||||||||||||||||||||||||||||||||||||||||
| Volume (Bcf) | Swaps | Sold Puts | Purchased Puts | Sold Calls | Basis Differential | Fair Value at June 30, 2020 (in millions) | |||||||||||||||||||||||||||||||||||||
Natural Gas | ||||||||||||||||||||||||||||||||||||||||||||
2020 | ||||||||||||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | — | $ | (1) | |||||||||||||||||||||||||||||||||
Two-way costless collars | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Three-way costless collars | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | |||||||||||||||||||||||||||||||||||||||||||
2021 | ||||||||||||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | — | $ | ||||||||||||||||||||||||||||||||||
Two-way costless collars | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
Three-way costless collars | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
Total | $ | ( | ||||||||||||||||||||||||||||||||||||||||||
2022 | ||||||||||||||||||||||||||||||||||||||||||||
Two-way costless collars | $ | — | $ | — | $ | $ | $ | — | $ | ( | ||||||||||||||||||||||||||||||||||
Three-way costless collars | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
Total | $ | ( | ||||||||||||||||||||||||||||||||||||||||||
2023 | ||||||||||||||||||||||||||||||||||||||||||||
Three-way costless collars | $ | — | $ | $ | $ | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
Basis Swaps | ||||||||||||||||||||||||||||||||||||||||||||
2020 | $ | — | $ | — | $ | — | $ | — | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||
2021 | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
2022 | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
Total | $ | ( |
(1)Includes $5 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet at June 30, 2020. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
14
| Volume (MBbls) | Weighted Average Strike Price per Bbl | Fair Value at June 30, 2020 (in millions) | ||||||||||||||||||||||||||||||||
Swaps | Sold Puts | Purchased Puts | Sold Calls | ||||||||||||||||||||||||||||||||
Oil | |||||||||||||||||||||||||||||||||||
2020 | |||||||||||||||||||||||||||||||||||
Fixed price swaps (1) | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
Two-way costless collars | — | — | |||||||||||||||||||||||||||||||||
Three-way costless collars | — | ||||||||||||||||||||||||||||||||||
Total | $ | ||||||||||||||||||||||||||||||||||
2021 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
Three-way costless collars | — | ||||||||||||||||||||||||||||||||||
Total | $ | ||||||||||||||||||||||||||||||||||
2022 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
Three-way costless collars | — | ||||||||||||||||||||||||||||||||||
Total | $ | ||||||||||||||||||||||||||||||||||
Ethane | |||||||||||||||||||||||||||||||||||
2020 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
2021 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | ( | ||||||||||||||||||||||||||
2022 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
Propane | |||||||||||||||||||||||||||||||||||
2020 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
Two-way costless collars | — | — | |||||||||||||||||||||||||||||||||
Total | $ | ||||||||||||||||||||||||||||||||||
2021 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ | |||||||||||||||||||||||||||
2022 | |||||||||||||||||||||||||||||||||||
Fixed price swaps | $ | $ | — | $ | — | $ | — | $ |
(1)Includes 790 MBbls of purchased fixed price oil swaps at $36.64 per barrel with a fair value of $2 million and 1,897 MBbls of sold fixed price oil swaps at $57.60 per barrel with a fair value of $34 million.
Other Derivative Contracts | |||||||||||||||||
| Volume (Bcf) | Weighted Average Strike Price per MMBtu | Fair Value at June 30, 2020 (in millions) | ||||||||||||||
Call Options – Natural Gas (Net) | |||||||||||||||||
2020 | $ | $ | ( | ||||||||||||||
2021 | ( | ||||||||||||||||
2022 | ( | ||||||||||||||||
2023 | ( | ||||||||||||||||
2024 | ( | ||||||||||||||||
Total | $ | ( |
Volume (MBbls) | Weighted Average Strike Price per Bbl | Fair Value at June 30, 2020 (in millions) | |||||||||||||||
Call Options – Oil | |||||||||||||||||
2021 | $ | $ |
15
Volume (Bcf) | Weighted Average Strike Price per MMBtu | Fair Value at June 30, 2020 (in millions) | |||||||||||||||||||||
| Swaps | Basis Differential | |||||||||||||||||||||
Storage (1) | |||||||||||||||||||||||
2020 | |||||||||||||||||||||||
Purchased fixed price swaps | $ | $ | $ | ( | |||||||||||||||||||
Purchased basis swaps | ( | ||||||||||||||||||||||
Sold fixed price swaps | |||||||||||||||||||||||
Sold basis swaps | ( | ||||||||||||||||||||||
Total | $ | ||||||||||||||||||||||
2021 | |||||||||||||||||||||||
Purchased fixed price swaps | $ | $ | $ | ||||||||||||||||||||
Sold fixed price swaps | |||||||||||||||||||||||
Sold basis swaps | ( | ||||||||||||||||||||||
Total | $ |
(1)The Company has entered into certain derivatives to protect the value of volumes of natural gas injected into a storage facility that will be withdrawn and sold at a later date.
Purchased Fixed Price Swaps – Marketing (Natural Gas) (1) | Volume (Bcf) | Weighted Average Strike Price per MMBtu | Fair Value at June 30, 2020 (in millions) | ||||||||||||||
2020 | $ | $ | ( | ||||||||||||||
2021 | |||||||||||||||||
Total | $ | ( |
(1)The Company has entered into a limited number of derivatives to protect the value of certain long-term sales contracts.
At June 30, 2020, the net fair value of the Company’s financial instruments related to commodities was a $168 million asset and included a net increase of $1 million related to non-performance risk. See Note 9 for additional details regarding the Company’s fair value measurements of its derivative positions.
As of June 30, 2020, the Company had no positions designated for hedge accounting treatment. Gains and losses on derivatives that are not designated for hedge accounting treatment, or do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the consolidated statements of operations. Accordingly, the gain (loss) on derivatives component of the statement of operations reflects the gain and losses on both settled and unsettled derivatives. The Company calculates gains and losses on settled derivatives as the summation of gains and losses on positions which have settled within the reporting period. Only the settled gains and losses are included in the Company’s realized commodity price calculations.
