SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF ORGANIZATION AND NATURE OF BUSINESS
Range Resources Corporation is a Fort Worth, Texas-based independent natural gas, natural gas liquids (“NGLs”) and oil company primarily engaged in the exploration, development and acquisition of natural gas and oil properties in the Appalachian and the North Louisiana regions of the United States. Our objective is to build stockholder value through consistent returns focused on the growth, on a per share debt-adjusted basis, of both reserves and production. Range is a Delaware corporation with our common stock listed and traded on the New York Stock Exchange under the symbol “RRC”.
(2) BASIS OF PRESENTATION
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Range Resources Corporation 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2017. The results of operations for the third quarter and the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for fair presentation of the results for the periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. These consolidated financial statements, including selected notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.
On September 16, 2016, we issued approximately 77.0 million shares of common stock in exchange for all outstanding shares of common stock of Memorial Resources Development Corp. (“Memorial” or “MRD Merger”) using an exchange ratio of 0.375 of a share of Range common stock for each share of Memorial common stock. For additional information, see Note 4.
Inventory.
As of September 30, 2017, we had $11.7 million of material and supplies inventory compared to $9.4 million at December 31, 2016. Material and supplies inventory consists of primarily tubular goods and equipment used in our operations and is stated at lower of specific cost of each inventory item or market. At September 30, 2017, we also had commodity inventory of $2.2 million compared to $8.3 million at December 31, 2016. Commodity inventory as of September 30, 2017 consists of natural gas and NGLs held in storage or as line fill in pipelines.
(3) NEW ACCOUNTING STANDARDS
Not Yet Adopted
In May 2014, an accounting standards update was issued that supersedes the existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance, requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. This standard is effective for us in first quarter 2018 and we expect to adopt the new standard using the modified retrospective method of adoption. We are utilizing a bottom-up approach to analyze the impact of the new standard on our contracts by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts and the impact of adopting this standards update on our total revenues, operating income (loss) and our consolidated balance sheet. We are currently completing our detailed analysis of our portfolio of contracts at the individual contract level as we continue to evaluate the impact of this accounting standards update on our consolidated results of operations, financial position, cash flows and financial disclosures, in addition to developing any process or control changes necessary. We have identified and implemented a number of control changes necessary for adoption.
In February 2016, an accounting standards update was issued that requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than twelve months. Classification of leases as either a finance or operating lease will determine the recognition, measurement and presentation of expenses. This accounting standards update also requires certain quantitative and qualitative disclosures about leasing arrangements. This standard is effective for us in first quarter 2019 and should be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it will have on our consolidated results of operations, financial position or cash flows but based on our preliminary review of the update, we expect that we will have operating leases with durations greater than twelve months on our balance sheet. As we continue to evaluate and implement the standard, we will provide additional information about the expected financial impact at a future date.
6
In August 2016, an accounting standards update was issued t
hat clarifies how entities classify certain cash receipts and cash payments on the statement of cash flows. The guidance is effective for us in first quarter 2018 and will be applied retrospectively with early adoption permitted. We are evaluating the prov
isions of this accounting standards update and assessing the impact, if any, it may have on our consolidated cash flow statement presentation.
Recently Adopted
In March 2016, an accounting standards update was issued that simplifies several aspects of the accounting for share-based payment award transactions. Among other things, this new guidance requires all income tax effects of share-based awards to be recognized in the statement of operations when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and allows a policy election to account for forfeitures as they occur. This new standard is effective for annual periods beginning after December 15, 2016. Early adoption is permitted. We elected to early adopt this accounting standards update in fourth quarter 2016 and reflected any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The following summarizes the impact of the adoption of this update on our consolidated financial statements:
Income taxes
- Upon adoption of this standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit in our consolidated statements of operations. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. Adoption of this new standard resulted in the recognition of an excess tax deficiency in our provision for income taxes rather than paid-in capital of $2.1 million for the year ended December 31, 2016 and affected our previously reported first quarter 2016 results as follows (in thousands, except per share data):
|
|
Three Months
Ended March 31, 2016
|
|
|
As Reported
|
|
|
|
As Adjusted
|
|
|
(unaudited)
|
|
Statements of Operations
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
(44,038
|
)
|
|
$
|
(41,976
|
)
|
Net loss
|
|
(91,710
|
)
|
|
|
(93,772
|
)
|
Basic earnings per share
|
|
(0.55
|
)
|
|
|
(0.56
|
)
|
Diluted earnings per share
|
|
(0.55
|
)
|
|
|
(0.56
|
)
|
In addition, we recorded a cumulative-effect adjustment to retained earnings (deficit) and reduced our deferred tax liability by $101.1 million for previously unrecognized tax benefits due to our NOL position as of December 31, 2016.
Forfeitures
-
Prior to adoption, share-based compensation expense was recognized on a straight line basis, net of estimated forfeitures, such that expense was recognized only for share-based awards that are expected to vest. We have elected to continue to estimate forfeitures.
Statements of cash flows
-
The presentation requirements for cash flows related to employee taxes paid for withheld shares were adjusted retrospectively.
These cash flows have historically been presented as an operating activity. Upon adoption of this new standard, these cash outflows were classified as a financing activity. Prior periods have been adjusted as follows (in thousands):
|
|
As Reported
|
|
|
|
As Adjusted
|
|
|
|
Net cash
provided from
operating activities
|
|
|
|
Net cash
provided from operating
activities
|
|
Three months ended March 31, 2016
|
$
|
87,424
|
|
|
$
|
90,785
|
|
Six months ended June 30, 2016
|
|
169,604
|
|
|
|
173,201
|
|
Nine months ended September 30, 2016
|
|
202,037
|
|
|
|
205,837
|
|
|
|
As Reported
|
|
|
|
As Adjusted
|
|
|
|
Net cash
used in
financing
activities
|
|
|
|
Net cash
used in
financing
activities
|
|
Three months ended March 31, 2016
|
$
|
(72,473
|
)
|
|
$
|
(75,834
|
)
|
Six months ended June 30, 2016
|
|
(95,411
|
)
|
|
|
(99,008
|
)
|
Nine months ended September 30, 2016
|
|
(35,229
|
)
|
|
|
(39,029
|
)
|
7
In January 2017, an accounting standards update was issued that eliminates the requirements to calculate the implied fair value of goodwill to measure goodwill impairment
charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for annual periods beginning after December 15, 2019 and should be applied on a prospective
basis. Early adoption is permitted for any goodwill impairment tests performed in first quarter 2017 or later. We elected to adopt this accounting standards update in first quarter 2017. The adoption did not have a significant impact on our consolidated r
esults of operations, financial position, cash flows or financial disclosures; however, this standard did change our policy for our annual goodwill impairment assessment by eliminating the requirement to calculate the implied fair value of goodwill.
