SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF ORGANIZATION AND NATURE OF BUSINESS
Range Resources Corporation (“Range,” “we,” “us,” or “our”) is a Fort Worth, Texas-based independent natural gas, natural gas liquids (“NGLs”) and oil company primarily engaged in the exploration, development and acquisition of natural gas and oil properties in the Appalachian region of the United States. Our objective is to build stockholder value through consistent growth in reserves and production on a cost-efficient basis. Range is a Delaware corporation with our common stock listed and traded on the New York Stock Exchange under the symbol “RRC.”
(2) BASIS OF PRESENTATION
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Range Resources Corporation 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2016. The results of operations for the second quarter and the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for fair presentation of the results for the periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. These consolidated financial statements, including selected notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.
(3) NEW ACCOUNTING STANDARDS
Not Yet Adopted
In May 2014, an accounting standards update was issued that supersedes the existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance, requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. This standard is effective for us in first quarter 2018 and will be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the update recognized at the date of initial application. Early adoption is permitted with an effective date no earlier than first quarter 2017. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position or cash flows.
In August 2014, an accounting standards update was issued that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in United States auditing standards. This standard is effective for us in fourth quarter 2016 and early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position or cash flows.
In February 2016, an accounting standards update was issued that requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Classification of leases as either a finance or operating lease will determine the recognition, measurement and presentation of expenses. This accounting standards update also requires certain quantitative and qualitative disclosures about leasing arrangements. This standard is effective for us in first quarter 2019 and should be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it may have, if any, on our consolidated results of operations, financial position or cash flows.
In March 2016, an accounting standards update was issued that simplifies several aspects of the accounting for share-based payment award transactions. Among other things, this new guidance will require all income tax effects of share-based awards to be recognized in the statement of operations when the awards vest or are settled, will allow an employer to repurchase more of an employee’s shares for tax withholding purposes than it can today without triggering liability accounting and will allow a policy election to account for forfeitures as they occur. This standard is effective for us in first quarter 2017 with prospective application and early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it may have, if any, on our consolidated results of operations, financial position or cash flows.
Recently Adopted
In April 2015, an accounting standards update was issued that requires debt issuance costs to be presented in the balance sheet as a direct reduction from the associated debt liability. This standard was effective for the reporting period beginning on January 1, 2016 with early adoption permitted. As of December 31, 2015, we adopted this standard retrospectively and have accounted for the debt issuance costs as a reduction of the associated debt liability. This adoption only affected our consolidated balance sheets and did not have an impact on our consolidated results of operations or cash flows. As of June 30, 2016, unamortized debt issuance costs
6
related to our bank credit facility exceeded our credit facility balance. The amount
of
debt iss
uance costs
which
exceeded the credit facility balance has been presented
in other
asset
s
on our consolidated balance sheet.
In November 2015, an accounting standards update was issued which requires entities to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This standard is effective for the reporting period beginning January 1, 2017 with early adoption permitted. As of December 31, 2015, we adopted this standard retrospectively and reclassified our current deferred tax assets and liabilities into non-current deferred tax assets and liabilities. This adoption only affected our consolidated balance sheets and did not have an impact on our consolidated results of operations or cash flows.
(4) DISPOSITIONS AND ACQUISITIONS
2016 Dispositions
We recognized a pretax net loss on the sale of assets of $3.3 million in second quarter 2016 compared to a pretax net gain of $2.9 million in the same period of the prior year and a pretax net loss on the sale of assets of $4.9 million in the six months ended June 30, 2016 compared to a pretax net gain of $2.7 million in the same period of the prior year.
Western Oklahoma.
In second quarter 2016, we sold certain properties in Western Oklahoma for proceeds of $77.7 million and we recorded a $2.7 million loss related to this sale, after closing adjustments.
Pennsylvania.
In first quarter 2016, we sold our non-operated interest in certain wells and gathering facilities in northeast Pennsylvania for proceeds of $111.5 million. After closing adjustments, we recorded a loss of $2.1 million related to this sale.
Other.
In the second quarter 2016, we sold miscellaneous inventory and surface property for proceeds of $74,000 resulting in a loss of $640,000. In first quarter 2016, we sold miscellaneous proved and unproved properties, inventory, other assets and surface acreage for proceeds of $1.6 million resulting in a gain of $443,000. Included in the $1.6 million of proceeds is $1.2 million received from the sale of proved properties in Mississippi and South Texas.
2015 Dispositions
In second quarter 2015, we sold miscellaneous unproved properties and inventory for proceeds of $3.6 million resulting in a gain of $2.9 million. In first quarter 2015, we sold miscellaneous unproved property, proved property and inventory for proceeds of $10.7 million resulting in a loss of $175,000. Included in the $10.7 million of proceeds is $10.5 million received from the sale of certain West Texas properties which closed in February 2015.
Proposed Memorial Merger
On May 15, 2016, Range and Memorial Resource Development Corp. (“Memorial”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) which provides for the Merger of Memorial and Range. Pursuant to the terms of the Merger Agreement, a wholly-owned subsidiary of Range will merge with and into Memorial, with Memorial surviving as a wholly-owned subsidiary of Range (the “Merger”). In order to complete the Merger, among other conditions, Range stockholders must approve the issuance of Range common stock to Memorial stockholders in connection with the Merger and Memorial stockholders must approve and adopt the Merger Agreement and the transactions contemplated by the Merger Agreement.
If the Merger is completed, each share of Memorial common stock outstanding immediately before that time (including outstanding shares of restricted Memorial common stock, all of which will become fully vested and unrestricted under the terms of the Merger Agreement) will automatically be converted into the right to receive 0.375 of a share of Range common stock. This exchange ratio is fixed and will not be adjusted to reflect stock price changes prior to the closing of the Merger. Based on the closing price of Range common stock on the NYSE on May 13, 2016, the last trading day before public announcement of the Merger, the aggregate equity value of the Merger consideration payable to Memorial stockholders was approximately $3.2 billion. We may choose to use the availability under our current bank credit facility to complete the proposed Merger which includes the repayment of Memorial’s credit facility and the redemption of Memorial’s senior notes.
Based on the estimated number of shares of Range and Memorial common stock that will be outstanding immediately prior to the closing of the Merger, we estimate that, upon such closing, existing Range stockholders will own approximately 69% of Range’s outstanding shares and former Memorial stockholders will own approximately 31% of Range’s outstanding shares.
At a special meeting of Range stockholders, which is currently expected to be held on September 15, 2016, Range stockholders will be asked to vote on the proposal to approve the issuance of shares of Range common stock to Memorial stockholders in connection with the Merger. Approval of this proposal requires the affirmative vote of a majority of the shares of Range common stock, present in person or represented by proxy at the Range special meeting and entitled to vote thereon, assuming a quorum is present. The record date for the special meeting is expected to be August 10, 2016.
