CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Energen Corporation (Energen or the Company) is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil, natural gas liquids and natural gas. Our operations are conducted through our subsidiary, Energen Resources Corporation (Energen Resources) and primarily occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico. Our corporate headquarters are located in Birmingham, Alabama. The unaudited consolidated financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the
2016
Annual Report of Energen on Form 10-K.
Our accompanying unaudited consolidated financial statements include Energen and its subsidiaries, principally Energen Resources, and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year. In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present a fair statement of our financial position, results of operations, and cash flows for the periods and as of the dates shown. Such adjustments consist of normal recurring items. Certain reclassifications were made to conform prior periods’ financial statements to the current-quarter presentation.
Workforce Reduction
On January 22, 2016 and March 18, 2016, we reduced our workforce as part of an overall plan to reduce costs and better align our workforce with the needs of our business. In connection with the reductions, we incurred charges of approximately
$5.0 million
during 2016 for one-time termination benefits which are included in general and administrative expense on the consolidated statements of operations.
2. DERIVATIVE COMMODITY INSTRUMENTS
We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. These derivative commodity instruments are accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net. Such instruments may include over-the-counter (OTC) swaps, options and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.
The following tables detail the offsetting of derivative assets and liabilities as well as the fair values of derivatives on the balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
|
|
Gross Amounts Not Offset in the Balance Sheets
|
|
|
Gross Amounts Recognized at Fair Value
|
Gross Amounts Offset in the Balance Sheets
|
Net Amounts Presented in the Balance Sheets
|
Financial Instruments
|
Cash Collateral Received
|
Net Fair Value Presented in the Balance Sheets
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Derivative instruments
|
$
|
43,352
|
|
$
|
(4,289
|
)
|
$
|
39,063
|
|
$
|
—
|
|
$
|
—
|
|
$
|
39,063
|
|
Noncurrent derivative instruments
|
12,936
|
|
(3,402
|
)
|
9,534
|
|
—
|
|
—
|
|
9,534
|
|
Total derivative assets
|
56,288
|
|
(7,691
|
)
|
48,597
|
|
—
|
|
—
|
|
48,597
|
|
Liabilities
|
|
|
|
|
|
|
Derivative instruments
|
4,770
|
|
(4,289
|
)
|
481
|
|
—
|
|
—
|
|
481
|
|
Noncurrent derivative instruments
|
3,904
|
|
(3,402
|
)
|
502
|
|
—
|
|
—
|
|
502
|
|
Total derivative liabilities
|
8,674
|
|
(7,691
|
)
|
983
|
|
—
|
|
—
|
|
983
|
|
Total derivatives
|
$
|
47,614
|
|
$
|
—
|
|
$
|
47,614
|
|
$
|
—
|
|
$
|
—
|
|
$
|
47,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2016
|
|
|
Gross Amounts Not Offset in the Balance Sheets
|
|
|
Gross Amounts Recognized at Fair Value
|
Gross Amounts Offset in the Balance Sheets
|
Net Amounts Presented in the Balance Sheets
|
Financial Instruments
|
Cash Collateral Received
|
Net Fair Value Presented in the Balance Sheets
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Derivative instruments
|
$
|
1,756
|
|
$
|
(1,706
|
)
|
$
|
50
|
|
$
|
—
|
|
$
|
—
|
|
$
|
50
|
|
Liabilities
|
|
|
|
|
|
|
Derivative instruments
|
67,173
|
|
(1,706
|
)
|
65,467
|
|
—
|
|
—
|
|
65,467
|
|
Noncurrent derivative instruments
|
3,006
|
|
—
|
|
3,006
|
|
—
|
|
—
|
|
3,006
|
|
Total derivative liabilities
|
70,179
|
|
(1,706
|
)
|
68,473
|
|
—
|
|
—
|
|
68,473
|
|
Total derivatives
|
$
|
(68,423
|
)
|
$
|
—
|
|
$
|
(68,423
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(68,423
|
)
|
Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net gain position
with thirteen of our active counterparties and in a net loss position with the remaining one at
June 30, 2017
. The three largest counterparty net gain positions at
June 30, 2017
, PNC Bank, National Association, J.P. Morgan Ventures Energy Corporation and J Aron and Company, constituted approximately
$6.4 million
,
$6.0 million
and
$5.1 million
, respectively, of Energen’s total net gain on fair value of derivatives.