(4) ACQUISITIONS AND DISPOSITIONS
Memorial Merger
On September 16, 2016, we completed our merger with Memorial which was accomplished through the merger of Medina Merger Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Range, with and into Memorial, with Memorial surviving as a wholly-owned subsidiary of Range. The results of Memorial’s operations since the effective time of the MRD Merger are included in our consolidated statements of operations. The MRD Merger was effected through the issuance of approximately 77.0 million shares of Range common stock in exchange for all outstanding shares of Memorial using an exchange ratio of 0.375 of a share of Range common stock for each share of Memorial common stock. At the effective time of the MRD Merger, Memorial’s liabilities, which are reflected in Range’s consolidated financial statements, included approximately $1.2 billion fair value of outstanding debt. In the last nine months of 2016, we incurred MRD Merger-related expenses of approximately $37.2 million which includes consulting, investment banking, advisory, legal and other merger-related fees.
Allocation of Purchase Price.
The MRD Merger has been accounted for as a business combination, using the acquisition method. The following table represents the final allocation of the total purchase price of the MRD Merger to the assets acquired and the liabilities assumed based on the fair value at the effective time of the MRD Merger, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill (in thousands, except shares and stock price):
Purchase price:
|
|
|
|
Shares of Range common stock issued to Memorial stockholders
|
|
77,042,749
|
|
Range common stock price per share at September 15, 2016 (close)
|
$
|
39.37
|
|
Total purchase price
|
$
|
3,033,173
|
|
|
|
|
|
Plus fair value of liabilities assumed by Range:
|
|
|
|
Accounts payable
|
$
|
55,624
|
|
Other current liabilities
|
|
108,367
|
|
Long-term debt
|
|
1,204,449
|
|
Deferred taxes
|
|
547,706
|
|
Other long-term liabilities
|
|
77,223
|
|
Total purchase price plus liabilities assumed
|
$
|
5,026,542
|
|
|
|
|
|
Fair value of Memorial assets:
|
|
|
|
Cash and equivalents
|
$
|
7,180
|
|
Other current assets
|
|
99,969
|
|
Derivative instruments
|
|
152,994
|
|
Natural gas and oil properties:
|
|
|
|
Proved property
|
|
1,122,311
|
|
Unproved property
|
|
1,999,187
|
|
Other property and equipment
|
|
3,579
|
|
Goodwill
(a)
|
|
1,641,197
|
|
Other
|
|
125
|
|
Total asset value
|
$
|
5,026,542
|
|
(a)
Goodwill will not be deductible for income tax purposes.
The fair value measurements of derivative instruments assumed were determined based on published forward commodity price curves as of the date of the MRD Merger and represent Level 2 inputs. Derivative instruments in an asset position include a measure of counterparty nonperformance risk and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, based on the current published credit default swap rates and other market based indicators. The fair value measurements of long-term debt were estimated based on published market prices and represent Level 1 inputs.
8
The fair value measurements of natural gas and oil properties and asset retirement obligations are based on inputs that are not observable in
the market and therefore represent Level 3 inputs. The fair values of natural gas and oil properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs
to the valuation of natural gas and oil properties include estimates of: (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices and (v) a market-based weighted average costs of capital ra
te. These inputs require significant judgments and estimates by management at the time of the valuation and may be subject to change. Management utilized the assistance of a third party valuation expert to estimate the value of natural gas and oil properti
es acquired. In some cases, certain amounts allocated to unproved properties are based on a market approach using third party published data which provides lease pricing information based on certain geographic areas and represent Level 2 inputs.
Goodwill is attributed to net deferred tax liabilities arising from the differences between the purchase price allocated to Memorial’s assets and liabilities based on fair value and the tax basis of these assets and liabilities. In addition, the total consideration for the MRD Merger included a control premium, which resulted in a higher value compared to the fair value of net assets acquired. There are also other qualitative assumptions of long-term factors that the MRD Merger creates including additional potential for exploration and development opportunities, additional scale and efficiencies in other basins in which we operate and substantial operating and administrative synergies.
The results of operations attributable to Memorial are included in our consolidated statements of operations beginning on September 16, 2016. We recognized $369.9 million of natural gas, oil and NGLs revenues and $220.0 million of field net operating income from these assets from January 1, 2017 to September 30, 2017.
Pro forma Financial Information.
The following pro forma condensed combined financial information was derived from the historical financial statements of Range and Memorial and gives effect to the MRD Merger as if it had occurred on January 1, 2016. The information below reflects pro forma adjustments for the issuance of Range common stock in exchange for Memorial’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including (i) the depletion of Memorial’s fair-valued proved oil and gas properties and (ii) the estimated tax impacts of the pro forma adjustments. Additionally, pro forma results for the nine months ended September 30, 2016 were adjusted to exclude $36.4 million of merger-related costs incurred by Range and $7.1 million incurred by Memorial. The pro forma results of operations do not include any cost savings or other synergies that may result from the MRD Merger or any estimated costs that have been or will be incurred by us to integrate the Memorial assets. The pro forma condensed combined financial information is not necessarily indicative of the results that might have actually occurred had the MRD Merger taken place on January 1, 2016. In addition, the pro forma financial information below is not intended to be a projection of future results (in thousands, except per share amounts).
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
2016
|
|
|
2016
|
|
Revenues
|
$
|
521,669
|
|
|
$
|
1,080,768
|
|
Net loss
|
$
|
(18,257
|
)
|
|
$
|
(431,225
|
)
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.08
|
)
|
|
$
|
(1.77
|
)
|
Diluted
|
$
|
(0.08
|
)
|
|
$
|
(1.77
|
)
|
2017 Dispositions
We recognized a pretax net gain on the sale of assets of $102,000 in third quarter 2017 compared to a pretax net loss of $2.6 million in the same period of the prior year and a pretax net gain on the sale of assets of $23.5 million in first nine months 2017 compared to a pretax net loss of $7.5 million in the same period of the prior year.
Western Oklahoma.
In first nine months 2017, we sold certain properties in Western Oklahoma for proceeds of $26.0 million and we recorded a gain of $22.1 million related to this sale, after closing adjustments and transaction fees.
Other
. In third quarter 2017, we sold miscellaneous inventory and other assets for proceeds of $295,000 resulting in a pretax gain of $102,000. In first six months 2017, we sold miscellaneous unproved properties, inventory, other assets and surface acreage for proceeds of $1.3 million resulting in a pretax gain of $1.3 million.
9
2016 Dispositions
Western Oklahoma.
In third quarter 2016, we sold properties in Western Oklahoma for proceeds of $900,000 and we recorded a loss of $2.6 million. In first six months 2016, we sold certain properties in Western Oklahoma for proceeds of $77.7 million and we recorded a $2.7 million loss related to this sale, after closing adjustments and transaction fees.
Pennsylvania.
In first nine months 2016, we sold our non-operated interest in certain wells and gathering facilities in northeast Pennsylvania for proceeds of $111.5 million. After closing adjustments, we recorded a loss of $2.1 million related to this sale.
Other
. In third quarter 2016, we sold miscellaneous inventory and surface property for proceeds of $131,000 resulting in a gain of $30,000. In first six months 2016, we sold miscellaneous proved and unproved properties, inventory, other assets and surface acreage for proceeds of $1.7 million resulting in a pretax loss of $198,000. Included in the $1.7 million of proceeds is $1.2 million received from the sale of proved properties in Mississippi and South Texas.