The Company was a party to interest rate swaps that were entered into to mitigate the Company’s exposure to volatility in interest rates. The interest rate swaps had a notional amount of $170 million and expired in June 2020. Changes in the fair value of the interest rate swaps were included in gain (loss) on derivatives on the consolidated statements of operations.
16
The balance sheet classification of the assets and liabilities related to derivative financial instruments (none of which are designated for hedge accounting treatment) is summarized below as of June 30, 2020 and December 31, 2019:
Derivative Assets | ||||||||||||||||||||
| Fair Value | |||||||||||||||||||
(in millions) | Balance Sheet Classification | June 30, 2020 | December 31, 2019 | |||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||
Purchased fixed price swaps – natural gas | Derivative assets | $ | $ | |||||||||||||||||
Purchased fixed price swaps – oil | Derivative assets | |||||||||||||||||||
Fixed price swaps – natural gas | Derivative assets | (1) | (1) | |||||||||||||||||
Fixed price swaps – oil | Derivative assets | |||||||||||||||||||
Fixed price swaps – ethane | Derivative assets | |||||||||||||||||||
Fixed price swaps – propane | Derivative assets | |||||||||||||||||||
Two-way costless collars – natural gas | Derivative assets | |||||||||||||||||||
Two-way costless collars – oil | Derivative assets | |||||||||||||||||||
Two-way costless collars – propane | Derivative assets | |||||||||||||||||||
Three-way costless collars – natural gas | Derivative assets | |||||||||||||||||||
Three-way costless collars – oil | Derivative assets | |||||||||||||||||||
Basis swaps – natural gas | Derivative assets | |||||||||||||||||||
Purchased call options – natural gas | Derivative assets | |||||||||||||||||||
Fixed price swaps – natural gas storage | Derivative assets | |||||||||||||||||||
Fixed price swaps – natural gas | Other long-term assets | |||||||||||||||||||
Fixed price swaps – oil | Other long-term assets | |||||||||||||||||||
Fixed price swaps – propane | Other long-term assets | |||||||||||||||||||
Two-way costless collars – natural gas | Other long-term assets | |||||||||||||||||||
Three-way costless collars – natural gas | Other long-term assets | |||||||||||||||||||
Three-way costless collars – oil | Other long-term assets | |||||||||||||||||||
Basis swaps – natural gas | Other long-term assets | |||||||||||||||||||
Purchased call options – natural gas | Other long-term assets | |||||||||||||||||||
Total derivative assets | $ | $ |
(1) Includes $5 million and $9 million at June 30, 2020 and December 31, 2019, respectively, in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
17
Derivative Liabilities | ||||||||||||||||||||
| Fair Value | |||||||||||||||||||
(in millions) | Balance Sheet Classification | June 30, 2020 | December 31, 2019 | |||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||
Purchased fixed price swaps – natural gas | Derivative liabilities | $ | $ | |||||||||||||||||
Purchased fixed price swaps – oil | Derivative liabilities | |||||||||||||||||||
Fixed price swaps – natural gas | Derivative liabilities | |||||||||||||||||||
Fixed price swaps – oil | Derivative liabilities | |||||||||||||||||||
Fixed price swaps – ethane | Derivative liabilities | |||||||||||||||||||
Fixed price swaps – propane | Derivative liabilities | |||||||||||||||||||
Two-way costless collars – natural gas | Derivative liabilities | |||||||||||||||||||
Two-way costless collars – oil | Derivative liabilities | |||||||||||||||||||
Three-way costless collars – natural gas | Derivative liabilities | |||||||||||||||||||
Three-way costless collars – oil | Derivative liabilities | |||||||||||||||||||
Basis swaps – natural gas | Derivative liabilities | |||||||||||||||||||
Sold call options – natural gas | Derivative liabilities | |||||||||||||||||||
Purchased fixed price swaps – natural gas storage | Derivative liabilities | |||||||||||||||||||
Fixed price swaps – natural gas | Other long-term liabilities | |||||||||||||||||||
Fixed price swaps – oil | Other long-term liabilities | |||||||||||||||||||
Fixed price swaps – ethane | Other long-term liabilities | |||||||||||||||||||
Fixed price swaps – propane | Other long-term liabilities | |||||||||||||||||||
Two-way costless collars – natural gas | Other long-term liabilities | |||||||||||||||||||
Three-way costless collars – natural gas | Other long-term liabilities | |||||||||||||||||||
Three-way costless collars – oil | Other long-term liabilities | |||||||||||||||||||
Basis swap – natural gas | Other long-term liabilities | |||||||||||||||||||
Sold call options – natural gas | Other long-term liabilities | |||||||||||||||||||
Sold call options – oil | Other long-term liabilities | |||||||||||||||||||
Total derivative liabilities | $ | $ |
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The following tables summarize the before-tax effect of the Company’s derivative instruments on the consolidated statements of operations for the three and six months ended June 30, 2020 and 2019:
Unsettled Gain (Loss) on Derivatives Recognized in Earnings | ||||||||||||||||||||||||||||||||
Derivative Instrument | Consolidated Statement of Operations Classification of Gain (Loss) on Derivatives, Unsettled | For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||
Purchased fixed price swaps – natural gas | Gain (Loss) on Derivatives | $ | $ | $ | $ | |||||||||||||||||||||||||||
Purchased fixed price swaps – oil | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Fixed price swaps – natural gas | Gain (Loss) on Derivatives | ( | ||||||||||||||||||||||||||||||
Fixed price swaps – oil | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Fixed price swaps – ethane | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Fixed price swaps – propane | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Two-way costless collars – natural gas | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Two-way costless collars – oil | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Two-way costless collars – propane | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Three-way costless collars – natural gas | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Three-way costless collars – oil | Gain (Loss) on Derivatives | ( | ||||||||||||||||||||||||||||||
Basis swaps – natural gas | Gain (Loss) on Derivatives | ( | ( | ( | ||||||||||||||||||||||||||||
Purchased call options – natural gas | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Sold call options – natural gas | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Sold call options – oil | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Purchased fixed price swap – natural gas storage | Gain (Loss) on Derivatives | ( | ||||||||||||||||||||||||||||||
Fixed price swap – natural gas storage | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Interest rate swaps | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Total gain (loss) on unsettled derivatives | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
Settled Gain (Loss) on Derivatives Recognized in Earnings (1) | ||||||||||||||||||||||||||||||||
Derivative Instrument | Consolidated Statement of Operations Classification of Gain (Loss) on Derivatives, Settled | For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Purchased fixed price swaps – natural gas | Gain (Loss) on Derivatives | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
Purchased fixed price swaps – oil | Gain (Loss) on Derivatives | ( | ( | ( | ( | |||||||||||||||||||||||||||
Purchased fixed price swaps – ethane | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Fixed price swaps – natural gas | Gain (Loss) on Derivatives | (2) | (2) | |||||||||||||||||||||||||||||
Fixed price swaps – oil | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Fixed price swaps – ethane | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Fixed price swaps – propane | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Two-way costless collars – natural gas | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Two-way costless collars – oil | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Two-way costless collars – propane | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Three-way costless collars – natural gas | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Three-way costless collars – oil | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Basis swaps – natural gas | Gain (Loss) on Derivatives | ( | ( | ( | ||||||||||||||||||||||||||||
Sold call options – natural gas | Gain (Loss) on Derivatives | ( | ( | |||||||||||||||||||||||||||||
Fixed price swaps – natural gas storage | Gain (Loss) on Derivatives | |||||||||||||||||||||||||||||||
Total gain on settled derivatives | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Total gain (loss) on derivatives | $ | ( | $ | $ | $ |
(1)The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions that settled within the period.