The following table details the effect of open and closed derivative commodity instruments not designated as hedging instruments on the statements of operations:
|
|
|
|
|
|
|
|
|
(in thousands)
|
Location on Statements of Operations
|
Three months
ended
June 30, 2017
|
Three months
ended
June 30, 2016
|
Gain (loss) recognized in income on derivatives
|
Gain (loss) on derivative instruments, net
|
$
|
38,101
|
|
$
|
(65,872
|
)
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Location on Statements of Operations
|
Six months
ended
June 30, 2017
|
Six months
ended
June 30, 2016
|
Gain (loss) recognized in income on derivatives
|
Gain (loss)on derivative instruments, net
|
$
|
102,647
|
|
$
|
(60,417
|
)
|
As of June 30, 2017, Energen had entered into the following transactions for the remainder of
2017
and subsequent years:
|
|
|
|
|
|
Production Period
|
Description
|
Total Hedged Volumes
|
Weighted Average Contract Price
|
Oil
|
|
|
|
2017
|
NYMEX Swaps
|
4,020
|
MBbl
|
$50.68 Bbl
|
|
NYMEX Three-Way Collars
|
2,400
|
MBbl
|
|
|
Ceiling sold price (call)
|
|
$62.18 Bbl
|
|
Floor purchased price (put)
|
|
$45.00 Bbl
|
|
Floor sold price (put)
|
|
$35.00 Bbl
|
2018
|
NYMEX Three-Way Collars
|
12,060
|
MBbl
|
|
|
Ceiling sold price (call)
|
|
$60.19 Bbl
|
|
Floor purchased price (put)
|
|
$46.12 Bbl
|
|
Floor sold price (put)
|
|
$36.12 Bbl
|
Oil Basis Differential
|
|
|
|
2017
|
WTI/WTI Basis Swaps
|
5,550
|
MBbl
|
$(0.66) Bbl
|
2018
|
WTI/WTI Basis Swaps
|
5,760
|
MBbl
|
$(1.12) Bbl
|
Natural Gas Liquids
|
|
|
|
2017
|
Liquids Swaps
|
41.6
|
MMGal
|
$0.57 Gal
|
2018
|
Liquids Swaps
|
105.8
|
MMGal
|
$0.59 Gal
|
Natural Gas
|
|
|
|
2017
|
Basin Specific Swaps - Permian
|
7.8
|
Bcf
|
$2.85 Mcf
|
2017
|
NYMEX Swaps
|
0.9
|
Bcf
|
$3.29 Mcf
|
2018
|
Basin Specific Swaps - Permian
|
3.6
|
Bcf
|
$2.56 Mcf
|
Natural Gas Basis Differential
|
|
|
|
2017
|
Permian Swaps
|
0.9
|
Bcf
|
$(0.29) Mcf
|
WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing
|
As of
June 30, 2017
, the maximum term over which Energen has hedged exposures to the variability of cash flows is through December 31, 2018.
3. 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 (exit price). In determining fair value, we use various valuation approaches and classify all assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect our own considerations about the assumptions other market participants would use in pricing the asset or liability based on the best information available in the circumstances. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The hierarchy is broken down into three levels based on the observability of inputs as follows:
|
|
Level 1 -
|
Unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
|
Level 2 -
|
Pricing inputs other than quoted prices in active markets included within Level 1, which are either directly or indirectly observable through correlation with market data as of the reporting date and
|
|
|
Level 3 -
|
Pricing that requires inputs that are both significant and unobservable to the calculation of the fair value measure. The fair value measure represents estimates of the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.
|
No transfers between fair value hierarchy levels occurred during the
three
months and six months ended
June 30, 2017
.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Energen classifies the fair value of multiple derivative instruments executed under master netting arrangements as net derivative assets and liabilities. The following fair value hierarchy tables present information about Energen’s assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(in thousands)
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
Derivative instruments
|
$
|
33,437
|
|
$
|
5,626
|
|
$
|
39,063
|
|
Noncurrent derivative instruments
|
7,587
|
|
1,947
|
|
9,534
|
|
Total assets
|
41,024
|
|
7,573
|
|
48,597
|
|
Liabilities:
|
|
|
|
Derivative instruments
|
481
|
|
—
|
|
481
|
|
Noncurrent derivative instruments
|
574
|
|
(72
|
)
|
502
|
|
Total liabilities
|
1,055
|
|
(72
|
)
|
983
|
|
Net derivative asset
|
$
|
39,969
|
|
$
|
7,645
|
|
$
|
47,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(in thousands)
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
Derivative instruments
|
$
|
50
|
|
$
|
—
|
|
$
|
50
|
|
Liabilities:
|
|
|
|
Derivative instruments
|
57,927
|
|
7,540
|
|
65,467
|
|
Noncurrent derivative instruments
|
1,694
|
|
1,312
|
|
3,006
|
|
Total liabilities
|
59,621
|
|
8,852
|
|
68,473
|
|
Net derivative liability
|
$
|
(59,571
|
)
|
$
|
(8,852
|
)
|
$
|
(68,423
|
)
|
Derivative Instruments:
The fair value of Energen’s derivative commodity instruments is determined using market transactions and other market evidence whenever possible, including market-based inputs to models and broker or dealer quotations. Our OTC derivative contracts trade in less liquid markets with limited pricing information as compared to markets with actively traded, unadjusted quoted prices; accordingly, the determination of fair value is inherently more difficult. OTC derivatives for which we are
able to substantiate fair value through direct or indirect observable market prices are classified within Level 2 of the fair value hierarchy. These Level 2 fair values consist of swaps and options priced in reference to NYMEX oil and natural gas prices. OTC derivatives valued using unobservable market prices have been classified within Level 3 of the fair value hierarchy. These Level 3 fair values include oil basis and natural gas liquids swaps. We consider the frequency of pricing and variability in pricing between sources in determining whether a market is considered active. While Energen does not have access to the specific assumptions used in its counterparties’ valuation models, Energen maintains communications with its counterparties and discusses pricing practices. Further, we corroborate the fair value of our transactions by comparison of market-based price sources.
Level 3 Fair Value Instruments:
Energen prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate
$6.8 million
change in the fair value of open Level 3 derivative contracts and to our results of operations.