7
At a special meeting of Memorial stockholders, Memorial stockholders will be asked to vote on a pro
posal to approve and
adopt the Merger A
greement and the tr
ansactions contemplated by the Merger Agreement, including the M
erger. Approval of this proposal requires the affirmative vote of a majority of the outstanding shares of Memorial common stock entitled to vote thereon
,
assuming a quorum is present
. At the special meeting, Memorial stockholders will also be asked to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to Memorial’s named executive o
fficers in connection with the
M
erger
.
The foregoing description of the Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed hereto as Exhibit 2.1 and is incorporated herein by reference.
(5) INCOME TAXES
Income tax benefit was as follows (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
Income tax benefit
|
$
|
(129,488
|
)
|
|
$
|
(61,975
|
)
|
|
$
|
(173,526
|
)
|
|
$
|
(39,609
|
)
|
Effective tax rate
|
|
36.5
|
%
|
|
|
34.3
|
%
|
|
|
35.4
|
%
|
|
|
30.3
|
%
|
We compute our quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to our year-to-date income, except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For second quarter and the six months ended June 30, 2016 and 2015, our overall effective tax rate was different than the federal statutory rate of 35% due primarily to state income taxes, valuation allowances and other permanent differences. The three months ended June 30, 2016 includes $3.2 million and the six months ended June 30, 2016 includes $7.7 million of tax expense related to an increase in our valuation allowance for state net operating loss carryforwards that we do not believe are realizable. The three months ended June 30, 2016 includes an income tax expense of $2.6 million and the six months ended June 30, 2016 includes an income tax expense of $2.5 million to adjust the valuation allowance on our deferred tax asset related to future deferred compensation plan distributions of our senior executives. In addition, for the six months ended June 30, 2016, we recorded income tax expense of $3.7 million related to equity compensation because we no longer have a hypothetical additional paid-in capital pool (“APIC Pool”) available to offset reduced tax benefits for the excess of financial accounting compensation expense over the corporate income tax deduction. The hypothetical APIC Pool represents the tax benefit of the cumulative excess of corporate income tax deductions over financial accounting compensation expense recognized for equity-based compensation awards which have fully vested. The APIC Pool will increase or decrease each year as equity awards vest. Shortfalls generated by the excess of compensation expense for financial accounting purposes over the corresponding corporate income tax deduction are charged to the APIC Pool rather than income tax expense. Once the APIC Pool is fully depleted, the tax effect of any excess of financial accounting expense over the corresponding corporate income tax deduction is recorded as income tax expense. The three months ended June 30, 2015 includes income tax expense of $6.1 million and the six months ended June 30, 2015 includes income tax expense of $11.3 million related to increases in our valuation allowances for state net operating loss carryforwards and credit carryforwards. The three months ended June 30, 2015 also includes income tax expense of $1.1 million and the six months ended June 30, 2015 includes income tax benefit of $874,000 adjusting our valuation allowance for our deferred tax asset related to future deferred compensation plan distributions of our senior executives.
(6) LOSS PER COMMON SHARE
Basic income or loss per share attributable to common shareholders is computed as (1) income or loss attributable to common shareholders (2) less income allocable to participating securities (3) divided by weighted average basic shares outstanding. Diluted income or loss per share attributable to common shareholders is computed as (1) basic income or loss attributable to common shareholders (2) plus diluted adjustments to income allocable to participating securities (3) divided by weighted average diluted shares outstanding. The following tables set forth a reconciliation of income or loss attributable to common shareholders to basic income or loss attributable to common shareholders to diluted income or loss attributable to common shareholders (in thousands except per share amounts):
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
Net loss, as reported
|
$
|
(224,936
|
)
|
|
$
|
(118,594
|
)
|
|
$
|
(316,646
|
)
|
|
$
|
(90,910
|
)
|
Participating earnings
(a)
|
|
(56
|
)
|
|
|
(111
|
)
|
|
|
(111
|
)
|
|
|
(224
|
)
|
Basic net loss attributed to common
shareholders
|
|
(224,992
|
)
|
|
|
(118,705
|
)
|
|
|
(316,757
|
)
|
|
|
(91,134
|
)
|
Reallocation of participating earnings
(a)
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
Diluted net loss attributed to common shareholders
|
$
|
(224,992
|
)
|
|
$
|
(118,705
|
)
|
|
$
|
(316,757
|
)
|
|
$
|
(91,134
|
)
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(1.35
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(0.55
|
)
|
Diluted
|
$
|
(1.35
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(0.55
|
)
|
(a)
|
Restricted Stock Awards represent participating securities because they participate in nonforfeitable dividends or distributions with common equity owners. Income allocable to participating securities represents the distributed and undistributed earnings attributable to the participating securities. Participating securities, however, do not participate in undistributed net losses.
|
8
The following table provides a reconciliation of basic weighted average common shares outstanding to di
luted weighted average common shares outstanding (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
Weighted average common shares outstanding – basic
|
|
167,126
|
|
|
|
166,421
|
|
|
|
166,964
|
|
|
|
166,230
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director and employee SARs
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
|
|
¾
|
|
Weighted average common shares outstanding – diluted
|
|
167,126
|
|
|
|
166,421
|
|
|
|
166,964
|
|
|
|
166,230
|
|
Weighted average common shares outstanding-basic for both the three months ended June 30, 2016 and the three months ended June 30, 2015 excludes 2.8 million shares of restricted stock held in our deferred compensation plan (although all awards are issued and outstanding upon grant). Weighted average common shares outstanding-basic for both the six months ended June 30, 2016 and the six months ended June 31, 2015 also exclude 2.8 million shares of restricted stock held in our deferred compensation plan. Due to our net loss from operations for the three months and six months ended June 30, 2016 and 2015, we excluded all outstanding stock appreciation rights (“SARs”) and restricted stock from the computation of diluted net loss per share because the effect would have been anti-dilutive.
(7) SUSPENDED EXPLORATORY WELL COSTS
We capitalize exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. Capitalized exploratory well costs are included in natural gas and oil properties in the accompanying consolidated balance sheets. If an exploratory well is determined to be impaired, the well costs are charged to exploration expense in the accompanying consolidated statements of operations. We did not have any exploratory well costs that have been capitalized for a period greater than one year as of June 30, 2016. The following table reflects the change in capitalized exploratory well costs for the six months ended June 30, 2016 and the year ended December 31, 2015 (in thousands):
|
|
June 30,
2016
|
|
|
|
December 31,
2015
|
|
Balance at beginning of period
|
$
|
4,161
|
|
|
$
|
2,996
|
|
Additions to capitalized exploratory well costs pending the determination of proved reserves
|
|
1,556
|
|
|
|
1,165
|
|
Reclassifications to wells, facilities and equipment based on determination of proved reserves
|
|
(5,717
|
)
|
|
|
¾
|
|
Divested wells
|
|
¾
|
|
|
|
¾
|
|
Balance at end of period
|
|
¾
|
|
|
|
4,161
|
|
Less exploratory well costs that have been capitalized for a period of one year or less
|
|
¾
|
|
|
|
(1,165
|
)
|
Capitalized exploratory well costs that have been capitalized for a period greater than one year
|
$
|
¾
|
|
|
$
|
2,996
|
|
Number of projects that have exploration well costs that have been capitalized greater than one year
|
|
¾
|
|
|
|
1
|
|
9
(
8
) INDEBTEDNESS
We had the following debt outstanding as of the dates shown below which are net of debt issuance costs (bank debt interest rate at June 30, 2016 is shown parenthetically) (in thousands). No interest was capitalized during the three or six months ended June 30, 2016 or the year ended December 31, 2015.