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(8) RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
In the first half of 2020, changes in accumulated other comprehensive income were related to the Company’s pension and other postretirement benefits. The following tables detail the components of accumulated other comprehensive income and the related tax effects for the six months ended June 30, 2020:
(in millions) | Pension and Other Postretirement | Foreign Currency | Total | ||||||||||||||
Beginning balance December 31, 2019 | $ | ( | $ | ( | $ | ( | |||||||||||
Other comprehensive income before reclassifications | |||||||||||||||||
Amounts reclassified from other comprehensive income (1) | |||||||||||||||||
Net current-period other comprehensive income | |||||||||||||||||
Ending balance June 30, 2020 | $ | ( | $ | ( | $ | ( |
Details about Accumulated Other Comprehensive Income | Affected Line Item in the Consolidated Statement of Operations | Amount Reclassified from Accumulated Other Comprehensive Income | ||||||||||||
For the six months ended June 30, 2020 | ||||||||||||||
(in millions) | ||||||||||||||
Pension and other postretirement: | ||||||||||||||
Amortization of prior service cost and net gain (1) | Other Income (Loss), Net | $ | ( | |||||||||||
Provision (Benefit) for Income Taxes | ( | |||||||||||||
Net Income (Loss) | $ | |||||||||||||
Total reclassifications for the period | Net Income (Loss) | $ |
(1) See Note 13 for additional details regarding the Company’s pension and other postretirement benefit plans.
(9) FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis
The carrying amounts and estimated fair values of the Company’s financial instruments as of June 30, 2020 and December 31, 2019 were as follows:
| June 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||
(in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
2018 revolving credit facility due April 2024 | ||||||||||||||||||||||||||
Senior notes (1) | ||||||||||||||||||||||||||
Derivative instruments, net | (2) | (2) | (2) | (2) |
(1)Excludes unamortized debt issuance costs and debt discounts.
(2)Includes $5 million and $9 million in premiums paid as of June 30, 2020 and December 31, 2019, respectively, related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:
Level 1 valuations - Consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority.
Level 2 valuations - Consist of quoted market information for the calculation of fair market value.
Level 3 valuations - Consist of internal estimates and have the lowest priority.
The carrying values of cash and cash equivalents, including marketable securities, accounts receivable, other current assets, accounts payable and other current liabilities on the consolidated balance sheets approximate fair value because of their short-term nature. For debt and derivative instruments, the following methods and assumptions were used to estimate fair value:
Debt: The fair values of the Company’s senior notes are based on the market value of the Company’s publicly traded debt as determined based on the market prices of the Company’s senior notes. The fair value of the Company’s 4.10 % Senior Notes due March 2022 is considered to be a Level 2 measurement on the fair value hierarchy. The fair values of the Company’s
20
remaining senior notes are considered the be a Level 1 measurement. The carrying values of the borrowings under the Company’s revolving credit facility (to the extent utilized) approximates fair value because the interest rate is variable and reflective of market rates. The Company considers the fair value of its revolving credit facility to be a Level 1 measurement on the fair value hierarchy.
Derivative Instruments: The Company measures the fair value of its derivative instruments based upon a pricing model that utilizes market-based inputs, including, but not limited to, the contractual price of the underlying position, current market prices, natural gas and liquids forward curves, discount rates such as the LIBOR curve for a similar duration of each outstanding position, volatility factors and non-performance risk. Non-performance risk considers the effect of the Company’s credit standing on the fair value of derivative liabilities and the effect of counterparty credit standing on the fair value of derivative assets. Both inputs to the model are based on published credit default swap rates and the duration of each outstanding derivative position. As of June 30, 2020, the impact of non-performance risk on the fair value of the Company’s net derivative asset position was a net increase of $1 million.
The Company has classified its derivative instruments into levels depending upon the data utilized to determine their fair values. The Company’s fixed price swaps (Level 2) are estimated using third-party discounted cash flow calculations using the New York Mercantile Exchange (“NYMEX”) futures index for natural gas and oil derivatives and Oil Price Information Service (“OPIS”) for ethane and propane derivatives. The Company utilized discounted cash flow models for valuing its interest rate derivatives (Level 2). The net derivative values attributable to the Company’s interest rate derivative contracts as of June 30, 2020 were based on (i) the contracted notional amounts, (ii) active market-quoted LIBOR yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.