(5) GOODWILL
During 2016, we recorded goodwill associated with the MRD Merger, which represents the cost of the acquired entity over the net amounts assigned to assets acquired and liabilities assumed. Goodwill is assessed for impairment whenever events or circumstances indicate that impairment of the carrying value of goodwill is likely, but no less often than annually. Our impairment test is typically performed during the fourth quarter; however, we performed an impairment test as of third quarter 2017 due to a significant decline of our market capitalization. Management utilized the assistance of a third-party valuation expert to determine the fair value of our business (our reporting unit). The fair value was determined based on both a market and an income approach. The fair value measurement using an income approach was based on internally developed estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 inputs. As a result of this measurement, the fair value of our business exceeded the carrying value of net assets and we did not record an impairment charge during third quarter 2017.
(6) INCOME TAXES
Income tax (benefit) expense was as follows (dollars in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Income tax (benefit) expense
|
$
|
(71,992
|
)
|
|
$
|
(13,705
|
)
|
|
$
|
98,054
|
|
|
$
|
(185,169
|
)
|
Effective tax rate
|
|
36.1
|
%
|
|
|
24.6
|
%
|
|
|
46.7
|
%
|
|
|
33.9
|
%
|
We compute our quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to our year-to-date income, except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For third quarter and nine months ended September 30, 2017 and 2016, our overall effective tax rate was different than the federal statutory rate of 35% due primarily to state income taxes and other tax items which are detailed below (dollars in thousands).
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Total (loss) income before income taxes
|
$
|
(199,692
|
)
|
|
$
|
(55,676
|
)
|
|
$
|
210,015
|
|
|
$
|
(545,848
|
)
|
U.S. federal statutory rate
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Total tax (benefit) expense at statutory rate
|
|
(69,892
|
)
|
|
|
(19,487
|
)
|
|
|
73,505
|
|
|
|
(191,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
|
(6,537
|
)
|
|
|
(2,007
|
)
|
|
|
6,591
|
|
|
|
(17,963
|
)
|
Non-deductible executive compensation
|
|
296
|
|
|
|
446
|
|
|
|
436
|
|
|
|
1,128
|
|
Non-deductible transaction costs
|
|
—
|
|
|
|
4,838
|
|
|
|
—
|
|
|
|
4,838
|
|
Tax less than book equity compensation
|
|
56
|
|
|
|
44
|
|
|
|
4,808
|
|
|
|
5,374
|
|
Change in valuation allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards & other
|
|
69
|
|
|
|
—
|
|
|
|
3,487
|
|
|
|
—
|
|
State net operating loss carryforwards & other
|
|
4,286
|
|
|
|
2,815
|
|
|
|
10,498
|
|
|
|
10,514
|
|
Rabbi trust and other
|
|
(508
|
)
|
|
|
(620
|
)
|
|
|
(1,561
|
)
|
|
|
1,656
|
|
Permanent differences and other
|
|
238
|
|
|
|
266
|
|
|
|
290
|
|
|
|
331
|
|
Total (benefit) expense for income taxes
|
$
|
(71,992
|
)
|
|
$
|
(13,705
|
)
|
|
$
|
98,054
|
|
|
$
|
(185,169
|
)
|
Effective tax rate
|
|
36.1
|
%
|
|
|
24.6
|
%
|
|
|
46.7
|
%
|
|
|
33.9
|
%
|
10
(7) (LOSS) INCOME PER COMMON SHARE
Basic income or loss per share attributable to common shareholders is computed as (1) income or loss attributable to common shareholders (2) less income allocable to participating securities (3) divided by weighted average basic shares outstanding. Diluted income or loss per share attributable to common shareholders is computed as (1) basic income or loss attributable to common shareholders (2) plus diluted adjustments to income allocable to participating securities (3) divided by weighted average diluted shares outstanding. The following tables set forth a reconciliation of income or loss attributable to common shareholders to basic income or loss attributable to common shareholders to diluted income or loss attributable to common shareholders (in thousands except per share amounts):
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Net (loss) income, as reported
|
$
|
(127,700
|
)
|
|
$
|
(41,971
|
)
|
|
$
|
111,961
|
|
|
$
|
(360,679
|
)
|
Participating earnings
(a)
|
|
(58
|
)
|
|
|
(56
|
)
|
|
|
(1,251
|
)
|
|
|
(167
|
)
|
Basic net (loss) income attributed to common shareholders
|
|
(127,758
|
)
|
|
|
(42,027
|
)
|
|
|
110,710
|
|
|
|
(360,846
|
)
|
Reallocation of participating earnings
(a)
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Diluted net (loss) income attributed to common shareholders
|
$
|
(127,758
|
)
|
|
$
|
(42,027
|
)
|
|
$
|
110,711
|
|
|
$
|
(360,846
|
)
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.52
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.45
|
|
|
$
|
(2.10
|
)
|
Diluted
|
$
|
(0.52
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.45
|
|
|
$
|
(2.10
|
)
|
(a)
|
Restricted Stock Awards represent participating securities because they participate in nonforfeitable dividends or distributions with common equity owners. Income allocable to participating securities represents the distributed and undistributed earnings attributable to the participating securities. Participating securities, however, do not participate in undistributed net losses.
|
The following table provides a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Weighted average common shares outstanding – basic
(1)
|
|
245,244
|
|
|
|
180,683
|
|
|
|
245,027
|
|
|
|
171,571
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director and employee PSUs and RSUs
|
|
—
|
|
|
|
—
|
|
|
|
253
|
|
|
|
—
|
|
Weighted average common shares outstanding – diluted
|
|
245,244
|
|
|
|
180,683
|
|
|
|
245,280
|
|
|
|
171,571
|
|
(1)
2017 includes common stock issued in connection with the exchange of 77.0 million shares for all outstanding Memorial common stock on September
16, 2016.
Weighted average common shares outstanding
–
basic for third quarter 2017 excludes 2.9 million shares of restricted stock held in our deferred compensation plan compared to 2.8 million shares in third quarter 2016 (although all awards are issued and outstanding upon grant). Weighted average common shares outstanding-basic for both the first nine months 2017 and the first nine months 2016 exclude 2.8 million shares of restricted stock. Due to our net loss from operations for the three months ended September 30, 2017, we excluded all outstanding stock appreciation rights (“SARs”), restricted stock and performance shares from the computation of diluted net loss per share because the effect would have been anti-dilutive. For first nine months 2017, SARs of 659,000 were outstanding but not included in the computation of diluted net income per share because the grant prices of the SARs were greater than the average market price of the common shares and would be anti-dilutive to the computations. In addition, there were 405,000 shares of equity awards for first nine months 2017 excluded from the computation of diluted net income per share because their effect would have been antidilutive. Due to our net loss from operations for the three months and the nine months ended September 30, 2016, we excluded all outstanding SARs, restricted stock and performance shares from the computation of diluted net loss per share because the effect would have been anti-dilutive.