The table below sets forth a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments as follows:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
June 30,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
5,574
|
|
$
|
(8,154
|
)
|
Realized gains (losses)
|
417
|
|
(1,398
|
)
|
Unrealized gains (losses) relating to instruments held at the reporting date*
|
1,876
|
|
(2,496
|
)
|
Settlements during period
|
(222
|
)
|
1,398
|
|
Balance at end of period
|
$
|
7,645
|
|
$
|
(10,650
|
)
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
June 30,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
(8,852
|
)
|
$
|
(16,059
|
)
|
Realized losses
|
(2,845
|
)
|
(6,916
|
)
|
Unrealized gains relating to instruments held at the reporting date*
|
16,301
|
|
5,409
|
|
Settlements during period
|
3,041
|
|
6,916
|
|
Balance at end of period
|
$
|
7,645
|
|
$
|
(10,650
|
)
|
*Includes
$3.1 million
and
$11.0 million
in gains for the three months and six months ended June 30, 2017, respectively. Includes
$3.7 million
and
$6.1 million
in losses for the three months and six months ended June 30, 2016, respectively.
The table below sets forth quantitative information about Energen’s Level 3 fair value measurements of derivative commodity instruments as follows:
|
|
|
|
|
|
|
|
(in thousands, except price data)
|
Fair Value as of June 30, 2017
|
Valuation Technique*
|
Unobservable Input*
|
Range
|
Oil Basis - WTI/WTI
|
|
|
|
|
2017
|
$
|
3,087
|
|
Discounted Cash Flow
|
Forward Basis
|
($1.34 - $1.26) Bbl
|
2018
|
$
|
(387
|
)
|
Discounted Cash Flow
|
Forward Basis
|
($1.07 - $1.04) Bbl
|
Natural Gas Liquids
|
|
|
|
|
2017
|
$
|
393
|
|
Discounted Cash Flow
|
Forward Basis
|
$0.57 Gal
|
2018
|
$
|
4,552
|
|
Discounted Cash Flow
|
Forward Basis
|
$0.55 Gal
|
*Discounted cash flow represents an income approach in calculating fair value including the referenced unobservable input and a discount reflecting credit quality of the counterparty.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in Energen’s consolidated balance sheets. The following methods and assumptions were used to estimate the fair values.
Asset retirement obligations:
Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. See Note 11, Asset Retirement Obligations, for further discussion related to these ARO’s. These assumptions are classified as Level 3 fair value measurements.
Asset Impairments:
We monitor our oil and natural gas properties as well as the market and business environments in which we operate and make assessments about events that could result in potential impairment. Such potential events may include, but are not limited to, commodity price declines, unanticipated increased operating costs, and lower than expected field production performance. If a material event occurs, Energen makes an estimate of undiscounted future cash flows to determine whether the asset is impaired. If the asset is impaired, we will record an impairment loss for the difference between the net book value of the properties and the fair value of the properties. The fair value of the properties typically is estimated using discounted cash flows and values derived from purchase and sale agreements and similar support as applicable. Cash flow and fair value estimates require Energen to make projections and assumptions for pricing, demand, competition, operating costs, legal and regulatory issues, discount rates and other factors for many years into the future.
These assumptions are classified as Level 3 fair value measurements. See Note 13, Asset Impairment, for impairments recognized by Energen during the three months and six months ended June 30, 2017 and 2016.
Financial Instruments not Carried at Fair Value
The stated value of cash and cash equivalents, short-term investments, accounts receivable (net of allowance), and short-term debt approximates fair value due to the short maturity of the instruments. The Company invested in certain short-term investments that qualify and were classified as cash and cash equivalents. Energen had allowance for doubtful accounts of
$0.6 million
at both June 30, 2017 and December 31, 2016, respectively. The fair value of Energen’s long-term debt, including the current portion, was approximately
$690.5 million
and
$559.9 million
and had a carrying value of
$678.5 million
and
$554.0 million
at
June 30, 2017
and
December 31, 2016
, respectively. The fair values are based on market prices of similar debt issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as a Level 1 fair value measurement and long-term debt is classified as a Level 2 fair value measurement.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Credit facility, due August 30, 2019
|
$
|
131,500
|
|
$
|
—
|
|
7.40% Medium-term Notes, Series A, due July 24, 2017
|
—
|
|
2,000
|
|
7.36% Medium-term Notes, Series A, due July 24, 2017
|
15,000
|
|
15,000
|
|
7.23% Medium-term Notes, Series A, due July 28, 2017
|
2,000
|
|
2,000
|
|
7.32% Medium-term Notes, Series A, due July 28, 2022
|
20,000
|
|
20,000
|
|
7.60% Medium-term Notes, Series A, due July 26, 2027
|
—
|
|
5,000
|
|
7.35% Medium-term Notes, Series A, due July 28, 2027
|
10,000
|
|
10,000
|
|
7.125% Medium-term Notes, Series B, due February 15, 2028
|
100,000
|
|
100,000
|
|
4.625% Notes, due September 1, 2021
|
400,000
|
|
400,000
|
|
Total
|
678,500
|
|
554,000
|
|
Less amounts due within one year
|
17,000
|
|
24,000
|
|
Less unamortized debt discount
|
374
|
|
387
|
|
Less unamortized debt issuance costs
|
1,968
|
|
2,170
|
|
Total
|
$
|
659,158
|
|
$
|
527,443
|
|
The aggregate maturities of Energen’s long-term debt outstanding at
June 30, 2017
are as follows:
|
|
|
|
|
|
|
(in thousands)
|
Remaining 2017
|
2018
|
2019
|
2020
|
2021
|
2022 and thereafter
|
$17,000
|
$—
|
$131,500
|
$—
|
$400,000
|
$130,000
|
On January 23, 2017, Energen redeemed the
$2.0 million
of
7.40%
Medium-term Notes, Series A, due July 24, 2017 and
$5.0 million
of
7.60%
Medium-term Notes, Series A, due July 26, 2027.