The Company’s call options, two-way costless collars and three-way costless collars (Level 2) are valued using the Black-Scholes model, an industry standard option valuation model that takes into account inputs such as contract terms, including maturity, and market parameters, including assumptions of the NYMEX and OPIS futures index, interest rates, volatility and credit worthiness. Inputs to the Black-Scholes model, including the volatility input, are obtained from a third-party pricing source, with independent verification of the most significant inputs on a monthly basis. An increase (decrease) in volatility would result in an increase (decrease) in fair value measurement, respectively.
The Company’s basis swaps (Level 2) are estimated using third-party calculations based upon forward commodity price curves.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| June 30, 2020 | ||||||||||||||||||||||
| Fair Value Measurements Using: | ||||||||||||||||||||||
(in millions) | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Assets (Liabilities) at Fair Value | |||||||||||||||||||
Assets | |||||||||||||||||||||||
Purchased fixed price swaps | $ | $ | $ | $ | |||||||||||||||||||
Fixed price swaps (1) | |||||||||||||||||||||||
Two-way costless collars | |||||||||||||||||||||||
Three-way costless collars | |||||||||||||||||||||||
Basis swaps | |||||||||||||||||||||||
Purchased call options | |||||||||||||||||||||||
Fixed price swaps - storage | |||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||
Purchased fixed price swaps | ( | ( | |||||||||||||||||||||
Fixed price swaps | ( | ( | |||||||||||||||||||||
Two-way costless collars | ( | ( | |||||||||||||||||||||
Three-way costless collars | ( | ( | |||||||||||||||||||||
Basis swaps | ( | ( | |||||||||||||||||||||
Sold call options | ( | ( | |||||||||||||||||||||
Purchased fixed price swaps – storage | ( | ( | |||||||||||||||||||||
Total (2) | $ | $ | $ | $ |
(1)Includes $5 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet at June 30, 2020. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
(2)Includes a net fair value increase of $1 million related to estimated nonperformance risk.
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| December 31, 2019 | ||||||||||||||||||||||
| Fair Value Measurements Using: | ||||||||||||||||||||||
(in millions) | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Assets (Liabilities) at Fair Value | |||||||||||||||||||
Assets | |||||||||||||||||||||||
Fixed price swaps (1) | $ | $ | $ | $ | |||||||||||||||||||
Two-way costless collars | |||||||||||||||||||||||
Three-way costless collars | |||||||||||||||||||||||
Basis swaps | |||||||||||||||||||||||
Purchased call options | |||||||||||||||||||||||
Fixed price swaps - storage | |||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||
Purchased fixed price swaps | ( | ( | |||||||||||||||||||||
Fixed price swaps | ( | ( | |||||||||||||||||||||
Two-way costless collars | ( | ( | |||||||||||||||||||||
Three-way costless collars | ( | ( | |||||||||||||||||||||
Basis swaps | ( | ( | |||||||||||||||||||||
Sold call options | ( | ( | |||||||||||||||||||||
Total | $ | $ | $ | $ |
(1)Includes $9 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet at December 31, 2019. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
The fair values of Level 3 derivative instruments are estimated using proprietary valuation models that utilize both market observable and unobservable parameters. Level 3 instruments consist of net derivatives valued using pricing models incorporating assumptions that, in the Company’s judgment, reflect reasonable assumptions a marketplace participant would use. There were no Level 3 derivatives in the second quarters of 2020 and 2019.
(10) DEBT
The components of debt as of June 30, 2020 and December 31, 2019 consisted of the following:
June 30, 2020 | |||||||||||||||||||||||
(in millions) | Debt Instrument | Unamortized Issuance Expense | Unamortized Debt Discount | Total | |||||||||||||||||||
Long-term debt: | |||||||||||||||||||||||
Variable rate ( | $ | $ | (1) | $ | $ | ||||||||||||||||||
( | |||||||||||||||||||||||
( | ( | ||||||||||||||||||||||
( | |||||||||||||||||||||||
( | |||||||||||||||||||||||
Total long-term debt | $ | $ | ( | $ | ( | $ | |||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||
(in millions) | Debt Instrument | Unamortized Issuance Expense | Unamortized Debt Discount | Total | |||||||||||||||||||
Long-term debt: | |||||||||||||||||||||||
Variable rate ( | $ | $ | (1) | $ | $ | ||||||||||||||||||
( | |||||||||||||||||||||||
( | ( | ||||||||||||||||||||||
( | |||||||||||||||||||||||
( | |||||||||||||||||||||||
Total long-term debt | $ | $ | ( | $ | ( | $ |
(1)At June 30, 2020 and December 31, 2019, unamortized issuance expense of $10 million and $11 million, respectively, associated with the 2018 credit facility (as defined below) was classified as other long-term assets on the consolidated balance sheets.
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Credit Facilities
2018 Revolving Credit Facility
In April 2018, the Company replaced its credit facility that was entered into in 2016 with a new revolving credit facility (the “2018 credit facility”) with a group of banks that, as amended, has a maturity date of April 2024. The 2018 credit facility has an aggregate maximum revolving credit amount of $3.5 billion and, in April 2020, the banks participating in the 2018 credit facility redetermined the borrowing base to be $1.8 billion, which also changed the aggregate commitments to that amount. The borrowing base is subject to redetermination at least twice a year, in April and October, and is secured by substantially all of the assets owned by the Company and its subsidiaries. The permitted lien provisions in the senior note indentures currently limit liens securing indebtedness to the greater of $2.0 billion or 25 % of adjusted consolidated net tangible assets.
The Company may utilize the 2018 credit facility in the form of loans and letters of credit. Loans under the 2018 credit facility are subject to varying rates of interest based on whether the loan is a Eurodollar loan or an alternate base rate loan. Eurodollar loans bear interest at the Eurodollar rate, which is adjusted LIBOR for such interest period plus the applicable margin (as those terms are defined in the 2018 credit facility documentation). The applicable margin for Eurodollar loans under the 2018 credit facility ranges from 1.50 % to 2.50 % based on the Company’s utilization of the 2018 credit facility. Alternate base rate loans bear interest at the alternate base rate plus the applicable margin. The applicable margin for alternate base rate loans under the 2018 credit facility ranges from 0.50 % to 1.50 % based on the Company’s utilization of the 2018 credit facility.