11
(8) SUSPENDED EXPLORATORY WELL COSTS
We capitalize exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. Capitalized exploratory well costs are included in natural gas and oil properties in the accompanying consolidated balance sheets. If an exploratory well is determined to be impaired, the well costs are charged to exploration expense in the accompanying consolidated statements of operations. We do not have any suspended exploratory well costs as of September 30, 2017. The following table reflects the change in capitalized exploratory well costs for the nine months ended September 30, 2017 and the year ended December 31, 2016 (in thousands):
|
|
September 30,
2017
|
|
|
|
December 31,
2016
|
|
Balance at beginning of period
|
$
|
7,412
|
|
|
$
|
4,161
|
|
Additions to capitalized exploratory well costs pending the determination of proved reserves
|
|
1,388
|
|
|
|
9,128
|
|
Reclassifications to wells, facilities and equipment based on determination of proved reserves
|
|
—
|
|
|
|
(5,877
|
)
|
Capitalized exploratory well costs charged to expense
|
|
(8,800
|
)
|
|
|
—
|
|
Balance at end of period
|
|
—
|
|
|
|
7,412
|
|
Less exploratory well costs that have been capitalized for a period of one year or less
|
|
—
|
|
|
|
(7,412
|
)
|
Capitalized exploratory well costs that have been capitalized for a period greater than one year
|
$
|
—
|
|
|
$
|
—
|
|
Number of projects that have exploratory well costs that have been capitalized greater than one year
|
|
—
|
|
|
|
—
|
|
(9) INDEBTEDNESS
We had the following debt outstanding as of the dates shown below (bank debt interest rate at September 30, 2017 is shown parenthetically). No interest was capitalized during the three months or the nine months ended September 30, 2017 or the year ended December 31, 2016 (in thousands).
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
|
December 31,
2016
|
|
Bank debt
(2.8%)
|
$
|
1,086,000
|
|
|
$
|
882,000
|
|
Senior notes:
|
|
|
|
|
|
|
|
4.875% senior notes due 2025
|
|
750,000
|
|
|
|
750,000
|
|
5.00% senior notes due 2023
|
|
741,531
|
|
|
|
741,531
|
|
5.00% senior notes due 2022
|
|
580,032
|
|
|
|
580,032
|
|
5.75% senior notes due 2021
|
|
475,952
|
|
|
|
475,952
|
|
5.875% senior notes due 2022
|
|
329,244
|
|
|
|
329,244
|
|
Other senior notes due 2022
|
|
590
|
|
|
|
1,090
|
|
Total senior notes
|
|
2,877,349
|
|
|
|
2,877,849
|
|
Senior subordinated notes:
|
|
|
|
|
|
|
|
5.00% senior subordinated notes due 2023
|
|
7,712
|
|
|
|
7,712
|
|
5.00% senior subordinated notes due 2022
|
|
19,054
|
|
|
|
19,054
|
|
5.75% senior subordinated notes due 2021
|
|
22,214
|
|
|
|
22,214
|
|
Total senior subordinated notes
|
|
48,980
|
|
|
|
48,980
|
|
Total debt
|
|
4,012,329
|
|
|
|
3,808,829
|
|
Unamortized premium
|
|
6,336
|
|
|
|
7,241
|
|
Unamortized debt issuance costs
|
|
(36,703
|
)
|
|
|
(42,553
|
)
|
Total debt net of debt issuance costs
|
$
|
3,981,962
|
|
|
$
|
3,773,517
|
|
12
Bank Debt
In October 2014, we entered into an amended and restated revolving bank facility, which we refer to as our bank debt or our bank credit facility, which is secured by substantially all of our assets and has a maturity date of October 16, 2019. The bank credit facility provides for a maximum facility amount of $4.0 billion. The bank credit facility provides for a borrowing base subject to redeterminations annually by May and for event-driven unscheduled redeterminations. As part of our annual redetermination completed on March 21, 2017, our borrowing base was reaffirmed at $3.0 billion and our bank commitment was also reaffirmed at $2.0 billion. As of September 30, 2017, our bank group was composed of twenty-nine financial institutions with no one bank holding more than 5.8% of the total facility. The borrowing base may be increased or decreased based on our request and sufficient proved reserves, as determined by the bank group. The commitment amount may be increased to the borrowing base, subject to payment of a mutually acceptable commitment fee to those banks agreeing to participate in the facility increase. As of September 30, 2017, the outstanding balance under our bank credit facility was $1.1 billion, before deducting debt issuance costs. Additionally, we had $285.8 million of undrawn letters of credit leaving $628.2 million of committed borrowing capacity available under the facility. During a non-investment grade period, borrowings under the bank credit facility can either be at the alternate base rate (“ABR,” as defined in the bank credit facility agreement) plus a spread ranging from 0.25% to 1.25% or LIBOR borrowings at the LIBOR Rate (as defined in the bank credit facility agreement) plus a spread ranging from 1.25% to 2.25%. The applicable spread is dependent upon borrowings relative to the borrowing base. We may elect, from time to time, to convert all or any part of our LIBOR loans to base rate loans or to convert all or any of the base rate loans to LIBOR loans. The weighted average interest rate was 2.8% in third quarter 2017 compared to 2.3% in third quarter 2016. The weighted average interest rate was 2.6% for first nine months 2017 compared to 2.3% for first nine months 2016. A commitment fee is paid on the undrawn balance based on an annual rate of 0.30% to 0.375%. At September 30, 2017, the commitment fee was 0.3% and the interest rate margin was 1.5% on our LIBOR loans and 0.5% on our base rate loans.
At any time during which we have an investment grade debt rating from Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services and we have elected, at our discretion, to effect the investment grade rating period, certain collateral security requirements, including the borrowing base requirement and restrictive covenants, will cease to apply and an additional financial covenant (as defined in the bank credit facility) will be imposed. During the investment grade period, borrowings under the credit facility can either be at the ABR plus a spread ranging from 0.125% to 0.75% or at the LIBOR Rate plus a spread ranging from 1.125% to 1.75% depending on our debt rating. The commitment fee paid on the undrawn balance would range from 0.15% to 0.30%. We currently do not have an investment grade debt rating.
Senior Notes
In May 2015, we issued $750.0 million aggregate principal amount of 4.875% senior notes due 2025 (the “Outstanding Notes”) for net proceeds of $737.4 million after underwriting discounts and commissions of $12.6 million. The notes were issued at par and were offered to qualified institutional buyers and non-U.S. persons outside of the United States in compliance with Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). On April 8, 2016, all of the Outstanding Notes were exchanged for an equal principal amount of registered 4.875% senior notes due 2025 pursuant to an effective registration statement on Form S-4 filed with the SEC on February 29, 2016 under the Securities Act (the “Exchange Notes”). The Exchange Notes are identical to the Outstanding Notes except the Exchange Notes are registered under the Securities Act and do not have restrictions on transfer, registration rights or provisions for additional interest. Under certain circumstances, if we experience a change of control, noteholders may require us to repurchase all of our senior notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any.
