NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statement Presentation
During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended
December 31, 2015
(Form 10-K) filed with the Securities and Exchange Commission (SEC). The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.
Certain reclassifications have been made to prior year statements to conform with the current year presentation. These reclassifications have no impact on previously reported stockholder's equity, net income (loss) or cash flows.
Recently Adopted Accounting Pronouncements
Debt Issuance Costs.
In March 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The update provides authoritative guidance for debt issuance costs related to line-of-credit arrangements, noting the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance is effective for interim and annual periods beginning after December 15, 2015.
Effective January 1, 2016, the Company adopted ASU No. 2015-03 as a change in accounting principle. The Condensed Consolidated Balance Sheet as of December 31, 2015 has been retrospectively adjusted to reflect the adoption of this guidance, resulting in a decrease of
$8.9 million
in both other assets and long term debt related to the debt issuance costs on our senior notes. There was
no
impact to the Company’s Condensed Consolidated Statement of Operations or Statement of Cash Flows.
Recently Issued Accounting Pronouncements
Stock-based Compensation.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, as an amendment to Accounting Standards Codification (ASC) Topic 718. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
The Company expects to adopt this guidance effective January 1, 2017. The recognition of previously unrecognized windfall tax benefits is expected to result in a cumulative-effect adjustment of between
$45.0 million
and
$50.0 million
(net of tax), which would increase retained earnings and decrease net deferred tax liabilities by the same amount as of the beginning of 2017. The remaining provisions of this amendment are not expected to have a material effect on the Company's financial position, results of operations or cash flows.
Leases.
In February 2016, the FASB issued ASU No. 2016-02, Leases, as a new Topic, ASC Topic 842. The new lease guidance supersedes Topic 840. The core principle of the guidance is that a company should recognize the assets and liabilities that arise from leases. This ASU does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. The guidance is effective for interim and annual periods beginning after December 15, 2018. This ASU can be adopted using a modified retrospective approach. The Company expects to adopt this standard effective January 1, 2019 and is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows.
Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as a new Topic, ASC Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which deferred the effective date of ASU No. 2014-09 by one year, making the new standard effective for interim and annual periods beginning after December 15, 2017. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus agent considerations (reporting revenue gross versus net), which clarifies the implementation guidance on principal versus agent considerations on such matters. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying performance obligations and licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope improvements and practical expedients, which addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows.
Statement of Cash Flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses eight specific cash flow issues for which current GAAP is either unclear or does not include specific guidance. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. This guidance must be adopted using a retrospective transition method. The Company is currently evaluating the effect that adopting this guidance will have on its cash flows.
2. Properties and Equipment, Net
Properties and equipment, net are comprised of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
Proved oil and gas properties
|
|
$
|
7,669,157
|
|
|
$
|
8,821,146
|
|
Unproved oil and gas properties
|
|
287,007
|
|
|
390,434
|
|
Gathering and pipeline systems
|
|
189,393
|
|
|
243,672
|
|
Land, building and other equipment
|
|
81,537
|
|
|
117,848
|
|
|
|
8,227,094
|
|
|
9,573,100
|
|
Accumulated depreciation, depletion and amortization
|
|
(3,504,496
|
)
|
|
(4,596,221
|
)
|
|
|
$
|
4,722,598
|
|
|
$
|
4,976,879
|
|
At
September 30, 2016
, the Company did not have any projects that had exploratory well costs capitalized for a period of greater than
one year
after drilling.
In February 2016, the Company completed the divestiture of certain proved and unproved oil and gas properties in east Texas for approximately
$56.4 million
and recognized a
$0.5 million
gain on sale of assets. The purchase price included a
$6.3 million
deposit that was received in the fourth quarter of 2015.