The 2018 credit facility contains customary representations and warranties and contains covenants including, among others, the following:
•a prohibition against incurring debt, subject to permitted exceptions;
•a restriction on creating liens on assets, subject to permitted exceptions;
•restrictions on mergers and asset dispositions;
•restrictions on use of proceeds, investments, transactions with affiliates, or change of principal business; and
•maintenance of the following financial covenants, commencing with the fiscal quarter ending June 30, 2018:
1.Minimum current ratio of no less than 1.00 to 1.00, whereby current ratio is defined as the Company’s consolidated current assets (including unused commitments under the credit agreement, but excluding non-cash derivative assets) to consolidated current liabilities (excluding non-cash derivative obligations and current maturities of long-term debt).
2.Maximum total net leverage ratio of no greater than (i) with respect to each fiscal quarter ending during the period from June 30, 2018 through March 31, 2019, 4.50 to 1.00, (ii) with respect to each fiscal quarter ending during the period from June 30, 2019 through March 31, 2020, 4.25 to 1.00, and (iii) with respect to each fiscal quarter ending on or after June 30, 2020, 4.00 to 1.00. Total net leverage ratio is defined as total debt less cash on hand (up to the lesser of 10 % of credit limit or $150 million) divided by consolidated EBITDAX for the last four consecutive quarters. EBITDAX, as defined in the credit agreement governing the Company’s 2018 credit facility, excludes the effects of interest expense, depreciation, depletion and amortization, income tax, any non-cash impacts from impairments, certain non-cash hedging activities, stock-based compensation expense, non-cash gains or losses on asset sales, unamortized issuance cost, unamortized debt discount and certain restructuring costs.
The 2018 credit facility contains customary events of default that include, among other things, the failure to comply with the financial covenants described above, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments and cross-defaults to material indebtedness. If an event of default occurs and is continuing, all amounts outstanding under the 2018 credit facility may become immediately due and payable. As of June 30, 2020, the Company was in compliance with all of the covenants contained in the credit agreement governing the 2018 credit facility. As a result of improving market conditions as evidenced by oil and NGL pricing and management actions, the Company’s current modeling no longer indicates that Southwestern will be in non-compliance with any covenants under the 2018 credit facility in late 2020.
23
Each United States domestic subsidiary of the Company for which the Company owns 100 % guarantees the 2018 credit facility. Pursuant to requirements under the indentures governing its senior notes, each subsidiary that became a guarantor of the 2018 credit facility also became a guarantor of each of the Company’s senior notes.
As of June 30, 2020, the Company had $209 million in letters of credit and $336 million borrowings outstanding under the 2018 credit facility. The Company currently does not anticipate being required to supply a materially greater amount of letters of credit under its existing contracts.
The Company’s exposure to the anticipated transition from LIBOR in late 2021 is limited to the 2018 credit facility. Upon announcement by the administrator of LIBOR identifying a specific date for LIBOR cessation, the credit agreement governing the 2018 credit facility will be amended to reference an alternative rate as established by JP Morgan, as Administrative Agent, and the Company. The alternative rate will be based on the prevailing market convention and is expected to be the Secured Overnight Financing Rate (“SOFR”).
Senior Notes
In January 2015, the Company completed a public offering of $1.0 billion aggregate principal amount of its 4.95 % senior notes due 2025 (the “2025 Notes”). The interest rate on the 2025 Notes is determined based upon the public bond ratings from Moody’s and S&P. Downgrades on the 2025 Notes from either rating agency increase interest costs by 25 basis points per downgrade level and upgrades decrease interest costs by 25 basis points per upgrade level, up to the stated coupon rate, on the following semi-annual bond interest payment. At June 30, 2020, the interest rate for the 2025 Notes was 6.20 %, reflecting a net downgrade in the Company’s bond ratings since the initial offering. This rate has been in effect since January 2019. On April 7, 2020, S&P downgraded the Company’s bond rating to BB-, which had the effect of increasing the interest rate on the 2025 Notes to 6.45 %. The first coupon payment to the bondholders at the higher interest rate will be paid in January 2021. In the event of future downgrades, the coupons for this series of notes have been capped at 6.95 %.
In the first half of 2020, the Company repurchased $6 million of its 4.10 % Senior Notes due 2022, $36 million of its 4.95 % Senior Notes due 2025, $21 million of its 7.50 % Senior Notes due 2026 and $44 million of its 7.75 % Senior Notes due 2027 for $72 million, and recognized a $35 million gain on the extinguishment of debt.
(11) COMMITMENTS AND CONTINGENCIES
Operating Commitments and Contingencies
As of June 30, 2020, the Company’s contractual obligations for demand and similar charges under firm transportation and gathering agreements to guarantee access capacity on natural gas and liquids pipelines and gathering systems totaled approximately $7.3 billion, $402 million of which related to access capacity on future pipeline and gathering infrastructure projects that still require the granting of regulatory approvals and additional construction efforts. The Company also had guarantee obligations of up to $1.0 billion of that amount. As of June 30, 2020, future payments under non-cancelable firm transportation and gathering agreements were as follows:
| Payments Due by Period | ||||||||||||||||||||||||||||||||||
(in millions) | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | 5 to 8 Years | More than 8 Years | |||||||||||||||||||||||||||||
Infrastructure currently in service | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Pending regulatory approval and/or construction (1) | |||||||||||||||||||||||||||||||||||
Total transportation charges | $ | $ | $ | $ | $ | $ |
(1)Based on estimated in-service dates as of June 30, 2020.
In December 2018, the Company closed the Fayetteville Shale sale and retained certain contractual commitments related to firm transportation, with the buyer obligated to pay the transportation provider directly for these charges. As of June 30, 2020, approximately $54 million of these contractual commitments remain of which the Company will reimburse the buyer for certain of these potential obligations up to approximately $27 million through December 2020 depending on the buyer’s actual use, and has recorded a $21 million liability for the estimated future payments, down from $46 million recorded at December 31, 2019.