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Bank debt
(3.8%), net of unamortized debt issuance costs of $3,000 and $8,573
(a)
|
$
|
—
|
|
|
$
|
86,427
|
|
Senior notes:
|
|
|
|
|
|
|
|
4.875% senior notes due 2025, net of unamortized debt issuance costs of $11,384 and $11,899
|
|
738,616
|
|
|
|
738,101
|
|
Senior subordinated notes:
|
|
|
|
|
|
|
|
5.75% senior subordinated notes due 2021, net of unamortized debt issuance costs of $5,435 and $5,905
|
|
494,565
|
|
|
|
494,095
|
|
5.00% senior subordinated notes due 2022, net of unamortized debt issuance costs of $7,234 and $7,777
|
|
592,766
|
|
|
|
592,223
|
|
5.00% senior subordinated notes due 2023, net of unamortized debt issuance costs of $8,986 and $9,543
|
|
741,014
|
|
|
|
740,457
|
|
Total debt
|
$
|
2,566,961
|
|
|
$
|
2,651,303
|
|
(a)
As of June 30, 2016, there were unamortized debt issuance costs of $4.1 million which exceeded our credit facility balance which were reclassified to other assets on our consolidated balance sheet.
Bank Debt
In October 2014, we entered into an amended and restated revolving bank facility, which we refer to as our bank debt or our bank credit facility, which is secured by substantially all of our assets and has a maturity date of October 16, 2019. The bank credit facility provides for a maximum facility amount of $4.0 billion. The bank credit facility provides for a borrowing base subject to redeterminations annually by May and for event-driven unscheduled redeterminations. As part of our annual redetermination completed on March 17, 2016, our borrowing base was reaffirmed at $3.0 billion and our bank commitment was also reaffirmed at $2.0 billion. As of June 30, 2016, our bank group was composed of twenty-nine financial institutions with no one bank holding more than 5.8% of the total facility. The borrowing base may be increased or decreased based on our request and sufficient proved reserves, as determined by the bank group. The commitment amount may be increased to the borrowing base, subject to payment of a mutually acceptable commitment fee to those banks agreeing to participate in the facility increase. As of June 30, 2016, the outstanding balance under our bank credit facility was $3.0 million, before deducting debt issuance costs. Additionally, we had $232.1 million of undrawn letters of credit leaving $1.8 billion of committed borrowing capacity available under the facility. During a non-investment grade period, borrowings under the bank credit facility can either be at the alternate base rate (“ABR,” as defined in the bank credit facility agreement) plus a spread ranging from 0.25% to 1.25% or LIBOR borrowings at the LIBOR Rate (as defined in the bank credit facility agreement) plus a spread ranging from 1.25% to 2.25%. The applicable spread is dependent upon borrowings relative to the borrowing base. We may elect, from time to time, to convert all or any part of our LIBOR loans to base rate loans or to convert all or any of the base rate loans to LIBOR loans. The weighted average interest rate was 2.8% for the three months ended June 30, 2016 compared to 1.7% for the three months ended June 30, 2015. The weighted average interest rate was 2.4% for the six months ended June 30, 2016 compared to 1.7% for the six months ended June 30, 2015. A commitment fee is paid on the undrawn balance based on an annual rate of 0.30% to 0.375%. At June 30, 2016, the commitment fee was 0.30% and the interest rate margin was 1.25% on our LIBOR loans and 0.25% on our base rate loans.
At any time during which we have an investment grade debt rating from Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services and we have elected, at our discretion, to effect the investment grade rating period, certain collateral security requirements, including the borrowing base requirement and restrictive covenants, will cease to apply and an additional financial covenant (as defined in the bank credit facility) will be imposed. During the investment grade period, borrowings under the credit facility can either be at the ABR plus a spread ranging from 0.125% to 0.75% or at the LIBOR Rate plus a spread ranging from 1.125% to 1.75% depending on our debt rating. The commitment fee paid on the undrawn balance would range from 0.15% to 0.30%. We currently do not have an investment grade debt rating.
Senior Notes
In May 2015, we issued $750.0 million aggregate principal amount of 4.875% senior notes due 2025 (the “Outstanding Notes”) for net proceeds of $737.4 million after underwriting discounts and commissions of $12.6 million. The notes were issued at par and were offered to qualified institutional buyers and non-U.S. persons outside the United States in compliance with Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). On April 8, 2016, all of the Outstanding Notes were exchanged for an equal principal amount of registered 4.875% senior notes due 2025 pursuant to an effective registration statement on Form S-4 filed with the SEC on February 29, 2016 under the Securities Act (the “Exchange Notes”). The Exchange Notes are identical to the Outstanding Notes except the Exchange Notes are registered under the Securities Act and do not have restrictions on transfer, registration rights or provisions for additional interest. Under certain circumstances, if we experience a change of control, noteholders may require us to repurchase all of our senior notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any.
10
Senior Subordinated Notes
If we experience a change of control, noteholders may require us to repurchase all or a portion of our senior subordinated notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any. All of the senior subordinated notes and the guarantees by our subsidiary guarantors are general, unsecured obligations and are subordinated to our bank debt and will be subordinated to existing and future senior debt that we or our subsidiary guarantors are permitted to incur under the bank credit facility and the indentures governing the subordinated notes.
Guarantees
Range is a holding company which owns no operating assets and has no significant operations independent of its subsidiaries. The guarantees by our subsidiaries, which are directly or indirectly owned by Range, of our senior notes, senior subordinated notes and our bank credit facility are full and unconditional and joint and several, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:
|
●
|
in the event of a sale or other disposition of all or substantially all of the assets of the subsidiary guarantor or a sale or other disposition of all the capital stock of the subsidiary guarantor, to any corporation or other person (including an unrestricted subsidiary of Range) by way of merger, consolidation, or otherwise; or
|
|
●
|
if Range designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the terms of the indenture.
|
Debt Covenants
Our bank credit facility contains negative covenants that limit our ability, among other things, to pay cash dividends, incur additional indebtedness, sell assets, enter into certain hedging contracts, change the nature of our business or operations, merge, consolidate, or make certain investments. In addition, we are required to maintain a ratio of EBITDAX (as defined in the bank credit facility agreement) to cash interest expense of equal to or greater than 2.5 and a current ratio (as defined in the bank credit facility agreement) of no less than 1.0. In addition, the ratio of the present value of proved reserves (as defined in the credit agreement) to total debt must be equal to or greater than 1.5 until Range has two investment grade ratings. We were in compliance with applicable covenants under the bank credit facility at June 30, 2016.