3. Equity Method Investments
The Company holds a
25%
equity interest in Constitution Pipeline Company, LLC (Constitution) and a
20%
equity interest in Meade Pipeline Co LLC (Meade). Activity related to
these equity method investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constitution
|
|
Meade
|
|
Total
|
|
|
Nine Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance at beginning of period
|
|
$
|
90,345
|
|
|
$
|
64,269
|
|
|
$
|
13,172
|
|
|
$
|
3,760
|
|
|
$
|
103,517
|
|
|
$
|
68,029
|
|
Contributions
|
|
8,325
|
|
|
13,500
|
|
|
15,851
|
|
|
7,298
|
|
|
24,176
|
|
|
20,798
|
|
Earnings (loss) on equity method investments
|
|
211
|
|
|
4,608
|
|
|
(3
|
)
|
|
(27
|
)
|
|
208
|
|
|
4,581
|
|
Balance at end of period
|
|
$
|
98,881
|
|
|
$
|
82,377
|
|
|
$
|
29,020
|
|
|
$
|
11,031
|
|
|
$
|
127,901
|
|
|
$
|
93,408
|
|
During 2016, the Company expects to contribute approximately
$30.0 million
to its equity method investments. For further information regarding the Company’s equity method investments, refer to
Note 4
of the Notes to the Consolidated Financial Statements in the Form 10-K.
Constitution
The following table represents summarized financial information for Constitution as derived from the respective unaudited financial statements of Constitution for the
nine
months ended
September 30, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
(In thousands)
|
|
2016
|
|
2015
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
Income (loss) from continuing operations
|
|
$
|
(10,974
|
)
|
|
$
|
19,366
|
|
Net income (loss)
|
|
$
|
(10,974
|
)
|
|
$
|
19,366
|
|
The Company records the activity for its equity method investments on a one month lag; however, the above summarized financial information represents Constitution's operations for the
nine
months ended
September 30, 2016
and
2015
, respectively.
On April 22, 2016, Constitution announced that the New York State Department of Environmental Conservation (NYSDEC) denied Constitution's application for a section 401 Water Quality Certification (Certification) for the New York State portion of its proposed 124-mile route. During second quarter of 2016, Constitution filed legal actions in the U.S Court of Appeals for the Second Circuit and the U.S District Court for the Northern District of New York challenging the legality and appropriateness of the NYSDEC’s decision. Both courts have granted Constitution's motions to expedite the schedules for the legal actions.
Constitution stated that it remains committed to pursuing the project and that it intends to pursue all available options to challenge the NYSDEC’s decision. In light of the denial of the Certification and ongoing litigation, Constitution has revised its target in-service date to the second half of 2018, assuming that the challenge process is satisfactorily and promptly concluded.
In light of the NYSDEC’s denial and resulting litigation, the Company evaluated its investment in Constitution for other-than-temporary impairment (OTTI) and as of September 30, 2016, does not believe there is an indication of an OTTI. The Company’s evaluation considered various factors, including but not limited to prior Federal Energy Regulatory Commission approval and the related economic viability of the project, legal actions filed by Constitution and the expected duration of the legal proceedings, which are at very early stages, and the other members’ commitment to the project. To the extent that the legal and regulatory proceedings have unfavorable outcomes, or if Constitution concludes that the project is no longer viable or elects to not go forward as legal and regulatory actions progress, the Company will reevaluate the facts and circumstances relative to its conclusions with respect to OTTI. In the event that facts and circumstances change, the Company may be required to recognize an impairment charge up to its investment value at such time, net of any cash and working capital held by Constitution. The Company will continue to monitor the carrying value of its investment as required.
At this time, the Company remains committed to funding the project in an amount in proportion to its ownership interest for the development and construction of the new pipeline. The Company's total contributions for this project are expected to be approximately
$240.0 million
. As of
September 30, 2016
, the Company has made contributions of approximately
$87.9 million
since inception of the project.
Meade
In October 2016, Meade revised its expected in-service date to mid-2018; however, this estimate is contingent on the timely issuance of remaining outstanding permits.
4. Debt and Credit Agreements
The Company’s debt and credit agreements consisted of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
7.33% weighted-average senior notes
|
|
$
|
—
|
|
|
$
|
20,000
|
|
6.51% weighted-average senior notes
|
|
361,000
|
|
|
425,000
|
|
9.78% senior notes
|
|
67,000
|
|
|
67,000
|
|
5.58% weighted-average senior notes
|
|
175,000
|
|
|
175,000
|
|
3.65% weighted-average senior notes
|
|
925,000
|
|
|
925,000
|
|
Revolving credit facility
|
|
—
|
|
|
413,000
|
|
|
|
1,528,000
|
|
|
2,025,000
|
|
Unamortized debt issuance costs
|
|
(7,810
|
)
|
|
(8,861
|
)
|
Total debt, net
(1)
|
|
$
|
1,520,190
|
|
|
$
|
2,016,139
|
|
(1)
Includes
$20.0 million
of current portion of long-term debt at
December 31, 2015
.