In the first quarter of 2019, the Company agreed to acquire firm transportation contracts with pipelines in the Appalachian Basin starting in 2021 and running through 2032 totaling $357 million in total contractual commitments, which is presented in the table above; the releasing shipper has agreed to reimburse $133 million of these commitments.
In February 2020, the Company was notified that the proposed Constitution pipeline project was cancelled and that the Company was released from a firm transportation agreement with its sponsor. Prior to its cancellation, the Company had contractual commitments totaling $512 million over the next 17 years related to the Constitution pipeline project.
24
Environmental Risk
The Company is subject to laws and regulations relating to the protection of the environment. Environmental and cleanup related costs of a non-capital nature are accrued when it is both probable that a liability has been incurred and when the amount can be reasonably estimated. Management believes any future remediation or other compliance related costs will not have a material effect on the financial position, results of operations or cash flows of the Company.
Litigation
The Company is subject to various litigation, claims and proceedings, most of which have arisen in the ordinary course of business, such as for alleged breaches of contract, miscalculation of royalties, employment matters, traffic accidents, pollution, contamination, encroachment on others’ property or nuisance. The Company accrues for litigation, claims and proceedings when a liability is both probable and the amount can be reasonably estimated. As of June 30, 2020, the Company does not currently have any material amounts accrued related to litigation matters. For any matters not accrued for, it is not possible at this time to estimate the amount of any additional loss, or range of loss, that is reasonably possible, but, based on the nature of the claims, management believes that current litigation, claims and proceedings, individually or in aggregate and after taking into account insurance, are not likely to have a material adverse impact on the Company’s financial position, results of operations or cash flows, for the period in which the effect of that outcome becomes reasonably estimable. Many of these matters are in early stages, so the allegations and the damage theories have not been fully developed, and are all subject to inherent uncertainties; therefore, management’s view may change in the future.
St. Lucie County Fire District Firefighters’ Pension Trust
On October 17, 2016, the St. Lucie County Fire District Firefighters’ Pension Trust filed a putative class action in the 61st District Court in Harris County, Texas, against the Company, certain of its former officers and current and former directors and the underwriters on behalf of itself and others that purchased certain depositary shares from the Company’s January 2015 equity offering, alleging material misstatements and omissions in the registration statement for that offering. The Company removed the case to federal court, but after a decision by the United States Supreme Court in an unrelated case that these types of cases are not subject to removal, the federal court remanded the case to the Texas state court. The Texas trial court denied the Company’s motion to dismiss, and in February 2020, the court of appeals declined to exercise discretion to reverse the trial court’s decision. The Company filed a petition to review the trial court’s decision with the Texas Supreme Court, and the Court requested a response from the plaintiff. The Company carries insurance for the claims asserted against it and the officer and director defendants, and the carrier has accepted coverage. The Company denies all allegations and intends to continue to defend this case vigorously. The Company does not expect this case to have a material adverse effect on the results of operations, financial position or cash flows of the Company after taking insurance into account. Additionally, it is not possible at this time to estimate the amount of any additional loss, or range of loss, that is reasonably possible.
Indemnifications
The Company has provided certain indemnifications to various third parties, including in relation to asset and entity dispositions, securities offerings and other financings, and litigation, such as the St. Lucie County Fire District Firefighters’ Pension Trust case described above. In the case of asset dispositions, these indemnifications typically relate to disputes, litigation or tax matters existing at the date of disposition. The Company likewise obtains indemnification for future matters when it sells assets, although there is no assurance the buyer will be capable of performing those obligations. In the case of equity offerings, these indemnifications typically relate to claims asserted against underwriters in connection with an offering. No material liabilities have been recognized in connection with these indemnifications.
(12) INCOME TAXES
The Company’s effective tax rate was approximately 0 % and (20 )% for the three and six months ended June 30, 2020, respectively. The change in the effective tax rate for the six months ended June 30, 2020 related to the effects of recording a valuation allowance against the Company’s U.S. deferred tax assets. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses estimates and judgment regarding future taxable income, and considers the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as current and forecasted business economics of the oil and gas industry.
Due to significant pricing declines and the material write-down of the carrying value of the Company’s natural gas and oil properties in addition to other negative evidence, the Company concluded that it was more likely than not that these deferred tax
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assets will not be realized and recorded a discrete tax expense of $408 million for the increase in its valuation allowance in the first quarter of 2020. The net change in valuation allowance is reflected as a component of income tax expense. The Company also has retained a valuation allowance of $87 million related to net operating losses in jurisdictions in which it no longer operates. Management will continue to assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted based on changes in subjective estimates of future taxable income or if objective negative evidence is no longer present.
The Company’s effective tax rate was approximately 10 % and (128 )% for the three and six months ended June 30, 2019, respectively. The effective tax rate for the six months ended June 30, 2019 was primarily the effect of releasing the valuation allowances previously recorded against the Company’s deferred tax assets. As of the first quarter of 2019, the Company had sustained and projected to sustain a three-year cumulative level of profitability. Based on this factor and other positive evidence available at the time, the Company concluded that it was more likely than not that the deferred tax assets would be realized and determined $522 million of the valuation allowance would be released during 2019, of which $411 million was released on a discrete basis in the first half of 2019.
(13) PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
The Company maintains defined pension and other postretirement benefit plans, which cover substantially all of the Company’s employees. Net periodic pension costs include the following components for the three and six months ended June 30, 2020 and 2019:
| Consolidated Statements of Operations Classification of Net Periodic Benefit Cost | For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Service cost | General and administrative expenses | $ | $ | $ | $ | ||||||||||||||||||||||||
Interest cost | Other Income (Loss), Net | ||||||||||||||||||||||||||||
Expected return on plan assets | Other Income (Loss), Net | ( | ( | ( | ( | ||||||||||||||||||||||||
Amortization of prior service cost | Other Income (Loss), Net | ||||||||||||||||||||||||||||
Amortization of net loss | Other Income (Loss), Net | ||||||||||||||||||||||||||||
Settlement loss | Other Income (Loss), Net | ||||||||||||||||||||||||||||
Net periodic benefit cost | $ | $ | $ | $ |
The Company’s other postretirement benefit plan had a net periodic benefit cost of less than $1 million for the three months ended June 30, 2020 and 2019, respectively, and $1 million and $1 million for the six months ended June 30, 2020 and 2019, respectively.