In September 2016, in conjunction with the MRD Merger, we issued $329.2 million senior unsecured 5.875% notes due 2022 (the “5.875% Notes”). In addition, we also completed a debt exchange offer to exchange senior subordinated notes for the following senior notes (in thousands):
|
|
|
|
|
Principal Amount
|
|
|
|
5.00% senior notes due 2023
|
$
|
741,531
|
5.00% senior notes due 2022
|
$
|
580,032
|
5.75% senior notes due 2021
|
$
|
475,952
|
|
|
|
All of the notes were offered to qualified institutional buyers and to non-U.S. persons outside the United States in compliance with Rule 144A and Regulation S under the Securities Act. On October 5, 2017, the 5.875% Notes, the 5.00% senior notes due 2023, the 5.00% senior notes due 2022 and the 5.75% senior notes due 2021 (collectively, the “Old Notes”) were exchanged for an equal principal amount of registered notes pursuant to an effective registration statement on Form S-4 filed with the SEC on August 9, 2017 under the Securities Act (the “New Notes”). The New Notes are identical to the Old Notes except the New Notes are registered under the Securities Act and do not have restrictions on transfer, registration rights or provisions for additional interest. Under certain circumstances, if we experience a change of control, noteholders may require us to repurchase all of our senior notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any.
13
Senior Subordinated Notes
If we experience a change of control, noteholders may require us to repurchase all or a portion of our senior subordinated notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any. All of the senior subordinated notes and the guarantees by our subsidiary guarantors are general, unsecured obligations and are subordinated to our bank debt and are subordinated to existing and future senior debt that we or our subsidiary guarantors are permitted to incur.
Guarantees
Range is a holding company which owns no operating assets and has no significant operations independent of its subsidiaries. The guarantees by our subsidiaries, which are directly or indirectly owned by Range, of our senior notes, senior subordinated notes and our bank credit facility are full and unconditional and joint and several, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:
|
•
|
in the event of a sale or other disposition of all or substantially all of the assets of the subsidiary guarantor or a sale or other disposition of all the capital stock of the subsidiary guarantor, to any corporation or other person (including an unrestricted subsidiary of Range) by way of merger, consolidation, or otherwise; or
|
|
|
•
|
if Range designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the terms of the indenture.
|
|
Debt Covenants
Our bank credit facility contains negative covenants that limit our ability, among other things, to pay cash dividends, incur additional indebtedness, sell assets, enter into certain hedging contracts, change the nature of our business or operations, merge, consolidate, or make certain investments. In addition, we are required to maintain a ratio of EBITDAX (as defined in the bank credit facility agreement) to cash interest expense of equal to or greater than 2.5 and a current ratio (as defined in the bank credit facility agreement) of no less than 1.0. In addition, the ratio of the present value of proved reserves (as defined in the credit agreement) to total debt must be equal to or greater than 1.5 until Range has two investment grade ratings. We were in compliance with applicable covenants under the bank credit facility at September 30, 2017.
(10) ASSET RETIREMENT OBLIGATIONS
Our asset retirement obligations primarily represent the estimated present value of the amounts we will incur to plug, abandon and remediate our producing properties at the end of their productive lives. Significant inputs used in determining such obligations include estimates of plugging and abandonment costs, estimated future inflation rates and well lives. The inputs are calculated based on historical data as well as current estimated costs. A reconciliation of our liability for plugging and abandonment costs for the nine months ended September 30, 2017 is as follows (in thousands):
|
|
Nine Months
Ended
September 30,
2017
|
|
Beginning of period
|
|
$
|
257,943
|
|
Liabilities incurred
|
|
|
5,597
|
|
Liabilities settled
|
|
|
(6,125
|
)
|
Disposition of wells
|
|
|
(2,427
|
)
|
Accretion expense
|
|
|
11,022
|
|
Change in estimate
|
|
|
862
|
|
End of period
|
|
|
266,872
|
|
Less current portion
|
|
|
(7,271
|
)
|
Long-term asset retirement obligations
|
|
$
|
259,601
|
|
Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying consolidated statements of operations.
14
(11) CAPITAL STOCK
We have authorized capital stock of 485.0 million shares which includes 475.0 million shares of common stock and 10.0 million shares of preferred stock. We currently have no preferred stock issued or outstanding. The following is a schedule of changes in the number of common shares outstanding since the beginning of 2016:
|
|
Nine Months
Ended
September 30,
2017
|
|
|
Year
Ended
December 31,
2016
|
|
Beginning balance
|
|
|
247,144,356
|
|
|
|
169,316,460
|
|
MRD Merger
|
|
|
—
|
|
|
|
77,042,749
|
|
Restricted stock grants
|
|
|
536,536
|
|
|
|
490,609
|
|
Restricted stock units vested
|
|
|
341,358
|
|
|
|
266,541
|
|
PSU-TSR units settled
|
|
|
85,461
|
|
|
|
—
|
|
Shares retired
|
|
|
—
|
|
|
|
(739
|
)
|
Treasury shares issued
|
|
|
15,580
|
|
|
|
28,736
|
|
Ending balance
|
|
|
248,123,291
|
|
|
|
247,144,356
|
|
15
(12) DERIVATIVE ACTIVITIES
We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We typically do not utilize complex derivatives, as we utilize commodity swaps, collars, options or combinations thereof to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. In third quarter 2017, we entered into combined natural gas derivative instruments containing a fixed price swap and a sold option to extend or double the volume (referred to as a swaption in the table below). The swap price is a fixed price determined at the time of the swaption contract. If the option is exercised, the contract will become a swap treated consistently with our fixed-price swaps. The fair value of our derivative contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”) for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net loss of $14.6 million at September 30, 2017. These contracts expire monthly through December 2019. The following table sets forth our commodity-based derivative volumes by year as of September 30, 2017, excluding our basis and freight swaps which are discussed separately below:
Period
|
|
Contract Type
|
|
Volume Hedged
|
|
Weighted
Average Hedge Price
|
Natural Gas
|
|
|
|
|
|
|
|
|
2017
|
|
Swaps
(1)
|
|
878,370 Mmbtu/day
|
|
|
$ 3.21
|
|
2018
|
|
Swaps
|
|
477,534 Mmbtu/day
|
|
|
$ 3.22
|
|
January-March 2019
|
|
Swaps
|
|
50,000 Mmbtu/day
|
|
|
$ 3.01
|
|
2017
|
|
Collars
(1)
|
|
122,609 Mmbtu/day
|
|
|
$ 3.45
–
$ 4.11
|
|
2018
|
|
Collars
|
|
60,000 Mmbtu/day
|
|
|
$ 3.40
–
$ 3.76
|
|
2017
|
|
Purchased Puts
(1)
|
|
185,870 Mmbtu/day
|
|
|
$ 3.50
(2)
|
|
2017
|
|
Sold Calls
|
|
17,935 Mmbtu/day
|
|
|
$ 3.75
(3)
|
|
April-December 2018
|
|
Swaptions
|
|
320,000 Mmbtu/day
(4)
|
|
|
$ 3.04
(4)
|
|
2019
|
|
Swaptions
|
|
60,000 Mmbtu/day
(4)
|
|
|
$ 3.00
(4)
|
|
|
|
|
|
|
|
|
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
2017
|
|
Swaps
(1)
|
|
9,511 bbls/day
|
|
|
$ 56.03
|
|
2018
|
|
Swaps
|
|
6,000 bbls/day
|
|
|
$ 52.96
|
|
2019
|
|
Swaps
|
|
1,000 bbls/day
|
|
|
$ 51.50
|
|
|
|
|
|
|
|
|
|
|
NGLs (C2-Ethane)
|
|
|
|
|
|
|
|
|
2017
|
|
Swaps
|
|
3,000 bbls/day
|
|
|
$ 0.27/gallon
|
|
2018
|
|
Swaps
|
|
250 bbls/day
|
|
|
$ 0.29/gallon
|
|
|
|
|
|
|
|
|
|
|
NGLs (C3-Propane)
|
|
|
|
|
|
|
|
|
2017
|
|
Swaps
|
|
17,576 bbls/day
|
|
|
$ 0.61/gallon
|
|
2018
|
|
Swaps
|
|
8,935 bbls/day
|
|
|
$0.66/gallon
|
|
|
|
|
|
|
|
|
|
|
NGLs (NC4-Normal Butane)
|
|
|
|
|
|
|
|
|
2017
|
|
Swaps
|
|
9,000 bbls/day
|
|
|
$ 0.76/gallon
|
|
2018
|
|
Swaps
|
|
4,558 bbls/day
|
|
|
$ 0.81/gallon
|
|
|
|
|
|
|
|
|
|
|
NGLs (C5-Natural Gasoline)
|
|
|
|
|
|
|
|
|
2017
|
|
Swaps
|
|
6,416 bbls/day
|
|
|
$ 1.08/gallon
|
|
2018
|
|
Swaps
|
|
4,027 bbls/day
|
|
|
$ 1.17/gallon
|
|
(1)
|
Includes derivative instruments assumed in connection with the MRD Merger.