The indentures governing our senior subordinated notes contain various restrictive covenants that are substantially identical to each other and may limit our ability to, among other things, pay cash dividends, incur additional indebtedness, sell assets, enter into transactions with affiliates, or change the nature of our business. At June 30, 2016, we were in compliance with these covenants. Our senior subordinated notes also include a limitation on the amount of credit facility debt we can incur. Certain thresholds, as set forth in the indenture debt incurrence test, may limit our ability to incur debt under our bank credit facility in excess of a $1.5 billion floor amount based on levels of commodity prices of natural gas, NGLs and crude oil used in the annual calculation of discounted future cash flows relating to proved oil and gas reserves (as further defined in the indenture). Based on our current discounted future net cash flows, our bank credit facility usage is limited to $1.5 billion until higher prices or proved reserve additions increase discounted future net cash flows.
(9) ASSET RETIREMENT OBLIGATIONS
Our asset retirement obligations primarily represent the estimated present value of the amounts we will incur to plug, abandon and remediate our producing properties at the end of their productive lives. Significant inputs used in determining such obligations include estimates of plugging and abandonment costs, estimated future inflation rates and well lives. The inputs are calculated based on historical data as well as current estimated costs. A reconciliation of our liability for plugging and abandonment costs for the six months ended June 30, 2016 is as follows (in thousands):
|
|
Six Months
Ended
June 30,
2016
|
|
Beginning of period
|
|
$
|
264,137
|
|
Liabilities incurred
|
|
|
921
|
|
Liabilities settled
|
|
|
(5,700
|
)
|
Disposition of wells
|
|
|
(4,731
|
)
|
Accretion expense
|
|
|
8,172
|
|
Change in estimate
|
|
|
2,819
|
|
End of period
|
|
|
265,618
|
|
Less current portion
|
|
|
(15,071
|
)
|
Long-term asset retirement obligations
|
|
$
|
250,547
|
|
11
Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying
consolidated
statements of
operations
.
(10) CAPITAL STOCK
We have authorized capital stock of 485.0 million shares which includes 475.0 million shares of common stock and 10.0 million shares of preferred stock. We currently have no preferred stock issued or outstanding. The following is a schedule of changes in the number of common shares outstanding since the beginning of 2015:
|
|
Six Months
Ended
June 30,
2016
|
|
|
Year
Ended
December 31,
2015
|
|
Beginning balance
|
|
|
169,316,460
|
|
|
|
168,628,177
|
|
SARs exercised
|
|
|
—
|
|
|
|
77,002
|
|
Restricted stock grants
|
|
|
459,099
|
|
|
|
335,103
|
|
Restricted stock units vested
|
|
|
246,564
|
|
|
|
252,507
|
|
Treasury shares issued
|
|
|
13,772
|
|
|
|
23,671
|
|
Ending balance
|
|
|
170,035,895
|
|
|
|
169,316,460
|
|
(11) DERIVATIVE ACTIVITIES
We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We do not utilize complex derivatives, as we typically utilize commodity swaps or collars to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. The fair value of our derivative contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”) for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net asset of $4.1 million at June 30, 2016. These contracts expire monthly through December 2018. The following table sets forth our commodity-based derivative volumes by year as of June 30, 2016, excluding our basis and freight swaps which are discussed separately below:
Period
|
|
Contract Type
|
|
Volume Hedged
|
|
Weighted
Average Hedge Price
|
Natural Gas
|
|
|
|
|
|
|
2016
|
|
Swaps
|
|
788,315 Mmbtu/day
|
|
$ 3.22
|
2017
|
|
Swaps
|
|
300,000 Mmbtu/day
|
|
$ 2.91
|
2018
|
|
Swaps
|
|
70,000 Mmbtu/day
|
|
$ 2.92
|
|
|
|
|
|
|
|
Crude Oil
|
|
|
|
|
|
|
2016
|
|
Swaps
|
|
6,000 bbls/day
|
|
$ 58.40
|
2017
|
|
Swaps
|
|
2,496 bbls/day
|
|
$ 51.29
|
|
|
|
|
|
|
|
NGLs (C2-Ethane)
|
|
|
|
|
|
|
2016
|
|
Swaps
|
|
500 bbls/day
|
|
$ 0.22/gallon
|
2017
|
|
Swaps
|
|
3,000 bbls/day
|
|
$ 0.27/gallon
|
|
|
|
|
|
|
|
NGLs (C3-Propane)
|
|
|
|
|
|
|
2016
|
|
Swaps
|
|
5,500 bbls/day
|
|
$ 0.60/gallon
|
2017
|
|
Swaps
|
|
3,966 bbls/day
|
|
$ 0.53/gallon
|
|
|
|
|
|
|
|
NGLs (NC4-Normal Butane)
|
|
|
|
|
|
|
2016
|
|
Swaps
|
|
4,750 bbls/day
|
|
$ 0.66/gallon
|
2017
|
|
Swaps
|
|
500 bbls/day
|
|
$ 0.61/gallon
|
|
|
|
|
|
|
|
NGLs (C5-Natural Gasoline)
|
|
|
|
|
|
|
2016
|
|
Swaps
|
|
3,500 bbls/day
|
|
$ 1.11/gallon
|
2017
|
|
Swaps
|
|
1,750 bbls/day
|
|
$ 0.97/gallon
|
Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, changes in fair value of these non-hedge derivatives are recognized in earnings as derivative fair value income or loss.
12
Basis Swap Contracts
In addition to the swaps above, at June 30, 2016, we had natural gas basis swap contracts which lock in the differential between NYMEX and certain of our physical pricing indices primarily in Appalachia. These contracts settle monthly through December 2017 and include a total volume of 64,125,000 Mmbtu. The fair value of these contracts was a loss of $3.8 million on June 30, 2016.
At June 30, 2016, we also had propane spread swap contracts which lock in the differential between Mont Belvieu and international propane indices. The contracts settle monthly through December 2017 and include a total volume of 1,162,500 barrels in 2016 and 1,650,000 barrels in 2017. The fair value of these contracts was a gain of $4.0 million on June 30, 2016.
Freight Swap Contracts
In connection with our international propane spread swaps, at June 30, 2016, we had freight swap contracts which lock in the freight rate for a specific trade route on the Baltic Exchange. These contracts settle monthly in fourth quarter 2016 and cover 5,000 metric tons per month with a fair value loss of $34,000 on June 30, 2016. These contracts use observable third-party pricing inputs that we consider to be a level 2 fair value classification.