As of June 30, 2020, the Company has contributed $9 million to the pension and other postretirement benefit plans and expects to contribute an additional $3 million to its pension plan during the remainder of 2020. The Company recognized liabilities of $24 million and $14 million related to its pension and other postretirement benefits, respectively, as of June 30, 2020, compared to liabilities of $30 million and $13 million as of December 31, 2019, respectively.
In the first half of 2019, the Company recognized a $4 million non-cash settlement loss related to $16 million of lump-sum payments from the pension plan for employees who were terminated as a result of the Fayetteville Shale sale.
The Company maintains a non-qualified deferred compensation supplemental retirement savings plan (“Non-Qualified Plan”) for certain key employees who may elect to defer and contribute a portion of their compensation, as permitted by the Non-Qualified Plan. Shares of the Company’s common stock purchased under the terms of the Non-Qualified Plan are included in treasury stock and totaled 3,632 shares and 5,115 shares at June 30, 2020 and December 31, 2019, respectively.
(14) LONG-TERM INCENTIVE COMPENSATION
The Company’s long-term incentive compensation plans consist of a combination of stock-based awards that derive their value directly or indirectly from the Company’s common stock price, and cash-based awards that are fixed in amount but subject to meeting annual performance thresholds. In March 2020, the Company issued its first long-term fixed cash-based awards.
Stock-Based Compensation
The Company’s stock-based compensation is classified as either equity awards or liability awards in accordance with GAAP. The fair value of an equity-classified award is determined at the grant date and is amortized to general and
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administrative expense on a straight-line basis over the vesting period of the award. A portion of this general and administrative expense is capitalized into natural gas and oil properties, included in property and equipment. The fair value of a liability-classified award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value of liability-classified awards are recorded to general and administrative expense and capitalized expense over the vesting period of the award. Generally, stock options granted to employees and directors vest ratably over three years from the grant date and expire seven years from the date of grant. The Company issues shares of restricted stock, restricted stock units or performance cash awards to employees and directors which generally vest over four years . Restricted stock, restricted stock units, performance cash awards and stock options granted to participants under the 2013 Incentive Plan, as amended and restated, immediately vest upon death, disability or retirement (subject to a minimum of three years of service). The Company issues performance unit awards to employees which historically have vested at or over three years .
In February 2020, the Company notified employees of a workforce reduction plan as a result of a strategic realignment of the Company’s organizational structure. This reduction was substantially complete by the end of the first quarter of 2020. Affected employees were offered a severance package which, if applicable, included the current value of unvested long-term incentive awards that were forfeited.
The Company recognized the following amounts in total employee stock-based compensation costs for the three and six months ended June 30, 2020 and 2019:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Stock-based compensation cost – expensed | $ | $ | $ | $ | |||||||||||||||||||
Stock-based compensation cost – capitalized |
Equity-Classified Awards
The Company recognized the following amounts in employee equity-classified stock-based compensation costs for the three and six months ended June 30, 2020 and 2019:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Equity-classified awards – expensed | $ | $ | $ | $ | |||||||||||||||||||
Equity-classified awards – capitalized |
As of June 30, 2020, there was $3 million of total unrecognized compensation cost related to the Company’s unvested equity-classified stock option grants, equity-classified restricted stock grants and equity-classified performance units. This cost is expected to be recognized over a weighted-average period of 0.7 years.
Equity-Classified Stock Options
The following table summarizes equity-classified stock option activity for the six months ended June 30, 2020 and provides information for options outstanding and options exercisable as of June 30, 2020:
| Number of Options | Weighted Average Exercise Price | |||||||||
| (in thousands) | ||||||||||
Outstanding at December 31, 2019 | $ | ||||||||||
Granted | $ | ||||||||||
Exercised | $ | ||||||||||
Forfeited or expired | ( | $ | |||||||||
Outstanding at June 30, 2020 | $ | ||||||||||
Exercisable at June 30, 2020 | $ |
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Equity-Classified Restricted Stock
The following table summarizes equity-classified restricted stock activity for the six months ended June 30, 2020 and provides information for unvested shares as of June 30, 2020:
| Number of Shares | Weighted Average Fair Value | |||||||||
| (in thousands) | ||||||||||
Unvested shares at December 31, 2019 | $ | ||||||||||
Granted | $ | ||||||||||
Vested | ( | $ | |||||||||
Forfeited | ( | $ | |||||||||
Unvested shares at June 30, 2020 | $ |
Equity-Classified Performance Units
The following table summarizes equity-classified performance unit activity for the six months ended June 30, 2020 and provides information for unvested units as of June 30, 2020. The performance unit awards granted in 2018 include a market condition based exclusively on the Total Shareholder Return (“TSR”), with their fair value calculated by a Monte Carlo model. The total fair value of the performance units is amortized to compensation expense on a straight line basis over the vesting period of the award. The grant date fair value is calculated using the closing price of the Company’s common stock at the grant date.
| Number of Units (1) | Weighted Average Fair Value | |||||||||
| (in thousands) | ||||||||||
Unvested units at December 31, 2019 | $ | ||||||||||
Granted | $ | ||||||||||
Vested | ( | $ | |||||||||
Forfeited | $ | ||||||||||
Unvested units at June 30, 2020 | $ |
(1)The actual payout of shares may range from a minimum of zero shares to a maximum of two shares per unit contingent upon TSR. The performance units have a -year vesting term and the actual disbursement of shares, if any, is determined during the first quarter following the end of the -year vesting period.