The debt agreements of Energen contain financial and nonfinancial covenants including routine matters such as timely payment of principal and interest, maintenance of corporate existence and restrictions on liens. Although none of the agreements have events of default based on credit ratings, the interest rates applicable to the syndicated credit facility discussed below may adjust based on credit rating changes during certain periods.
Under Energen’s Indenture dated September 1, 1996 with The Bank of New York as Trustee, a cross default provision provides that any debt default of more than
$10 million
by Energen or Energen Resources will constitute an event of default by Energen. The Indenture does not include a restriction on the payment of dividends.
Credit Facility:
On September 2, 2014, Energen entered into a
five
-year syndicated secured credit facility with domestic and foreign lenders. On October 25, 2016, the borrowing and aggregate commitments base was reaffirmed at
$1.05 billion
with no changes in association with the semi-annual redetermination required under the agreement. On April 21, 2017, the borrowing base was increased to
$1.4 billion
. The aggregate commitment under the credit facility did not change and remains at
$1.05 billion
. Energen’s obligations under the syndicated credit facility are unconditionally guaranteed by Energen Resources. Subject to release of collateral in certain periods upon the achievement of certain investment grade ratings from designated ratings agencies, the credit facility is collateralized by certain assets of Energen, including a pledge of equity interests in subsidiaries of Energen other than Energen Resources, and by mortgages on substantially all of Energen Resources’ oil and natural gas properties. The current credit facility qualifies for classification as long-term debt on the consolidated balance sheets. The financial covenants of the credit facility require Energen to maintain a ratio of total debt to consolidated income before interest expense, income taxes, depreciation, depletion, amortization, exploration expense and other non-cash income and expenses (EBITDAX) less than or equal to
4.0
to 1.0; to maintain a ratio of consolidated current assets (adjusted to include amounts available for borrowings and exclude non-cash derivative instruments) to consolidated current liabilities (adjusted to exclude maturities under the credit facility and non-cash derivative instruments) greater than or equal to
1.0
to 1.0; and, during certain periods, to maintain a ratio of the net present value of proved reserves of our oil and natural gas properties to consolidated total debt greater than or equal to
1.50
to 1.0. We are also bound by covenants which limit our ability to incur additional indebtedness, make certain distributions or alter our corporate structure. Energen may not pay dividends during an event of default if the payment would result in an event of default or if availability is less than
10 percent
of the loan limit under the credit facility. Our credit facility also limits our ability to enter into commodity hedges based on projected production volumes. In addition, the terms of our credit facility limit the amount we can borrow to a borrowing base amount which is determined by our lenders in their sole discretion based on their valuation of our proved reserves and their internal criteria including commodity price outlook. The borrowing base amount is subject to redetermination semi-annually and for event-driven unscheduled redeterminations. Our next scheduled redetermination is October 1, 2017.
Under the credit facility, a cross default provision provides that any debt default of more than
$75 million
by Energen or Energen Resources will constitute an event of default by Energen.
Upon an uncured event of default under the credit facility, all amounts owing under the credit facility, if any, depending on the nature of the event of default will automatically, or may upon notice by the administrative agent or the requisite lenders thereunder, become immediately due and payable and the lenders may terminate their commitments under the defaulted facility. Energen was in compliance with the terms of its credit facility as of
June 30, 2017
.
The following is a summary of information relating to Energen’s credit facility:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Credit facility outstanding
|
$
|
131,500
|
|
$
|
—
|
|
Available for borrowings
|
918,500
|
|
1,050,000
|
|
Total borrowing commitments
|
$
|
1,050,000
|
|
$
|
1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|
2017
|
2016
|
2017
|
2016
|
Maximum amount outstanding at any month-end
|
$
|
131,500
|
|
$
|
—
|
|
$
|
131,500
|
|
$
|
214,500
|
|
Average daily amount outstanding
|
$
|
47,484
|
|
$
|
374
|
|
$
|
23,887
|
|
$
|
67,654
|
|
Weighted average interest rates based on:
|
|
|
|
|
Average daily amount outstanding
|
2.38
|
%
|
1.72
|
%
|
2.38
|
%
|
1.72
|
%
|
Amount outstanding at period-end
|
2.44
|
%
|
—
|
%
|
2.44
|
%
|
—
|
%
|
The following is a summary of information relating to Energen’s interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|
2017
|
2016
|
2017
|
2016
|
Interest expense
|
$
|
9,145
|
|
$
|
9,038
|
|
$
|
18,111
|
|
$
|
18,871
|
|
Amortization of debt issuance costs related to long-term debt, including our credit facility*
|
$
|
830
|
|
$
|
827
|
|
$
|
1,673
|
|
$
|
1,653
|
|
Capitalized interest*
|
$
|
—
|
|
$
|
47
|
|
$
|
—
|
|
$
|
47
|
|
Commitment fees*
|
$
|
774
|
|
$
|
831
|
|
$
|
1,561
|
|
$
|
1,780
|
|
*Included in Energen’s total interest expense. At June 30, 2017, Energen paid commitment fees on the unused portion of the available credit facility at a current annual rate of
30
basis points.