The borrowing base under the terms of the Company's revolving credit facility is redetermined annually in April. In addition, either the Company or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. Effective
April 19, 2016
, the Company’s borrowing base was reduced from
$3.4 billion
to
$3.2 billion
. The maximum credit amount under the revolving credit facility remained unchanged at
$1.8 billion
; however, the available commitments were reduced to
$1.6 billion
at the time of the redetermination.
In May 2016, the Company repurchased
$64.0 million
principal amount of its
6.51%
weighted-average senior notes for approximately
$68.3 million
. A
$4.7 million
extinguishment loss was recognized in the second quarter of 2016
associated with the premium paid and the write-off of a portion of the associated deferred financing costs due to early repayment
. As a result of the repurchase of these senior notes, the available commitments under the revolving credit facility increased to
$1.7 billion
and remained at that level as of
September 30, 2016
.
At
September 30, 2016
, the Company was in compliance with all restrictive financial covenants for both its revolving credit facility and senior notes. As of
September 30, 2016
, based on the Company's asset coverage and leverage ratios, there were no interest rate adjustments required for the Company's senior notes.
At
September 30, 2016
, the Company had
no
borrowings outstanding under its revolving credit facility and had unused commitments of
$1.7 billion
. There were
no
borrowings under the revolving credit facility during the second and
third
quarters of
2016
. The Company’s weighted-average effective interest rate for the revolving credit facility for the
three
months ended
September 30, 2015
was approximately
2.1%
and for the
nine
months ended
September 30, 2016
and
2015
was approximately
2.3%
and
2.2%
, respectively.
5. Derivative Instruments and Hedging Activities
As of
September 30, 2016
, the Company had the following outstanding commodity derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collars
|
|
|
|
Basis Swaps
|
|
|
|
|
|
|
|
Floor
|
|
Ceiling
|
|
Swaps
|
|
Type of Contract
|
|
Volume
|
|
Contract Period
|
|
Range
|
|
Weighted-Average
|
|
Range
|
|
Weighted-Average
|
|
Weighted-Average
|
|
Weighted-Average
|
Natural gas
|
|
7.5
|
|
Bcf
|
|
Oct. 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.51
|
|
|
|
Natural gas
|
|
35.5
|
|
Bcf
|
|
Jan. 2017 - Dec. 2017
|
|
|
|
|
|
|
|
|
|
$
|
3.12
|
|
|
|
Natural gas
|
|
35.5
|
|
Bcf
|
|
Jan. 2017 - Dec. 2017
|
|
$
|
—
|
|
|
$
|
3.09
|
|
|
$3.42-$3.45
|
|
$
|
3.43
|
|
|
|
|
|
Natural gas
|
|
17.7
|
|
Bcf
|
|
Jan. 2018 - Dec. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.42
|
|
Crude oil
|
|
0.5
|
|
Mmbbl
|
|
Oct. 2016 - Dec. 2016
|
|
$
|
—
|
|
|
$
|
38.00
|
|
|
$47.10-$47.50
|
|
$
|
47.28
|
|
|
|
|
|
In the table above, natural gas prices are stated per Mcf and crude oil prices are stated per barrel.
Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(In thousands)
|
|
Balance Sheet Location
|
|
September 30,
2016
|
|
December 31,
2015
|
|
September 30,
2016
|
|
December 31,
2015
|
Commodity contracts
|
|
Other current assets
|
|
$
|
518
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity contracts
|
|
Other assets (non-current)
|
|
1,144
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commodity contracts
|
|
Derivative instruments (current)
|
|
—
|
|
|
—
|
|
|
5,818
|
|
|
—
|
|
Commodity contracts
|
|
Other liabilities (non-current)
|
|
—
|
|
|
—
|
|
|
335
|
|
|
—
|
|
|
|
|
|
$
|
1,662
|
|
|
$
|
—
|
|
|
$
|
6,153
|
|
|
$
|
—
|
|
Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
Derivative assets
|
|
|
|
|
|
|
Gross amounts of recognized assets
|
|
$
|
2,668
|
|
|
$
|
—
|
|
Gross amounts offset in the statement of financial position
|
|
(1,006
|
)
|
|
—
|
|
Net amounts of assets presented in the statement of financial position
|
|
1,662
|
|
|
—
|
|
Gross amounts of financial instruments not offset in the statement of financial position
|
|
—
|
|
|
—
|
|
Net amount
|
|
$
|
1,662
|
|
|
$
|
—
|
|
Derivative liabilities
|
|
|
|
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
7,159
|
|
|
$
|
—
|
|
Gross amounts offset in the statement of financial position
|
|
(1,006
|
)
|
|
—
|
|
Net amounts of liabilities presented in the statement of financial position
|
|
6,153
|
|
|
—
|
|
Gross amounts of financial instruments not offset in the statement of financial position
|
|
—
|
|
|
—
|
|
Net amount
|
|
$
|
6,153
|
|
|
$
|
—
|
|
Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cash received (paid) on settlement of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
$
|
(8,101
|
)
|
|
$
|
45,097
|
|
|
$
|
3,204
|
|
|
$
|
133,827
|
|
Non-cash gain (loss) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
15,005
|
|
|
(27,733
|
)
|
|
(4,490
|
)
|
|
(89,159
|
)
|
|
|
$
|
6,904
|
|
|
$
|
17,364
|
|
|
$
|
(1,286
|
)
|
|
$
|
44,668
|
|
6. Fair Value Measurements
The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For further information regarding the fair value hierarchy, refer to
Note 1
of the Notes to the Consolidated Financial Statements in the Form 10-K.
Financial Assets and Liabilities
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Balance at
September 30, 2016
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
12,297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,297
|
|
Derivative instruments
|
|
—
|
|
|
(233
|
)
|
|
1,895
|
|
|
1,662
|
|
Total assets
|
|
$
|
12,297
|
|
|
$
|
(233
|
)
|
|
$
|
1,895
|
|
|
$
|
13,959
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
25,088
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,088
|
|
Derivative instruments
|
|
—
|
|
|
4,722
|
|
|
1,431
|
|
|
6,153
|
|
Total liabilities
|
|
$
|
25,088
|
|
|
$
|
4,722
|
|
|
$
|
1,431
|
|
|
$
|
31,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Balance at December 31, 2015
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
12,921
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,921
|
|
Total assets
|
|
$
|
12,921
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,921
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
22,371
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,371
|
|
Total liabilities
|
|
$
|
22,371
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,371
|
|
The Company’s investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company’s common stock that are publicly traded and for which market prices are readily available.
The derivative instruments were measured based on quotes from the Company’s counterparties. Such quotes have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are verified using relevant NYMEX futures contracts and/or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk. The Company measured the non-performance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions with which it has derivative transactions, while non-performance risk of the Company is evaluated
using a market credit spread provided by the Company’s bank. The Company has not incurred any losses related to non-performance risk of its counterparties and does not anticipate any material impact on its financial results due to non-performance by third parties.
The most significant unobservable inputs relative to the Company’s Level 3 derivative contracts are basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
85,958
|
|
Total gain (loss) included in earnings
|
|
381
|
|
|
23,867
|
|
Settlement (gain) loss
|
|
83
|
|
|
(77,532
|
)
|
Transfers in and/or out of level 3
|
|
—
|
|
|
—
|
|
Balance at end of period
|
|
$
|
464
|
|
|
$
|
32,293
|
|
|
|
|
|
|
Change in unrealized gain (loss) relating to assets and liabilities still held at the end of the period
|
|
$
|
464
|
|
|
$
|
(53,665
|
)
|
There were no transfers between Level 1 and Level 2 fair value measurements for the
nine
months ended
September 30, 2016
and
2015
.
Non-Financial Assets and Liabilities
The Company discloses or recognizes its non-financial assets and liabilities, such as impairments, at fair value on a nonrecurring basis. As
none
of the Company’s non-financial assets and liabilities were measured at fair value as of
September 30, 2016
and
December 31, 2015
, additional disclosures were not required.
The estimated fair value of the Company’s asset retirement obligation at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. Cash and cash equivalents are classified as Level 1 in the fair value hierarchy and the remaining financial instruments are classified as Level 2.
The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes and the revolving credit facility is based on interest rates currently available to the Company. The Company’s debt is valued using an income approach and classified as Level 3 in the fair value hierarchy.