Liability-Classified Awards
The Company recognized the following amounts in employee liability-classified stock-based compensation costs for the three and six months ended June 30, 2020:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Liability-classified stock-based compensation cost – expensed | $ | $ | $ | $ | |||||||||||||||||||
Liability-classified stock-based compensation cost – capitalized |
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Liability-Classified Restricted Stock Units
In the first quarter of each year beginning with 2018, the Company granted restricted stock units that vest over a period of four years and are payable in either cash or shares at the option of the Compensation Committee of the Company’s Board of Directors. The Company has accounted for these as liability-classified awards, and accordingly changes in the market value of the instruments will be recorded to general and administrative expense and capitalized expense over the vesting period of the award. As of June 30, 2020, there was $26 million of total unrecognized compensation cost related to liability-classified restricted stock units that is expected to be recognized over a weighted-average period of 2.8 years. The amount of unrecognized compensation cost for liability-classified awards will fluctuate over time as they are marked to market.
| Number of Units | Weighted Average Fair Value | |||||||||
| (in thousands) | ||||||||||
Unvested units at December 31, 2019 | $ | ||||||||||
Granted | $ | ||||||||||
Vested | ( | $ | |||||||||
Forfeited | ( | $ | |||||||||
Unvested units at June 30, 2020 | $ |
Liability-Classified Performance Units
In each year beginning with 2018, the Company granted performance units that vest at the end of, or over, a 15 million of total unrecognized compensation cost related to liability-classified performance units. This cost is expected to be recognized over a weighted-average period of 2.3 years. The amount of unrecognized compensation cost for liability-classified awards will fluctuate over time as they are marked to market. The final value of the performance unit awards is contingent upon the Company’s actual performance against these performance measures. -year period and are payable in either cash or shares at the option of the Compensation Committee of the Company’s Board of Directors. The Company has accounted for these as liability-classified awards, and accordingly changes in the fair market value of the instruments will be recorded to general and administrative expense and capitalized expense over the vesting period of the awards. The performance unit awards granted in 2018 include a performance condition based on cash flow per debt-adjusted share and two market conditions, one based on absolute TSR and the other on relative TSR as compared to a group of the Company’s peers. The performance unit awards granted in 2019 include performance conditions based on return on average capital employed and two market conditions, one based on absolute TSR and the other on relative TSR. The performance units granted in 2020 include a performance condition based on return on average capital employed and a market condition based on relative TSR. The fair values of the market conditions are calculated by Monte Carlo models on a quarterly basis. As of June 30, 2020, there was $
| Number of Units | Weighted Average Fair Value | |||||||||
| (in thousands) | ||||||||||
Unvested units at December 31, 2019 | $ | ||||||||||
Granted | $ | ||||||||||
Vested | $ | ||||||||||
Forfeited | ( | $ | |||||||||
Unvested units at June 30, 2020 | $ |
Cash-Based Compensation
Performance Cash Awards
In 2020, the Company granted performance cash awards that vest over a 18 million of total unrecognized compensation cost related to performance cash awards. This cost is expected to be recognized over a weighted average 3.7 years. The final value of the performance cash awards is contingent upon the Company’s actual performance against these performance measures. -year period and are payable in cash on an annual basis. The value of each unit of the award equals one dollar. The Company recognizes the cost of these awards as general and administrative expense and capitalized expense over the vesting period of the awards. The performance cash awards granted in 2020 include a performance condition determined annually by the Company. In 2020, the performance measure is a targeted discretionary cash flow amount. If the Company, in its sole discretion, determines that the threshold was not met, the amount for that vesting period will not vest and will be cancelled. As of June 30, 2020, there was $
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Number of Units | Weighted Average Fair Value | ||||||||||
(in thousands) | |||||||||||
Unvested units at December 31, 2019 | $ | ||||||||||
Granted | $ | ||||||||||
Vested | $ | ||||||||||
Forfeited | ( | $ | |||||||||
Unvested units at June 30, 2020 | $ |
(15) SEGMENT INFORMATION
The Company’s reportable business segments have been identified based on the differences in products or services provided. Revenues for the E&P segment are derived from the production and sale of natural gas and liquids. The Marketing segment generates revenue through the marketing of both Company and third-party produced natural gas and liquids volumes.
Summarized financial information for the Company’s reportable segments is shown in the following table. The accounting policies of the segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of the 2019 Annual Report. Management evaluates the performance of its segments based on operating income, defined as operating revenues less operating costs. Income before income taxes, for the purpose of reconciling the operating income amount shown below to consolidated income before income taxes, is the sum of operating income, interest expense, gain (loss) on derivatives, gain on early extinguishment of debt and other income. The “Other” column includes items not related to the Company’s reportable segments, including real estate and corporate items. Corporate general and administrative costs, depreciation expense and taxes, other than income taxes, are allocated to the segments.
E&P | Marketing | Other | Total | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Three months ended June 30, 2020 | ||||||||||||||||||||||||||||||||
Revenues from external customers | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Intersegment revenues | ( | |||||||||||||||||||||||||||||||
Depreciation, depletion and amortization expense | ||||||||||||||||||||||||||||||||
Impairments | ||||||||||||||||||||||||||||||||
Operating loss | ( | (1) | ( | ( | ||||||||||||||||||||||||||||
Interest expense (2) | ||||||||||||||||||||||||||||||||
Loss on derivatives | ( | ( | ||||||||||||||||||||||||||||||
Gain on extinguishment of debt | ||||||||||||||||||||||||||||||||
Other income (loss), net | ( | |||||||||||||||||||||||||||||||
Provision for income taxes (2) | ||||||||||||||||||||||||||||||||
Assets | (3) | (4) | ||||||||||||||||||||||||||||||
Capital investments (5) | ||||||||||||||||||||||||||||||||
Three months ended June 30, 2019 | ||||||||||||||||||||||||||||||||
Revenues from external customers | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Intersegment revenues | ( | |||||||||||||||||||||||||||||||
Depreciation, depletion and amortization expense | ||||||||||||||||||||||||||||||||
Impairments | ||||||||||||||||||||||||||||||||
Operating income (loss) | (1) | ( | ||||||||||||||||||||||||||||||
Interest expense (2) |