5. RECONCILIATION OF EARNINGS PER SHARE (EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Three months ended
|
(in thousands, except per share amounts)
|
June 30, 2017
|
June 30, 2016
|
|
Net
|
|
Per Share
|
Net
|
|
Per Share
|
|
Income
|
Shares
|
Amount
|
Income
|
Shares
|
Amount
|
Basic EPS
|
$
|
29,481
|
|
97,189
|
|
$
|
0.30
|
|
$
|
36,759
|
|
97,067
|
|
$
|
0.38
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Stock options
|
|
24
|
|
|
|
11
|
|
|
Non-vested restricted stock
|
|
287
|
|
|
|
184
|
|
|
Performance share awards
|
|
193
|
|
|
|
127
|
|
|
Diluted EPS
|
$
|
29,481
|
|
97,693
|
|
$
|
0.30
|
|
$
|
36,759
|
|
97,389
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
Six months ended
|
(in thousands, except per share amounts)
|
June 30, 2017
|
June 30, 2016
|
|
Net
|
|
Per Share
|
Net
|
|
Per Share
|
|
Income
|
Shares
|
Amount
|
Loss
|
Shares
|
Amount
|
Basic EPS
|
$
|
62,884
|
|
97,165
|
|
$
|
0.65
|
|
$
|
(166,357
|
)
|
91,850
|
|
$
|
(1.81
|
)
|
Effect of dilutive securities
|
|
|
|
|
|
|
Stock options
|
|
26
|
|
|
|
—
|
|
|
Non-vested restricted stock
|
|
275
|
|
|
|
—
|
|
|
Performance share awards
|
|
182
|
|
|
|
—
|
|
|
Diluted EPS
|
$
|
62,884
|
|
97,648
|
|
$
|
0.64
|
|
$
|
(166,357
|
)
|
91,850
|
|
$
|
(1.81
|
)
|
In periods of loss, shares that otherwise would have been included in diluted average common shares outstanding are excluded. The Company had
247,066
of excluded shares for the six months ended June 30, 2016.
Energen had the following shares that were excluded from the computation of diluted EPS, as inclusion would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Stock options
|
539
|
|
539
|
|
539
|
|
709
|
|
Non-vested restricted stock
|
6
|
|
3
|
|
6
|
|
43
|
|
Performance share awards
|
139
|
|
—
|
|
139
|
|
—
|
|
6. EQUITY OFFERING
During the first quarter of 2016, Energen issued
18,170,000
additional shares of common stock through a public equity offering. We
received net proceeds of approximately
$381.1 million
, after deducting offering expenses. Net proceeds from this offering were used to repay borrowings under our credit facility and for general corporate purposes.
7. STOCK COMPENSATION
Stock Incentive Plan
Restricted Stock:
The Stock Incentive Plan provides for the grant of restricted stock and restricted stock units (restricted stock awards) which have been valued based on the quoted market price of Energen’s common stock at the date of grant. Restricted stock awards vest within three years from grant date. A summary of restricted stock award activity during the six months ended June 30, 2017 is presented below:
|
|
|
|
|
|
|
|
Shares
|
Weighted Average Price
|
Nonvested at December 31, 2016
|
325,643
|
|
$
|
44.44
|
|
Restricted stock units granted
|
124,659
|
|
52.45
|
|
Vested
|
(38,000
|
)
|
70.00
|
|
Forfeited
|
(2,669
|
)
|
44.31
|
|
Nonvested at June 30, 2017
|
409,633
|
|
$
|
44.51
|
|
Performance Share Awards:
In addition,
the Stock Incentive Plan provides for the grant of performance share awards to eligible employees based on predetermined Energen performance criteria at the end of an award period. The Stock Incentive Plan provides that payment of earned performance share awards be made in the form of Energen common stock. Performance share awards are valued using the Monte Carlo model which uses historical volatility and other assumptions to estimate the probability of satisfying the market condition of the award and have a
three
-year vesting period. A summary of performance share award activity during the six months ended June 30, 2017 is presented below:
|
|
|
|
|
|
|
|
Shares
|
Weighted
Average Price
|
Nonvested at December 31, 2016
|
336,442
|
|
$
|
57.03
|
|
Granted (two-year vesting period)
|
3,116
|
|
$
|
96.54
|
|
Granted (three-year vesting period)
|
137,084
|
|
66.89
|
|
Vested and paid
|
(59,530
|
)
|
93.52
|
|
Forfeited
|
(2,937
|
)
|
45.61
|
|
Nonvested at June 30, 2017
|
414,175
|
|
$
|
55.43
|
|
Stock Repurchase Program
During the
three
months and six months ended
June 30, 2017
, Energen had non-cash purchases of approximately
$15,000
and
$3.2 million
, respectively, of Energen common stock in conjunction with tax withholdings on other stock compensation and our non-qualified deferred compensation plan. Energen had non-cash purchases of Energen common stock of
$19,000
and
$2.4 million
during the three months and six months June 30, 2016. Energen utilized internally generated cash flows in payment of the related tax withholdings.
8. EMPLOYEE BENEFIT PLANS
Pension Plans
In October 2014, Energen’s Board of Directors elected to freeze and terminate its qualified defined benefit pension plan. A plan amendment adopted in October 2014 closed the plan to new entrants, effective November 1, 2014, and froze benefit accruals effective December 31, 2014. Energen terminated the plan on January 31, 2015 and distributed benefits in December 2015. The Pension Benefit Guaranty Corporation (PBGC) is conducting an audit of the termination of the pension plan to ensure that Energen properly calculated and distributed benefits in accordance with plan provisions and in compliance with the appropriate laws and regulations administered by the PBGC.