The carrying amount and fair value of debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
(In thousands)
|
|
Carrying
Amount
|
|
Estimated Fair
Value
|
|
Carrying
Amount
|
|
Estimated Fair
Value
|
Debt, net
|
|
$
|
1,520,190
|
|
|
$
|
1,507,258
|
|
|
$
|
2,016,139
|
|
|
$
|
1,839,530
|
|
Current maturities
|
|
—
|
|
|
—
|
|
|
(20,000
|
)
|
|
(20,378
|
)
|
Long-term debt, excluding current maturities
|
|
$
|
1,520,190
|
|
|
$
|
1,507,258
|
|
|
$
|
1,996,139
|
|
|
$
|
1,819,152
|
|
7. Asset Retirement Obligations
Activity related to the Company’s asset retirement obligations is as follows:
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
September 30, 2016
|
Balance at beginning of period
|
|
$
|
145,606
|
|
Liabilities incurred
|
|
2,861
|
|
Liabilities settled
|
|
(708
|
)
|
Liabilities divested
|
|
(16,353
|
)
|
Accretion expense
|
|
5,295
|
|
Balance at end of period
|
|
$
|
136,701
|
|
8. Commitments and Contingencies
Contractual Obligations
The Company has various contractual obligations in the normal course of its operations. There have been no material changes to the Company’s contractual obligations described under “Transportation and Gathering Agreements,” “Drilling Rig Commitments” and “Lease Commitments” as disclosed in
Note 9
in the Notes to Consolidated Financial Statements included in the Form 10-K.
Legal Matters
The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.
Contingency Reserves
When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters in which reserves have been established. The Company believes that any such amount above the amounts accrued would not be material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.
9. Capital Stock
On
February 22, 2016
, the Company entered into an underwriting agreement, pursuant to which the Company sold an aggregate of
44,000,000
shares of common stock at a price to the Company of
$19.675
per share. On
February 26, 2016
, the Company received
$865.7 million
in net proceeds, after deducting underwriting discounts and commissions. On
March 2, 2016
, the Company sold an additional
6,600,000
shares of common stock as a result of the exercise of the underwriters’ option to purchase additional shares and received
$129.9 million
in net proceeds. These net proceeds were used for general corporate purposes, including repaying indebtedness under the Company’s revolving credit facility and certain of our senior notes and funding a portion of our capital program.
10. Stock-based Compensation
General
From time to time the Company grants certain stock-based compensation awards, including restricted stock awards, restricted stock units and performance share awards. Stock-based compensation expense (benefit) associated with these awards was
$5.1 million
and
$(2.9) million
in the
third
quarter of
2016
and
2015
, respectively, and
$23.0 million
and
$11.6 million
during the first
nine
months of
2016
and
2015
, respectively. Stock-based compensation expense is included in general and administrative expense in the Condensed Consolidated Statement of Operations.
During the first
nine
months of
2016
, the Company recorded a tax shortfall of
$2.1 million
, resulting in a reduction of the Company's windfall tax benefit that is recorded in additional paid in capital in the Condensed Consolidated Balance Sheet. There was
no
tax benefit recognized from stock-based compensation during the first
nine
months of
2015
. The tax shortfall is a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for certain awards that vested during the period. The Company is able to recognize a tax benefit only to the extent it reduces the Company’s income taxes payable.
Refer to
Note 13
of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.
Restricted Stock Units
During the first
nine
months of
2016
,
67,000
restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date value of
$20.55
per unit. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.
Performance Share Awards
The performance period for the awards granted in
2016
commenced on
January 1, 2016
and ends on
December 31, 2018
. The Company used an annual forfeiture rate assumption ranging from
0%
to
6%
for purposes of recognizing stock-based compensation expense for its performance share awards.
Performance Share Awards Based on Internal Performance Metrics
The fair value of performance share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to
100%
of the award in shares of common stock. Based on the Company’s probability assessment at
September 30, 2016
, it is considered probable that the criteria for all performance awards based on internal metrics awards will be met.
Employee Performance Share Awards.
During the first
nine
months of
2016
,
435,990
Employee Performance Share Awards were granted at a grant date value of
$20.49
per share. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a
three
-year performance period.
Hybrid Performance Share Awards.