|
(2)
|
Weighted average deferred premium is ($0.32).
|
(3)
|
Weighted average deferred premium is $0.31.
|
(4)
|
Contains a combined derivative instrument consisting of a fixed price swap and a sold option to extend or double the volume. For April through December of 2018, we have swaps in place for 160,000 Mmbtu per day on which the counterparty can elect to double the volume at a weighted average price of $3.02. We also have swaps in place for 160,000 Mmbtu per day on which the counterparty can elect to extend the contract through December 2019 at a weighted average price of $3.07. In 2019, if the counterparty elects to double the volume, we would have additional swaps covering 60,000 Mmbtu per day at a weighted average price of $3.00.
|
Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. We recognize all changes in fair value of these derivatives as earnings in derivative fair value income or loss in the periods in which they occur.
16
Basis Swap Contracts
In addition to the swaps described above, at September 30, 2017, we had natural gas basis swap contracts which lock in the differential between NYMEX Henry Hub and certain of our physical pricing indices primarily in Appalachia. These contracts settle monthly through March 2019 and include a total volume of 130,120,000 Mmbtu. The fair value of these contracts was a loss of $4.7 million on September 30, 2017.
At September 30, 2017, we also had propane basis swap contracts which lock in the differential between Mont Belvieu and international propane indices. The contracts settle monthly through December 2018 and include a total volume of 659,000 barrels in 2017 and 750,000 barrels in 2018. The fair value of these contracts was a gain of $1.1 million on September 30, 2017.
Freight Swap Contracts
In connection with our international propane basis swaps, at September 30, 2017, we had freight swap contracts which lock in the freight rate for a specific trade route on the Baltic Exchange. These contracts settle monthly in fourth quarter 2017 through December 2018 and cover 5,000 metric tons per month with a fair value gain of $45,000 on September 30, 2017.
Derivative Assets and Liabilities
The combined fair value of derivatives included in the accompanying consolidated balance sheets as of September 30, 2017 and December 31, 2016 is summarized below. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements. The tables below provide additional information relating to our master netting arrangements with our derivative counterparties (in thousands):
|
|
|
September 30
, 2017
|
|
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross
Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
Assets Presented
in the
Balance Sheet
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
|
$
|
37,288
|
|
|
$
|
(12,385
|
)
|
|
$
|
24,903
|
|
|
–swaptions
|
|
|
9,092
|
|
|
|
(8,711
|
)
|
|
|
381
|
|
|
–basis swaps
|
|
|
3,782
|
|
|
|
(2,774
|
)
|
|
|
1,008
|
|
|
–collars
|
|
|
6,214
|
|
|
|
(2,101
|
)
|
|
|
4,113
|
|
|
–puts
|
|
|
8,547
|
|
|
|
(4,238
|
)
|
|
|
4,309
|
|
Crude oil
|
–swaps
|
|
|
7,133
|
|
|
|
(2,918
|
)
|
|
|
4,215
|
|
NGLs
|
–C2 ethane swaps
|
|
|
82
|
|
|
|
(82
|
)
|
|
|
—
|
|
|
–C3 propane swaps
|
|
|
—
|
|
|
|
(2,956
|
)
|
|
|
(2,956
|
)
|
|
–C3 propane basis swaps
|
|
|
18,169
|
|
|
|
(18,169
|
)
|
|
|
—
|
|
|
–NC4 butane swaps
|
|
|
34
|
|
|
|
(4,340
|
)
|
|
|
(4,306
|
)
|
|
–C5 natural gasoline swaps
|
|
|
115
|
|
|
|
(1,094
|
)
|
|
|
(979
|
)
|
Freight
|
–swaps
|
|
|
47
|
|
|
|
(47
|
)
|
|
|
—
|
|
|
|
|
$
|
90,503
|
|
|
$
|
(59,815
|
)
|
|
$
|
30,688
|
|
17
|
|
|
September 30
, 2017
|
|
|
|
|
Gross
Amounts of
Recognized
(Liabilities)
|
|
|
Gross
Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
(Liabilities) Presented
in the
Balance Sheet
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
|
$
|
(10,805
|
)
|
|
$
|
12,385
|
|
|
$
|
1,580
|
|
|
–swaptions
|
|
|
(16,694
|
)
|
|
|
8,711
|
|
|
|
(7,983
|
)
|
|
–basis swaps
|
|
|
(8,458
|
)
|
|
|
2,774
|
|
|
|
(5,684
|
)
|
|
–collars
|
|
|
—
|
|
|
|
2,101
|
|
|
|
2,101
|
|
|
–puts
|
|
|
—
|
|
|
|
4,238
|
|
|
|
4,238
|
|
|
–calls
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
(29
|
)
|
Crude oil
|
–swaps
|
|
|
(1,031
|
)
|
|
|
2,918
|
|
|
|
1,887
|
|
NGLs
|
–C2 ethane swaps
|
|
|
(125
|
)
|
|
|
82
|
|
|
|
(43
|
)
|
|
–C3 propane swaps
|
|
|
(36,046
|
)
|
|
|
2,956
|
|
|
|
(33,090
|
)
|
|
–C3 propane basis swaps
|
|
|
(17,072
|
)
|
|
|
18,169
|
|
|
|
1,097
|
|
|
–NC4 butane swaps
|
|
|
(13,700
|
)
|
|
|
4,340
|
|
|
|
(9,360
|
)
|
|