Energen’s non-qualified supplemental retirement plans were terminated effective December 31, 2014. Distributions under the plans were partially made in the first quarter of 2015 with the remainder of approximately
$14.5 million
paid in the first quarter of 2016. The Company expects to make
no
additional benefit payments with respect to the termination of the non-qualified supplemental retirement plans. Certain annuities associated with our non-qualified supplemental retirement plans remain of approximately
$1.0 million
and
$1.1 million
and are included in other current liabilities and other long-term liabilities on the consolidated balance sheets at June 30, 2017 and December 31, 2016, respectively. In the first quarter of 2016, Energen incurred a settlement charge of
$3.3 million
for the payment of lump sums from the non-qualified supplemental retirement plans.
Postretirement Benefit Plans
Energen provides certain postretirement health care and life insurance benefits for all employees hired prior to January 1, 2010. These postretirement healthcare and life insurance benefits are available upon reaching normal retirement age while working for Energen. The components of net periodic postretirement benefit income for Energen’s postretirement benefit plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Components of net periodic benefit cost:
|
|
|
|
|
Service cost
|
$
|
18
|
|
$
|
24
|
|
$
|
35
|
|
$
|
47
|
|
Interest cost
|
57
|
|
52
|
|
113
|
|
118
|
|
Expected long-term return on assets
|
(62
|
)
|
(69
|
)
|
(124
|
)
|
(180
|
)
|
Prior service cost amortization
|
(114
|
)
|
(113
|
)
|
(227
|
)
|
(238
|
)
|
Actuarial loss amortization
|
2
|
|
—
|
|
5
|
|
—
|
|
Settlement charge
|
—
|
|
—
|
|
—
|
|
45
|
|
Curtailment gain
|
—
|
|
—
|
|
—
|
|
(816
|
)
|
Net periodic income
|
$
|
(99
|
)
|
$
|
(106
|
)
|
$
|
(198
|
)
|
$
|
(1,024
|
)
|
There are no required contributions to the postretirement benefit plan during 2017. In the first quarter of 2016, Energen incurred a curtailment gain of
$0.8 million
in connection with the reduction in workforce.
9. COMMITMENTS AND CONTINGENCIES
Commitments and Agreements:
Under various agreements for third-party gathering, treatment, transportation or other services, Energen is committed to deliver minimum production volumes or to pay certain costs in the event the minimum quantities are not delivered. These delivery commitments are approximately
3.4 million
barrels of oil equivalent (MMBOE) through
October 2020
.
Legal Matters:
Energen and its affiliates are, from time to time, parties to various pending or threatened legal proceedings and we have accrued a provision for our estimated liability. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. We recognize a liability for contingencies, including an estimate of legal costs to be incurred, when information available indicates both a loss is probable and the amount of the loss can be reasonably estimated. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of Energen and its affiliates. It should be noted, however, that there is uncertainty in the valuation of pending claims and prediction of litigation results.
On November 4, 2015, Energen Resources filed a quiet title action against Endeavor Energy Resources, L.P. (Endeavor) in the District Court of Howard County, Texas, to remove a cloud on the title to approximately
10,000
acres leased by Energen Resources in that county. Energen Resources believes the cloud on title arises from a prior, unreleased but partially terminated oil and gas lease covering the leased lands. The trial judge ruled with respect to the acreage not held by production that Endeavor’s lease terminated prior to the date Energen Resources entered into its lease. In November 2016, the trial judge entered a final judgment to that effect and that judgement has been appealed by Endeavor.
Environmental Matters:
Various environmental laws and regulations apply to the operations of Energen and Energen Resources. Historically, the cost of environmental compliance has not materially affected our financial position, results of operations or cash flows. New regulations, enforcement policies, claims for damages or other events could result in significant unanticipated costs.
During January 2014, Energen Resources responded to a General Notice and Information Request from the Environmental Protection Agency regarding the Reef Environmental Site (the Site) in Sylacauga, Talladega County, Alabama. The letter identifies Energen Resources as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 for the cleanup of the Site. In 2008, Energen hired a third party to transport approximately
3,000
gallons of non-hazardous wastewater to Reef Environmental for wastewater treatment. Reef Environmental ceased operating its wastewater treatment system in 2010. Because it used Reef Environmental only one time for a small volume of non-hazardous wastewater, Energen Resources has not accrued a liability for cleanup of the Site.
New Mexico Audits:
In 2011, Energen Resources received an Order to Perform Restructured Accounting and Pay Additional Royalties (the Order), following an audit performed by the Taxation and Revenue Department (the Department) of the State of New Mexico on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The Order addressed ONRR’s efforts to change accounting and reporting practices, and to unbundle fees charged by third parties that gather, compress and transport natural gas production. ONRR now maintains that all or some of such fees are not deductible.
Energen Resources appealed the Order in 2011 and in July 2012, on a motion from ONRR, the Order was remanded. In August 2014, ONRR issued its Revised Order and Energen Resources appealed the Revised Order. In the Revised Order, ONRR ordered that Energen pay additional royalties on production from certain federal leases in the amount of
$129,700
. At ONRR’s request the Revised Order was also remanded in August 2015. On April 15, 2016 ONRR issued its Second Revised Order. The Second Revised Order directs Energen Resources to pay additional royalties of
$189,000
, replacing the previous demand of
$129,700
. Energen estimates that application of the ONRR position to all of the Company’s federal leases would result in ONRR claims up to approximately
$24 million
, plus interest and penalties from 2004 forward. ONRR began implementing its unbundling initiative in 2010, but seeks to implement its revisions retroactively, despite the fact that they conflict with previous audits, allowances and industry practice. Energen is contesting the Second Revised Order, the predecessor orders and the findings. Management is unable, at this time, to determine a range of reasonably possible losses, and no amount has been accrued as of
June 30, 2017
.