Derivative Assets and Liabilities
The combined fair value of derivatives included in the accompanying consolidated balance sheets as of June 30, 2016 and December 31, 2015 is summarized below. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements. The tables below provide additional information relating to our master netting arrangements with our derivative counterparties (in thousands):
|
|
|
June 30, 2016
|
|
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross Amounts
Offset in the Balance Sheet
|
|
|
Net Amounts of
Assets Presented in the
Balance Sheet
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
|
$
|
48,702
|
|
|
$
|
(14,875
|
)
|
|
$
|
33,827
|
|
|
–basis swaps
|
|
|
3,621
|
|
|
|
(6,942
|
)
|
|
|
(3,321
|
)
|
Crude oil
|
–swaps
|
|
|
12,472
|
|
|
|
(5,312
|
)
|
|
|
7,160
|
|
NGLs
|
–C2 ethane swaps
|
|
|
51
|
|
|
|
(201
|
)
|
|
|
(150
|
)
|
|
–C3 propane swaps
|
|
|
1,999
|
|
|
|
(1,391
|
)
|
|
|
608
|
|
|
–C3 propane spread swaps
|
|
|
11,964
|
|
|
|
(8,394
|
)
|
|
|
3,570
|
|
|
–NC4 butane swaps
|
|
|
522
|
|
|
|
(86
|
)
|
|
|
436
|
|
|
–C5 natural gasoline swaps
|
|
|
4,281
|
|
|
|
(2,314
|
)
|
|
|
1,967
|
|
Freight
|
–swaps
|
|
|
¾
|
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
|
$
|
83,612
|
|
|
$
|
(39,549
|
)
|
|
$
|
44,063
|
|
|
|
|
June 30, 2016
|
|
|
|
|
Gross
Amounts of
Recognized (Liabilities)
|
|
|
Gross Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
(Liabilities) Presented in the
Balance Sheet
|
|
Derivative (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
|
$
|
(50,780
|
)
|
|
$
|
14,875
|
|
|
$
|
(35,905
|
)
|
|
–basis swaps
|
|
|
(7,446
|
)
|
|
|
6,942
|
|
|
|
(504
|
)
|
Crude oil
|
–swaps
|
|
|
(4,108
|
)
|
|
|
5,312
|
|
|
|
1,204
|
|
NGLs
|
–C2 ethane swaps
|
|
|
(1,252
|
)
|
|
|
201
|
|
|
|
(1,051
|
)
|
|
–C3 propane swaps
|
|
|
(2,101
|
)
|
|
|
1,391
|
|
|
|
(710
|
)
|
|
–C3 propane spread swaps
|
|
|
(7,988
|
)
|
|
|
8,394
|
|
|
|
406
|
|
|
–NC4 butane swaps
|
|
|
(2,567
|
)
|
|
|
86
|
|
|
|
(2,481
|
)
|
|
–C5 natural gasoline swaps
|
|
|
(3,165
|
)
|
|
|
2,314
|
|
|
|
(851
|
)
|
Freight
|
–swaps
|
|
|
(34
|
)
|
|
|
34
|
|
|
|
¾
|
|
|
|
|
$
|
(79,441
|
)
|
|
$
|
39,549
|
|
|
$
|
(39,892
|
)
|
13
|
|
December 31, 2015
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
Assets Presented in the
Balance Sheet
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
$
|
219,357
|
|
|
$
|
(10,245
|
)
|
|
$
|
209,112
|
|
–basis swaps
|
|
8,251
|
|
|
|
(2,765
|
)
|
|
|
5,486
|
Crude oil
|
–swaps
|
|
38,699
|
|
|
|
¾
|
|
|
|
38,699
|
NGLs
|
–C3 propane swaps
|
|
15,884
|
|
|
|
¾
|
|
|
|
15,884
|
|
–C3 propane spread swaps
|
|
2,497
|
|
|
|
(2,497
|
)
|
|
|
¾
|
|
–NC4 butane swaps
|
|
6,968
|
|
|
|
¾
|
|
|
|
6,968
|
|
–C5 natural gasoline swaps
|
|
12,694
|
|
|
|
(81
|
)
|
|
|
12,613
|
|
|
$
|
304,350
|
|
|
$
|
(15,588
|
)
|
|
$
|
288,762
|
|
|
December 31, 2015
|
|
|
|
Gross
Amounts of
Recognized
(Liabilities)
|
|
|
Gross Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
(Liabilities) Presented in the
Balance Sheet
|
|
Derivative (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
$
|
(10,245
|
)
|
|
$
|
10,245
|
|
|
$
|
¾
|
|
|
–basis swaps
|
|
(2,786
|
)
|
|
|
2,765
|
|
|
|
(21
|
)
|
NGLs
|
–C3 propane spread swap
|
|
(3,633
|
)
|
|
|
2,497
|
|
|
|
(1,136
|
)
|
|
–C5 natural gasoline swaps
|
|
(81
|
)
|
|
|
81
|
|
|
|
¾
|
|
|
|
$
|
(16,745
|
)
|
|
$
|
15,588
|
|
|
$
|
(1,157
|
)
|
The effects of our derivatives on our consolidated statements of operations are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
Derivative Fair Value
Income (Loss)
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Commodity swaps
|
$
|
(158,576
|
)
|
|
$
|
(42,100
|
)
|
|
Collars
|
|
¾
|
|
|
|
(1,650
|
)
|
|
Basis swaps
|
|
(4,199
|
)
|
|
|
8,959
|
|
|
Freight swaps
|
|
(23
|
)
|
|
|
¾
|
|
|
Total
|
$
|
(162,798
|
)
|
|
$
|
(34,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
Derivative Fair Value
Income (Loss)
|
|
|
|
2016
|
|
|
|
2015
|
|
|
Commodity swaps
|
$
|
(78,931
|
)
|
|
$
|
83,676
|
|
|
Collars
|
|
¾
|
|
|
|
6,765
|
|
|
Basis swaps
|
|
3,075
|
|
|
|
(2,393
|
)
|
|
Freight swaps
|
|
(34
|
)
|
|
|
¾
|
|
|
Total
|
$
|
(75,890
|
)
|
|
$
|
88,048
|
|
|
14
(
1
2
) FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and do not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:
|
●
|
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
●
|
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
●
|
Level 3 – Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
|
Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.
Fair Values – Recurring
We use a market approach for our recurring fair value measurements and endeavor to use the best information available. The following tables present the fair value hierarchy table for assets and liabilities measured at fair value, on a recurring basis (in thousands):
|
|
Fair Value Measurements at June 30, 2016 using:
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Carrying
Value as of
June 30,
2016
|
|
Trading securities held in the deferred compensation plans
|
|
$
|
62,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,194
|
|
Derivatives
–
swaps
|
|
|
—
|
|
|
|
4,054
|
|
|
|
—
|
|
|
|
4,054
|
|
–basis swaps
|
|
|
—
|
|
|
|
151
|
|
|
|
—
|
|
|
|
151
|
|
–freight swaps
|
|
|
—
|
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(34
|
)
|
|
|
Fair Value Measurements at December 31, 2015 using:
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Carrying
Value as of
December 31,
2015
|
|
Trading securities held in the deferred compensation plans
|
|
$
|
62,376
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,376
|
|
Derivatives
–
swaps
|
|
|
—
|
|
|
|
283,276
|
|
|
|
—
|
|
|
|
283,276
|
|
–basis swaps
|
|
|
—
|
|
|
|
4,329
|
|
|
|
—
|
|
|
|
4,329
|
|
Our trading securities in Level 1 are exchange-traded and measured at fair value with a market approach using end of period market values. Derivatives in Level 2 are measured at fair value with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes.