During the first
nine
months of
2016
,
271,938
Hybrid Performance Share Awards were granted at a grant date value of
$20.49
per share.
The 2016 awards vest 25% on each of the first and second anniversary dates and 50% on the third anniversary
, provided that the Company has
$100 million
or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.
Performance Share Awards Based on Market Conditions
These awards have both an equity and liability component, with the right to receive up to the first
100%
of the award in shares of common stock and the right to receive up to an additional
100%
of the value of the award in excess of the equity component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.
TSR Performance Share Awards.
During the first
nine
months of
2016
,
407,907
TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a
three
-year performance period.
The following assumptions were used to determine the grant date fair value of the equity component (February 17, 2016) and the period-end fair value of the liability component of the TSR Performance Share Awards:
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
September 30, 2016
|
Fair value per performance share award
|
|
$
|
18.57
|
|
|
$5.26 - $9.14
|
Assumptions:
|
|
|
|
|
|
Stock price volatility
|
|
34.4
|
%
|
|
30.4% - 38.4%
|
Risk free rate of return
|
|
0.9
|
%
|
|
0.3% - 0.8%
|
11. Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock appreciation rights were exercised and stock awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that which are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average shares - basic
|
|
465,149
|
|
|
413,846
|
|
|
454,060
|
|
|
413,636
|
|
Dilution effect of stock appreciation rights and stock awards at end of period
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average shares - diluted
|
|
465,149
|
|
|
413,846
|
|
|
454,060
|
|
|
413,636
|
|
The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect due to net loss
|
|
1,784
|
|
|
1,692
|
|
|
1,326
|
|
|
1,390
|
|
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect calculated using the treasury stock method
|
|
—
|
|
|
—
|
|
|
1
|
|
|
3
|
|
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect
|
|
1,784
|
|
|
1,692
|
|
|
1,327
|
|
|
1,393
|
|
12. Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
Accounts receivable, net
|
|
|
|
|
|
|
Trade accounts
|
|
$
|
118,840
|
|
|
$
|
116,772
|
|
Joint interest accounts
|
|
1,618
|
|
|
2,013
|
|
Other accounts
|
|
1,986
|
|
|
2,557
|
|
|
|
122,444
|
|
|
121,342
|
|
Allowance for doubtful accounts
|
|
(1,143
|
)
|
|
(1,113
|
)
|
|
|
$
|
121,301
|
|
|
$
|
120,229
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
Tubular goods and well equipment
|
|
$
|
10,962
|
|
|
$
|
14,685
|
|
Natural gas in storage
|
|
2,525
|
|
|
2,364
|
|
|
|
$
|
13,487
|
|
|
$
|
17,049
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
Prepaid balances and other
|
|
$
|
3,588
|
|
|
$
|
2,671
|
|
Derivative instruments
|
|
518
|
|
|
—
|
|
|
|
$
|
4,106
|
|
|
$
|
2,671
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
12,297
|
|
|
$
|
12,921
|
|
Debt issuance costs
|
|
12,258
|
|
|
14,871
|
|
Derivative instruments
|
|
1,144
|
|
|
—
|
|
Other accounts
|
|
78
|
|
|
64
|
|
|
|
$
|
25,777
|
|
|
$
|
27,856
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
Trade accounts
|
|
$
|
26,439
|
|
|
$
|
30,038
|
|
Natural gas purchases
|
|
2,815
|
|
|
2,231
|
|
Royalty and other owners
|
|
70,631
|
|
|
75,106
|
|
Accrued capital costs
|
|
44,551
|
|
|
27,479
|
|
Taxes other than income
|
|
10,349
|
|
|
14,628
|
|
Other accounts
|
|
5,357
|
|
|
10,925
|
|
|
|
$
|
160,142
|
|
|
$
|
160,407
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
8,040
|
|
|
$
|
13,870
|
|
Taxes other than income
|
|
5,910
|
|
|
5,073
|
|
Asset retirement obligations
|
|
2,000
|
|
|
2,000
|
|
Other accounts
|
|
2,249
|
|
|
3,980
|
|
|
|
$
|
18,199
|
|
|
$
|
24,923
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
25,088
|
|
|
$
|
22,371
|
|
Other accounts
|
|
4,330
|
|
|
3,653
|
|
|
|
$
|
29,418
|
|
|
$
|
26,024
|
|