10. EXPLORATORY COSTS
Energen capitalizes exploratory drilling costs until a determination is made that the well or project has either found proved reserves or is impaired. After an exploratory well has been drilled and found oil and natural gas reserves, a determination may be pending as to whether the oil and natural gas quantities can be classified as proved. In those circumstances, Energen continues to capitalize the drilling costs pending the determination of proved status if (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) Energen is making sufficient progress assessing the reserves and the economic and operating viability of the project. Capitalized exploratory drilling costs are presented in proved properties in the balance sheets. If the exploratory well is determined to be a dry hole, the costs are charged to exploration expense. Other exploration costs, including geological and geophysical costs, are expensed as incurred.
The following table sets forth capitalized exploratory well costs and includes additions pending determination of proved reserves, reclassifications to proved reserves and costs charged to expense:
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
(in thousands)
|
2017
|
2016
|
Capitalized exploratory well costs at beginning of period
|
$
|
168,265
|
|
$
|
105,591
|
|
Additions pending determination of proved reserves
|
170,737
|
|
78,457
|
|
Reclassifications due to determination of proved reserves
|
(197,601
|
)
|
(146,610
|
)
|
Capitalized exploratory well costs at end of period
|
$
|
141,401
|
|
$
|
37,438
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
(in thousands)
|
2017
|
2016
|
Capitalized exploratory well costs at beginning of period
|
$
|
164,996
|
|
$
|
103,588
|
|
Additions pending determination of proved reserves
|
335,703
|
|
161,903
|
|
Reclassifications due to determination of proved reserves
|
(359,298
|
)
|
(228,053
|
)
|
Capitalized exploratory well costs at end of period
|
$
|
141,401
|
|
$
|
37,438
|
|
The following table sets forth capitalized exploratory well costs:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Exploratory wells in progress (drilling rig not released)
|
$
|
15,224
|
|
$
|
14,531
|
|
Capitalized exploratory well costs capitalized for a period of one year or less
|
126,177
|
|
143,602
|
|
Capitalized exploratory well costs for a period greater than one year
|
—
|
|
6,863
|
|
Total capitalized exploratory well costs
|
$
|
141,401
|
|
$
|
164,996
|
|
At
June 30, 2017
, Energen had
51
gross exploratory wells either drilling or waiting on results from completion and testing, all of which were located in the Permian Basin. As of June 30, 2017, the Company had
no
wells capitalized greater than a year. As of December 31, 2016, the Company had
two
gross wells capitalized greater than a year, which were completed during 2017.
11. ASSET RETIREMENT OBLIGATIONS
Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. The ARO fair value liability is determined by calculating the present value of the estimated future cash outflows, adjusted for inflation, we expect to incur to plug, abandon and reclaim our producing properties at the end of their productive lives, and is recognized on a discounted basis incorporating an estimate of performance risk specific to Energen. Subsequent to initial measurement, liabilities are accreted to their present value and capitalized costs are depreciated over the estimated useful lives of the related assets. Upon settlement of the liability, Energen may recognize a gain or loss for differences between estimated and actual settlement costs.
The following table reflects the components of the change in Energen’s ARO balance:
|
|
|
|
|
(in thousands)
|
|
Balance as of December 31, 2016
|
$
|
81,544
|
|
Liabilities incurred
|
758
|
|
Liabilities settled
|
(292
|
)
|
Accretion expense
|
2,857
|
|
Balance as of June 30, 2017
|
$
|
84,867
|
|
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides changes in the components of accumulated other comprehensive income (loss), net of the related income tax effects.
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,405
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(138
|
)
|
Balance as of June 30, 2017
|
|
$
|
1,267
|
|
The following table provides details of the reclassifications out of accumulated other comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
June 30,
|
|
|
2017
|
2016
|
|
(in thousands)
|
Amounts Reclassified
|
Line Item Where Presented
|
Postretirement plans:
|
|
|
|
Prior service cost
|
$
|
113
|
|
$
|
113
|
|
General and administrative
|
Actuarial losses
|
(2
|
)
|
—
|
|
General and administrative
|
Total postretirement plans
|
111
|
|
113
|
|
|
Income tax benefit
|
(42
|
)
|
(42
|
)
|
|
Total reclassifications for the period, net of tax
|
$
|
69
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 30,
|
|
|
2017
|
2016
|
|
(in thousands)
|
Amounts Reclassified
|
Line Item Where Presented
|
Pension and postretirement plans:
|
|
|
|
Prior service cost
|
$
|
227
|
|
$
|
238
|
|
General and administrative
|
Actuarial losses
|
(5
|
)
|
(3,058
|
)
|
General and administrative
|
Total pension and postretirement plans
|
222
|
|
(2,820
|
)
|
|
Income tax expense (benefit)
|
(84
|
)
|
1,079
|
|
|
Total reclassifications for the period, net of tax
|
$
|
138
|
|
$
|
(1,741
|
)
|
|
13. ASSET IMPAIRMENT
Impairments recognized by Energen are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Permian Basin oil properties
|
|
|
|
|
Central Basin Platform
|
$
|
—
|
|
$
|
—
|
|
$
|
1,096
|
|
$
|
187,043
|
|
Delaware Basin
|
—
|
|
—
|
|
—
|
|
21,288
|
|
San Juan Basin properties
|
—
|
|
—
|
|
—
|
|
7,519
|
|
Permian Basin unproved leasehold properties
|
29
|
|
—
|
|
393
|
|
4,135
|
|
San Juan Basin unproved leasehold properties
|
—
|
|
—
|
|
—
|
|
40
|
|
Total asset impairments
|
$
|
29
|
|
$
|
—
|
|
$
|
1,489
|
|
$
|
220,025
|
|
Non-cash impairment writedowns are reflected in asset impairment on the consolidated statements of operations.