15
Our trading securities held in the deferred compensation plan are accounted for using the mark-to-market accounting method and are included in other assets in the accompanying consolidat
ed balance sheets. We elected to adopt the fair value option to simplify our accounting for the investments in our deferred compensation plan. Interest, dividends, and mark-to-market gains or losses are included in deferred compensation plan expense in the
accompanying consolidated statements of operations. For
second
quarter 2016, interest and dividends were $
181,000
and the mark-to-market adjustment was a gain of $
1.2
million
compared to interest and dividends of $1
3
9,000 and a mark-to-market
loss
of $
576
,000
in
second
quarter 2015.
For the six months ended June 30, 2016, interest and dividends were $
317,000 and the mark-to-market gain
was
$
1.4
million compared to interes
t and dividends of $248,000
and mark-to-market adjustment of a gain of $832,000
in the same period of 2015.
Fair Values—Non-recurring
Our proved natural gas and oil properties are reviewed for impairment periodically as events or changes in circumstances indicate the carrying amount may not be recoverable. In the six months ended June 30, 2016, due to declines in commodity prices, there were indicators that the carrying value of certain of our oil and gas properties may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their remaining fair value was measured using an income approach based upon internal estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 measurements. We also considered the potential sale of certain of these properties. We recorded non-cash impairment charges during the six months ended June 30, 2016 of $43.0 million related to our natural gas and oil properties in Western Oklahoma. Our estimates of future cash flows attributable to our natural gas and oil properties could decline further with commodity prices which may result in additional impairment charges. The following table presents the value of these assets measured at fair value on a non-recurring basis at the time impairment was recorded (in thousands):
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Fair Value
|
|
|
|
Impairment
|
|
|
|
Fair Value
|
|
|
|
Impairment
|
|
|
Natural gas and oil properties
|
$
|
90,150
|
|
|
$
|
43,040
|
|
|
$
|
¾
|
|
|
$
|
¾
|
|
|
Fair Values—Reported
The following table presents the carrying amounts and the fair values of our financial instruments as of June 30, 2016 and December 31, 2015 (in thousands):
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps and basis swaps
|
|
$
|
44,063
|
|
|
$
|
44,063
|
|
|
$
|
288,762
|
|
|
$
|
288,762
|
|
Marketable securities
(a)
|
|
|
62,194
|
|
|
|
62,194
|
|
|
|
62,376
|
|
|
|
62,376
|
|
(Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps and basis swaps
|
|
|
(39,892
|
)
|
|
|
(39,892
|
)
|
|
|
(1,157
|
)
|
|
|
(1,157
|
)
|
Bank credit facility
(b)
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
|
|
(95,000
|
)
|
|
|
(95,000
|
)
|
Deferred compensation plan
(c)
|
|
|
(158,669
|
)
|
|
|
(158,669
|
)
|
|
|
(122,918
|
)
|
|
|
(122,918
|
)
|
4.875% senior notes due 2025
(b)
|
|
|
(750,000
|
)
|
|
|
(713,438
|
)
|
|
|
(750,000
|
)
|
|
|
(572,813
|
)
|
5.75% senior subordinated notes due 2021
(b)
|
|
|
(500,000
|
)
|
|
|
(488,750
|
)
|
|
|
(500,000
|
)
|
|
|
(396,250
|
)
|
5.00% senior subordinated notes due 2022
(b)
|
|
|
(600,000
|
)
|
|
|
(562,500
|
)
|
|
|
(600,000
|
)
|
|
|
(447,000
|
)
|
5.00% senior subordinated notes due 2023
(b)
|
|
|
(750,000
|
)
|
|
|
(704,063
|
)
|
|
|
(750,000
|
)
|
|
|
(551,250
|
)
|
(a)
|
Marketable securities, which are held in our deferred compensation plans, are actively traded on major exchanges.
|
(b)
|
The book value of our bank debt approximates fair value because of its floating rate structure. The fair value of our senior notes and our senior subordinated notes is based on end of period market quotes which are Level 2 inputs.
|
(c)
|
The fair value of our deferred compensation plan is updated at the closing price on the balance sheet date which is a Level 1 input.
|
Our current assets and liabilities contain financial instruments, the most significant of which are trade accounts receivable and payable. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments and (2) our historical and expected incurrence of bad debt expense. Non-financial liabilities initially measured at fair value include asset retirement obligations. For additional information, see Note 10.
16
Concentrations of Credit Risk
As of June 30, 2016, our primary concentrations of credit risk are the risks of not collecting accounts receivable and the risk of a counterparty’s failure to perform under derivative obligations. Most of our receivables are from a diverse group of companies, including major energy companies, pipeline companies, local distribution companies, financial institutions and end-users in various industries. Letters of credit or other appropriate security are obtained as deemed necessary to limit our risk of loss. Our allowance for uncollectable receivables was $4.7 million at June 30, 2016 and $5.0 million at December 31, 2015. As of June 30, 2016, our derivative contracts consist of swaps. Our derivative exposure to credit risk is diversified primarily among major investment grade financial institutions, where we have master netting agreements which provide for offsetting payables against receivables from separate derivative contracts. To manage counterparty risk associated with our derivatives, we select and monitor our counterparties based on our assessment of their financial strength and/or credit ratings. We may also limit the level of exposure with any single counterparty. At June 30, 2016, our derivative counterparties include twenty-one financial institutions, of which all but five are secured lenders in our bank credit facility. At June 30, 2016, our net derivative assets include a net receivable from these five counterparties that are not included in our bank credit facility of $1.9
million.
(13) STOCK-BASED COMPENSATION PLANS
Stock-Based Awards
We have one active equity-based stock plan, our Amended and Restated 2005 Equity-Based Incentive Compensation Plan, which we refer to as the 2005 Plan. Under this plan, incentive and non-qualified stock options, SARs, and various other awards may be issued to non-employee directors and employees pursuant to decisions of the Compensation Committee, which is comprised of only non-employee, independent directors. In 2005, we began granting SARs which represent the right to receive a payment equal to the excess of the fair market value of shares of our common stock on the date the right is exercised over the value of the stock on the date of grant. All SARs granted under the 2005 Plan will be settled in shares of stock, vest over a three-year period and have a maximum term of five years from the date they are granted. In 2011, the Compensation Committee of the Board of Directors began granting restricted stock units under our equity-based stock compensation plans. These restricted stock units, which we refer to as restricted stock Equity Awards, vest over a three-year period. All awards granted have been issued at prevailing market prices at the time of grant and the vesting of these shares is based upon an employee’s continued employment with us, with the exception of employment termination due to death, disability or retirement.