–C5 natural gasoline swaps
|
|
|
(4,678
|
)
|
|
|
1,094
|
|
|
|
(3,584
|
)
|
Freight
|
–swaps
|
|
|
(2
|
)
|
|
|
47
|
|
|
|
45
|
|
|
|
|
$
|
(108,640
|
)
|
|
$
|
59,815
|
|
|
$
|
(48,825
|
)
|
|
|
|
December 31, 2016
|
|
|
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross
Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
Assets Presented
in the
Balance Sheet
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
|
$
|
13,213
|
|
|
$
|
(11,425
|
)
|
|
$
|
1,788
|
|
|
–basis swaps
|
|
|
12,535
|
|
|
|
(9,437
|
)
|
|
|
3,098
|
|
|
–collars
|
|
|
6,298
|
|
|
|
(6,298
|
)
|
|
|
—
|
|
|
–puts
|
|
|
18,159
|
|
|
|
(15,429
|
)
|
|
|
2,730
|
|
Crude oil
|
–swaps
|
|
|
9,356
|
|
|
|
(3,489
|
)
|
|
|
5,867
|
|
NGLs
|
–C2 ethane swaps
|
|
|
53
|
|
|
|
(53
|
)
|
|
|
—
|
|
|
–C3 propane basis swaps
|
|
|
17,396
|
|
|
|
(17,396
|
)
|
|
|
—
|
|
|
–NC4 butane swaps
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
—
|
|
Freight
|
–swaps
|
|
|
65
|
|
|
|
(65
|
)
|
|
|
—
|
|
|
|
|
$
|
77,079
|
|
|
$
|
(63,596
|
)
|
|
$
|
13,483
|
|
18
|
|
|
December 31, 2016
|
|
|
|
|
Gross
Amounts of
Recognized
(Liabilities)
|
|
|
Gross
Amounts
Offset in the
Balance Sheet
|
|
|
Net Amounts of
(Liabilities) Presented
in the
Balance Sheet
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
–swaps
|
|
$
|
(158,359
|
)
|
|
$
|
11,425
|
|
|
$
|
(146,934
|
)
|
|
–basis swaps
|
|
|
(687
|
)
|
|
|
9,437
|
|
|
|
8,750
|
|
|
–collars
|
|
|
(2,625
|
)
|
|
|
6,298
|
|
|
|
3,673
|
|
|
–puts
|
|
|
—
|
|
|
|
15,429
|
|
|
|
15,429
|
|
|
–calls
|
|
|
(1,041
|
)
|
|
|
—
|
|
|
|
(1,041
|
)
|
Crude oil
|
–swaps
|
|
|
(13,206
|
)
|
|
|
3,489
|
|
|
|
(9,717
|
)
|
NGLs
|
–C2 ethane swaps
|
|
|
(1,008
|
)
|
|
|
53
|
|
|
|
(955
|
)
|
|
–C3 propane swaps
|
|
|
(32,437
|
)
|
|
|
—
|
|
|
|
(32,437
|
)
|
|
–C3 propane basis swaps
|
|
|
(18,138
|
)
|
|
|
17,396
|
|
|
|
(742
|
)
|
|
–NC4 butane swaps
|
|
|
(13,419
|
)
|
|
|
4
|
|
|
|
(13,415
|
)
|
|
–C5 natural gasoline swaps
|
|
|
(12,176
|
)
|
|
|
—
|
|
|
|
(12,176
|
)
|
Freight
|
–swaps
|
|
|
—
|
|
|
|
65
|
|
|
|
65
|
|
|
|
|
$
|
(253,096
|
)
|
|
$
|
63,596
|
|
|
$
|
(189,500
|
)
|
The effects of our derivatives on our consolidated statements of operations are summarized below (in thousands):
|
Derivative Fair Value (Loss) Income
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Commodity swaps
|
$
|
(87,861
|
)
|
|
$
|
38,662
|
|
|
$
|
172,457
|
|
|
$
|
(40,270
|
)
|
Swaptions
|
|
(7,602
|
)
|
|
|
—
|
|
|
|
(7,602
|
)
|
|
|
—
|
|
Collars
|
|
956
|
|
|
|
1,320
|
|
|
|
15,221
|
|
|
|
1,320
|
|
Puts
|
|
(73
|
)
|
|
|
2,842
|
|
|
|
9,646
|
|
|
|
2,842
|
|
Calls
|
|
104
|
|
|
|
—
|
|
|
|
1,144
|
|
|
|
—
|
|
Basis swaps
|
|
6,113
|
|
|
|
21,853
|
|
|
|
(2,554
|
)
|
|
|
24,929
|
|
Freight swaps
|
|
(63
|
)
|
|
|
(121
|
)
|
|
|
14
|
|
|
|
(155
|
)
|
Total
|
$
|
(88,426
|
)
|
|
$
|
64,556
|
|
|
$
|
188,326
|
|
|
$
|
(11,334
|
)
|
19
(13) FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to measure fair value by converting future amounts, such as cash flows or earnings, into a single present value amount using current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace the service capacity of an asset. This is often referred to as current replacement cost. The cost approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.
The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and do not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:
|
•
|
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
•
|
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
•
|
Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimates of the assumptions market participants would use in determining fair value. Our level 3 measurements consist of instruments using standard pricing models and other valuation methods that utilize unobservable pricing inputs that are significant to the overall fair value.
|
Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.
Significant uses of fair value measurements include:
|
•
|
impairment assessments of long-lived assets;
|
|
•
|
impairment assessments of goodwill; and
|
|
•
|
recorded value of derivative instruments and trading securities.
|
The need to test long-lived assets and goodwill can be based on several indicators, including a significant reduction in prices of natural gas, oil and condensate, NGLs, sustained declines in our common stock, unfavorable adjustments to reserves, significant changes in the expected timing of production, other changes to contracts or changes in the regulatory environment in which a property is located.