Permian Basin:
During the first quarter of 2017, Energen recognized non-cash impairment writedowns in the Permian Basin of
$1.1 million
to adjust the carrying amount of these properties to their fair value. During the first quarter of 2016, Energen recognized non-cash impairment writedowns in the Permian Basin of
$208.3 million
to adjust the carrying amount of these properties to their fair value. We estimate future discounted cash flows in determining fair value using commodity assumptions, which are based on the commodity price curve for
five
years and then escalated at
3
percent through our assumed price cap. Our commodity price assumptions declined in the first quarter of 2016 by approximately
5 percent
for oil and
4 percent
for natural gas in comparable periods.
In the year-to-date 2017, Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties of
$0.4 million
. Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties in the Delaware Basin and the Central Basin Platform of
$4.1 million
in the first quarter of 2016.
San Juan Basin:
During the first quarter of 2016, Energen recognized non-cash impairment writedowns on held for sale properties in the San Juan Basin of
$7.5 million
to adjust the carrying amount of these properties to their fair value.
14. ACQUISITION AND DISPOSITION OF PROPERTIES
During the six months ended June 30, 2017, Energen completed an estimated total of
$235.6 million
in various purchases and renewals of unproved acquisitions including approximately
$185.9 million
in the Delaware Basin and approximately
$30.9 million
in the Midland Basin for unproved leasehold and
$18.8 million
for mineral purchases in the Delaware Basin. During the six months ended June 30, 2016, Energen completed an estimated
$27.2 million
in various purchases and renewals of unproved leasehold largely in the Permian Basin.
During June, July and August of 2016, Energen completed a series of asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico for an aggregate purchase price of
$552 million
. These transactions had closing dates of June 3, 7, 30, July 15 and August 9 of 2016 with various effective dates ranging from March 1, 2016 to June 30, 2016. Minor portions of the assets were transferred to other parties upon the exercise of preferential purchase rights under pre-existing joint operating agreements in the ordinary course of business. Pre-tax proceeds to Energen were approximately
$532.5 million
after purchase price adjustments of approximately
$19 million
related to the operations of the properties subsequent to the effective dates and other one-time adjustments including transfer payments and certain amounts due the buyer, but before consideration of transaction costs of approximately
$5 million
. Energen recognized total net pre-tax gains of approximately
$246 million
on the sales. Energen used proceeds from the sale to fund ongoing operations. For the six months ended June 30, 2017, included in the net (gain) loss on sale of assets and other, Energen recognized post-closing adjustment losses of
$0.2 million
on these sales. For the six months ended June 30, 2016, Energen recognized pre-tax gains of
$161.1 million
on the sales closed through June 30, 2016.
15. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2017-09, Stock Compensation - Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the
terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods within those annual years. This amendment is not expected to have a material impact to the Company’s financial position or results of operations.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require that the service cost component of net periodic postretirement benefit expense be presented in the same statement of operations line item as other employee compensation costs, while the remaining components of net periodic postretirement benefit expense are to be presented outside operating income. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods within those annual years.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This update apples to all entities that are required to present a statement of cash flows. This update provides guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update will be effective for financial statements issued for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years with early adoption permitted. This update will be applied using the retrospective transition method. Adoption of this standard will only affect the presentation of the Company’s cash flows and is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which makes a number of changes meant to simplify and improve accounting for share-based payments. The amendment was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this ASU effective January 1, 2017 did not have a material impact on our consolidated financial statements. Upon adoption of this new guidance, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in our consolidated statements of operations as a discrete item in the reporting period in which they occur. The presentation requirements for cash flows related to employee taxes paid for withheld shares were adjusted retrospectively. These cash outflows, which were historically presented as an operating activity, were classified as a financing activity under taxes paid for shares withheld on the consolidated statements of cash flows. The Company also had an approximate
$169,000
decrease to retained earnings associated with our election to recognize forfeitures as they occur.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This update increases transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendment is
effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The primary effect of adopting the new standard will be to record assets and obligations on the balance sheet for contracts currently recognized as operating leases. We have identified certain applicable leases under the standard and are currently developing an inventory of all applicable leases. The Company is still evaluating the impact of this standard on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This update is based on the principle that revenue is recognized to depict the transfer of 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. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Companies may apply this update retrospectively or using a modified retrospective approach to adjust retained earnings. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU No. 2014-09 to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company expects to adopt this standard using the modified retrospective method of adoption on January 1, 2018. We continue to evaluate the impact of this standard on our individual customer contracts; however, due to the short length of our revenue cycle, we do not expect and have not identified any significant impacts to our consolidated financial statements.