In first quarter 2014, the Compensation Committee began granting performance share unit (“PSU”) awards under our 2005 Plan. The number of shares to be issued is determined by our total shareholder return compared to the total shareholder return of a predetermined group of peer companies over the performance period. The grant date fair value of the PSU awards is determined using a Monte Carlo simulation and is recognized as stock-based compensation expense over the three-year performance period. The actual payout of shares granted depends on our total shareholder return compared to our peer companies and will be between zero and 150%.
The Compensation Committee also grants restricted stock to certain employees and non-employee directors of the Board of Directors as part of their compensation. Upon grant of these restricted shares, which we refer to as restricted stock Liability Awards, the shares generally are placed in our deferred compensation plan and, upon vesting, employees are allowed to take withdrawals either in cash or in stock based on their distribution elections. Compensation expense is recognized over the vesting period, which is typically three years for employee grants and immediate vesting for non-employee directors. All restricted stock awards are issued at prevailing market prices at the time of the grant and vesting is based upon an employee’s continued employment with us, with the exception of employment termination due to death, disability or retirement. Prior to vesting, all restricted stock awards have the right to vote such shares and receive dividends thereon. These Liability Awards are classified as a liability and are remeasured at fair value each reporting period. This mark-to-market adjustment is reported as deferred compensation plan expense in the accompanying consolidated statements of operations.
Total Stock-Based Compensation Expense
Stock-based compensation represents amortization of restricted stock, PSUs and SARs expense. Unlike the other forms of stock-based compensation, the mark-to-market adjustment of the liability related to the vested restricted stock held in our deferred compensation plan is directly tied to the change in our stock price and not directly related to the functional expenses and therefore, is not allocated to the functional categories. The following table details the allocation of stock-based compensation to functional expense categories (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
Direct operating expense
|
$
|
696
|
|
|
$
|
654
|
|
|
$
|
1,284
|
|
|
$
|
1,540
|
|
Brokered natural gas and marketing expense
|
|
378
|
|
|
|
619
|
|
|
|
894
|
|
|
|
1,125
|
|
Exploration expense
|
|
371
|
|
|
|
751
|
|
|
|
1,061
|
|
|
|
1,483
|
|
General and administrative expense
|
|
15,443
|
|
|
|
15,953
|
|
|
|
26,556
|
|
|
|
27,033
|
|
Termination costs
|
|
¾
|
|
|
|
434
|
|
|
|
¾
|
|
|
|
1,721
|
|
Total stock-based compensation
|
$
|
16,888
|
|
|
$
|
18,411
|
|
|
$
|
29,795
|
|
|
$
|
32,902
|
|
17
Performance Share Unit Awards
The following is a summary of our non-vested PSU awards outstanding at June 30, 2016:
|
|
Number of
Units
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Outstanding at December 31, 2015
|
|
|
262,124
|
|
|
$
|
64.77
|
|
Units granted
(a)
|
|
|
413,959
|
|
|
|
36.64
|
|
Units vested
|
|
|
(113,041
|
)
|
|
|
52.88
|
|
Units forfeited
|
|
|
(42,603
|
)
|
|
|
46.09
|
|
Outstanding at June 30, 2016
|
|
|
520,439
|
|
|
$
|
46.51
|
|
(a)
Amounts granted reflect the number of performance units granted; however, the actual payout of shares will be between zero percent and 150% of the performance units granted depending on the total shareholder return ranking compared to the peer companies at the end of the three-year performance period.
The following assumptions were used to estimate the fair value of PSUs granted during first six months 2016 and 2015:
|
|
Six Months Ended
June 30,
|
|
|
2016
|
|
|
|
2015
|
|
Risk-free interest rate
|
|
0.94
|
%
|
|
|
1.0
|
%
|
Expected annual volatility
|
|
49
|
%
|
|
|
33
|
%
|
Weighted average grant date fair value per unit
|
$
|
36.64
|
|
|
$
|
56.78
|
|
We recorded PSU compensation expense of $5.6 million in first six months 2016 compared to $4.1 million in the same period of 2015.
Restricted Stock Awards
Equity Awards
In first six months 2016, we granted 940,000 restricted stock Equity Awards to employees at an average grant price of $28.18 compared to 583,000 restricted stock Equity Awards granted to employees at an average grant price of $52.45 in first six months 2015. These awards generally vest over a three-year period. We recorded compensation expense for these Equity Awards of $11.5 million in first six months 2016 compared to $14.0 million in the same period of 2015. Equity Awards are not issued to employees until they are vested. Employees do not have the option to receive cash.
Liability Awards
In first six months 2016, we granted 456,000 shares of restricted stock Liability Awards as compensation to employees at an average price of $35.70 with vesting over a three-year period and 52,000 shares were granted to non-employee directors at an average price of $38.73 with immediate vesting. In first six months 2015, we granted 294,000 shares of Liability Awards as compensation to employees at an average price of $56.20 with vesting over a three-year period and 39,000 shares were granted to non-employee directors at an average price of $58.35 with immediate vesting. We recorded compensation expense for Liability Awards of $11.3 million in first six months 2016 compared to $11.7 million in the same period of 2015. Substantially all of these awards are held in our deferred compensation plan, are classified as a liability and are remeasured at fair value at the end of each reporting period. This mark-to-market adjustment is reported as deferred compensation expense in our consolidated statements of operations (see additional discussion below). The following is a summary of the status of our non-vested restricted stock outstanding at June 30, 2016:
|
|
Equity Awards
|
|
|
Liability Awards
|
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at December 31, 2015
|
|
|
436,764
|
|
|
$
|
59.74
|
|
|
|
308,737
|
|
|
$
|
65.80
|
|
Granted
|
|
|
940,491
|
|
|
|
28.18
|
|
|
|
508,206
|
|
|
|
36.01
|
|
Vested
|
|
|
(255,270
|
)
|
|
|
45.79
|
|
|
|
(214,406
|
)
|
|
|
52.91
|
|
Forfeited
|
|
|
(106,120
|
)
|
|
|
43.45
|
|
|
|
(49,519
|
)
|
|
|
40.33
|
|
Outstanding at June 30, 2016
|
|
|
1,015,865
|
|
|
$
|
35.73
|
|
|
|
553,018
|
|
|
$
|
45.70
|
|
18
Stock Appreciation Right Awards
There were 1.0 million SARs outstanding at June 30, 2016. Information with respect to SARs activity in the six months ended June 30, 2016 is summarized below:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
1,510,977
|
|
|
$
|
63.73
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired/forfeited
|
|
|
(507,377
|
)
|
|
|
53.16
|
|
Outstanding at June 30, 2016
|
|
|
1,003,600
|
|
|
$
|
69.08
|
|
Deferred Compensation Plan
Our deferred compensation plan gives non-employee directors and officers the ability to defer all or a portion of their salaries, bonuses or director fees and invest in Range common stock or make other investments at the individual’s discretion. Range provides a partial matching contribution to officers which vests over three years. The assets of the plan are held in a grantor trust, which we refer to as the Rabbi Trust, and are therefore available to satisfy the claims of our general creditors in the event of bankruptcy or insolvency. Our stock held in the Rabbi Trust is treated as a liability award as employees are allowed to take withdrawals from the Rabbi Trust either in cash or in Range stock. The liability for the vested portion of the stock held in the Rabbi Trust is reflected as deferred compensation liability in the accompanying consolidated balance sheets and is adjusted to fair value each reporting period by a charge or credit to deferred compensation plan expense on our consolidated statements of operations. The assets of the Rabbi Trust, other than our common stock, are invested in marketable securities and reported at their market value as other assets in the accompanying consolidated balance sheets. The deferred compensation liability reflects the vested market value of the marketable securities and Range stock held in the Rabbi Trust. Changes in the market value of the marketable securities and changes in the fair value of the deferred compensation plan liability are charged or credited to deferred compensation plan expense each quarter. We recorded mark-to-market loss of $25.7 million in second quarter 2016 compared to mark-to-market gain of $7.3 million in second quarter 2015. We recorded a mark-to-market loss of $41.8 million in first six months 2016 compared to a gain of $12.9 million in first six months 2015. The Rabbi Trust held 2.8 million shares (2.3 million of which were vested) of Range stock at June 30, 2016 compared to 2.8 million shares (2.5 million of which were vested) at December 31, 2015.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Net cash provided from operating activities included:
|
|
|
|
|
|
|
|
|
Income taxes refunded from taxing authorities
|
|
$
|
(101
|
)
|
|
$
|
—
|
|
Interest paid
|
|
|
69,991
|
|
|
|
73,189
|
|
Non-cash investing and financing activities included:
|
|
|
|
|
|
|
|
|
Increase in asset retirement costs capitalized
|
|
|
3,740
|
|
|
|
18,684
|
|
Decrease in accrued capital expenditures
|
|
|
(4,741)
|
|
|
|
(156,897
|
)
|
|
|
|
|
|
|
|
|
|
(15) COMMITMENTS AND CONTINGENCIES
Litigation
We are the subject of, or party to, a number of pending or threatened legal actions, administrative proceedings and claims arising in the ordinary course of our business. While many of these matters involve inherent uncertainty, we believe that the amount of the liability, if any, ultimately incurred with respect to these actions, proceedings or claims will not have a material adverse effect on our consolidated financial position as a whole or on our liquidity, capital resources or future annual results of operations. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. We will continue to evaluate our litigation and regulatory proceedings quarterly and will establish and adjust any estimated liability as appropriate to reflect our assessment of the then current status of litigation and regulatory proceedings. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
19
Transportation and Gathering Contracts
In first six months 2016, our transportation and gathering commitments increased by approximately $1.5 billion over the next sixteen years primarily due to firm transportation contracts for both ethane and propane in connection with the start-up of the Mariner East pipeline and other pricing changes to current contracts. As of June 30, 2016, the increase to future minimum transportation and gathering fees is as follows (in thousands):
|
|
Transportation and Gathering Contracts
|
|
2016
|
$
|
47,668
|
|
2017
|
|
102,729
|
|
2018
|
|
103,345
|
|
2019
|
|
103,905
|
|
2020
|
|
104,627
|
|
Thereafter
|
|
1,040,075
|
|
|
$
|
1,502,349
|
|
Delivery Commitments
In first six months 2016, we entered into new agreements with several pipeline companies and end users to deliver natural gas volumes from our production. The new agreements are to deliver from 1,500 to 40,500 Mmbtu per day of natural gas and the commitments are between one and five years and began as early as second quarter 2016.
In the first six months 2016, in connection with the startup of Mariner East, we have contracted to deliver ethane production volumes from our Marcellus Shale wells of 20,000 bbls per day for 15 years.
(16) OFFICE CLOSING AND TERMINATION COSTS
In first quarter 2015, we announced the closing of our Oklahoma City administrative and operational office to reduce our general and administrative expenses, due in part to the impact of lower commodity prices on our operations. In fourth quarter 2014, we initially accrued an estimated $8.4 million of termination costs relating to the closure of this office as it was probable of occurring. In early 2015, those plans and personnel involved were finalized which resulted in additional accruals in 2015 for severance and other personnel costs of $275,000, additional accelerated vesting of stock-based compensation of $608,000 and $3.2 million of building lease costs. The following summarizes our termination costs for the six months ended June 30, 2016 and 2015 (in thousands):
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
|
2015
|
|
Termination costs
|
$
|
—
|
|
|
$
|
1,414
|
|
Building lease
|
|
167
|
|
|
|
3,232
|
|
Stock-based compensation
|
|
—
|
|
|
|
1,721
|
|
Total termination costs
|
$
|
167
|
|
|
$
|
6,367
|
|
The following details our accrued liability as of June 30, 2016 (in thousands):
|
|
June 30,
2016
|
|
Beginning balance at December 31, 2015
|
$
|
11,630
|
|
Accrued building rent
|
|
167
|
|
Payments
|
|
(7,901
|
)
|
Ending balance at June 30, 2016
|
$
|
3,896
|
|
20
(
1
7
)
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
(a)
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
Natural gas and oil properties:
|
|
|
|
|
|
|
|
|
Properties subject to depletion
|
|
$
|
8,074,869
|
|
|
$
|
8,047,181
|
|
Unproved properties
|
|
|
930,142
|
|
|
|
949,155
|
|
Total
|
|
|
9,005,011
|
|
|
|
8,996,336
|
|
Accumulated depreciation, depletion and amortization
|
|
|
(2,864,358
|
)
|
|
|
(2,635,031
|
)
|
Net capitalized costs
|
|
$
|
6,140,653
|
|
|
$
|
6,361,305
|
|
(a)
|
Includes capitalized asset retirement costs and the associated accumulated amortization.
|
(18)
Costs Incurred for Property Acquisition, Exploration and Development
(a)
|
|
Six Months
Ended
June 30,
2016
|
|
|
Year
Ended
December 31, 2015
|
|
|
|
(in thousands)
|
|
Acreage purchases
|
|
$
|
8,873
|
|
|
$
|
73,025
|
|
Development
|
|
|
219,386
|
|
|
|
708,268
|
|
Exploration:
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
30,914
|
|
|
|
87,505
|
|
Expense
|
|
|
10,637
|
|
|
|
18,421
|
|
Stock-based compensation expense
|
|
|
1,061
|
|
|
|
2,985
|
|
Gas gathering facilities:
|
|
|
|
|
|
|
|
|
Development
|
|
|
1,054
|
|
|
|
13,337
|
|
Subtotal
|
|
|
271,925
|
|
|
|
903,541
|
|
Asset retirement obligations
|
|
|
3,740
|
|
|
|
22,184
|
|
Total costs incurred
|
|
$
|
275,665
|
|
|
$
|
925,725
|
|
(a)
|
Includes costs incurred whether capitalized or expensed.
|
21