20
Fair Values – Recurring
We use a market approach for our recurring fair value measurements and endeavor to use the best information available. The following tables present the fair value hierarchy table for assets and liabilities measured at fair value, on a recurring basis (in thousands):
|
|
Fair Value Measurements at September 30, 2017 using:
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Carrying
Value as of
September 30,
2017
|
|
Trading securities held in the deferred compensation plans
|
|
$
|
64,784
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,784
|
|
Derivatives
–
swaps
|
|
|
—
|
|
|
|
(21,733
|
)
|
|
|
—
|
|
|
|
(21,733
|
)
|
–collars
|
|
|
—
|
|
|
|
6,214
|
|
|
|
—
|
|
|
|
6,214
|
|
–puts
|
|
|
—
|
|
|
|
8,547
|
|
|
|
—
|
|
|
|
8,547
|
|
–calls
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
(29
|
)
|
–basis swaps
|
|
|
—
|
|
|
|
(3,601
|
)
|
|
|
22
|
|
|
|
(3,579
|
)
|
–freight swaps
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
|
|
45
|
|
–swaptions
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,602
|
)
|
|
|
(7,602
|
)
|
|
Fair Value Measurements at December 31, 2016 using:
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Carrying
Value as of
December 31,
2016
|
|
Trading securities held in the deferred compensation plans
|
$
|
61,717
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,717
|
|
Derivatives
|
–swaps
|
|
—
|
|
|
|
(207,979
|
)
|
|
|
—
|
|
|
|
(207,979
|
)
|
|
–collars
|
|
—
|
|
|
|
3,673
|
|
|
|
—
|
|
|
|
3,673
|
|
|
–puts
|
|
—
|
|
|
|
18,159
|
|
|
|
—
|
|
|
|
18,159
|
|
|
–calls
|
|
—
|
|
|
|
(1,041
|
)
|
|
|
—
|
|
|
|
(1,041
|
)
|
|
–basis swaps
|
|
—
|
|
|
|
11,106
|
|
|
|
—
|
|
|
|
11,106
|
|
|
–freight swaps
|
|
—
|
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
Our trading securities in Level 1 are exchange-traded and measured at fair value with a market approach using end of period market values. Derivatives in Level 2 are measured at fair value with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes. As of September 30, 2017, a portion of our natural gas derivative instruments contain swaptions where the counterparty has the right, but not the obligation, to enter into a fixed price swap on a pre-determined date. Derivatives in Level 3 are measured at fair value with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes. Subjectivity in the volatility factors utilized can cause a significant change in the fair value measurement of our swaptions. The following is a reconciliation of the beginning and ending balances for derivative instruments classified as Level 3 in the fair value hierarchy (in thousands):
|
|
As of
September 30,
2017
|
|
Beginning balance
|
|
$
|
—
|
|
Changes in fair value of derivative instruments
|
|
|
(7,602
|
)
|
Settlements received
|
|
|
—
|
|
Ending balance
|
|
$
|
(7,602
|
)
|
Our trading securities held in the deferred compensation plan are accounted for using the mark-to-market accounting method and are included in other assets in the accompanying consolidated balance sheets. We elected to adopt the fair value option to simplify our accounting for the investments in our deferred compensation plan. Interest, dividends, and mark-to-market gains or losses are included in deferred compensation plan expense in the accompanying consolidated statements of operations. For third quarter 2017, interest and dividends were $1.5 million and the mark-to-market adjustment was a gain of $1.1 million compared to interest and dividends of $192,000 and a mark-to-market gain of $2.3 million in third quarter 2016. For first nine months 2017, interest and dividends were $2.4 million and the mark-to-market gain was $4.1 million compared to interest and dividends of $509,000 and mark-to-market adjustment of a gain of $3.7 million in the same period of the prior year.
21
Fair Values—Non-recurring
Our proved natural gas and oil properties are reviewed for impairment periodically as events or changes in circumstances indicate the carrying amount may not be recoverable. In third quarter 2017, there were indicators that the carrying value of certain of our oil and gas properties in Oklahoma and in the Texas Panhandle may be impaired and undiscounted future cash flows attributed to these assets indicated their carrying amounts were not expected to be recovered. Their remaining fair value was measured using an income approach based upon internal estimates of future production levels, prices, drilling and operating costs and discount rates, which are Level 3 measurements. We also considered the potential sale of certain of these properties. We recorded non-cash charges in the third quarter and nine months ended 2017 of $63.7 million related to these properties. In addition, we recorded non-cash charges in first nine months 2016 of $43.0 million related to our natural gas and oil properties in Western Oklahoma. Our estimates of future cash flows attributable to our natural gas and oil properties could decline further with lower commodity prices which may result in additional impairment charges.
The following table presents the value of these assets measured at fair value on a non-recurring basis at the time impairment was recorded (in thousands):
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
Nine Months Ended
September 30, 2016
|
|
Fair Value
|
|
|
|
Impairment
|
|
|
|
Fair Value
|
|
|
|
Impairment
|
Natural gas and oil properties
|
$
|
85,597
|
|
|
$
|
63,679
|
|
|
$
|
90,150
|
|
|
$
|
43,040
|
Fair Values—Reported
The following table presents the carrying amounts and the fair values of our financial instruments as of September 30, 2017 and December 31, 2016 (in thousands):
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps, options and basis swaps
|
|
$
|
30,688
|
|
|
$
|
30,688
|
|
|
$
|
13,483
|
|
|
$
|
13,483
|
|
Marketable securities
(a)
|
|
|
64,784
|
|
|
|
64,784
|
|
|
|
61,717
|
|
|
|
61,717
|
|
(Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps, options and basis swaps
|
|
|
(48,825
|
)
|
|
|
(48,825
|
)
|
|
|
(189,500
|
)
|
|
|
(189,500
|
)
|
Bank credit facility
(b)
|
|
|
(1,086,000
|
)
|
|
|
(1,086,000
|
)
|
|
|
(882,000
|
)
|
|
|
(882,000
|
)
|
5.75% senior notes due 2021
(b)
|
|
|
(475,952
|
)
|
|
|
(493,567
|
)
|
|
|
(475,952
|
)
|
|
|
(496,180
|
)
|
5.00% senior notes due 2022
(b)
|
|
|
(580,032
|
)
|
|
|
(579,342
|
)
|
|
|
(580,032
|
)
|
|
|
(577,132
|
)
|
5.875% senior notes due 2022
(b)
|
|
|
(329,244
|
)
|
|
|
(339,464
|
)
|
|
|
(329,244
|
)
|
|
|
(343,648
|
)
|
Other senior notes due 2022
(b)
|
|
|
(590
|
)
|
|
|
(584
|
)
|
|
|
(1,090
|
)
|
|
|
(1,104
|
)
|
5.00% senior notes due 2023
(b)
|
|
|
(741,531
|
)
|
|
|
(738,164
|
)
|
|
|
(741,531
|
)
|
|
|
(735,043
|
)
|
4.875% senior notes due 2025
(b)
|
|
|
(750,000
|
)
|
|
|
(736,028
|
)
|
|
|
(750,000
|
)
|
|
|
(724,688
|
)
|
5.75% senior subordinated notes due 2021
(b)
|
|
|
(22,214
|
)
|
|
|
(22,596
|
)
|
|
|
(22,214
|
)
|
|
|
(22,325
|
)
|
5.00% senior subordinated notes due 2022
(b)
|
|
|
(19,054
|
)
|
|
|
(18,692
|
)
|
|
|
(19,054
|
)
|
|
|
(18,387
|
)
|
5.00% senior subordinated notes due 2023
(b)
|
|
|
(7,712
|
)
|
|
|
(7,671
|
)
|
|
|
(7,712
|
)
|
|
|
(7,645
|
)
|
Deferred compensation plan
(c)
|
|
|
(106,008
|
)
|
|
|
(106,008
|
)
|
|
|
(139,580
|
)
|
|
|
(139,580
|
)
|
(a)
|
Marketable securities, which are held in our deferred compensation plans, are actively traded on major exchanges.
|
(b)
|
The book value of our bank debt approximates fair value because of its floating rate structure. The fair value of our senior notes and our senior subordinated notes is based on end of period market quotes which are Level 2 inputs.
|
(c)
|
The fair value of our deferred compensation plan is updated at the closing price on the balance sheet date which is a Level 1 input.
|
Our current assets and liabilities contain financial instruments, the most significant of which are trade accounts receivable and payable. We believe the carrying values of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including (1) the short-term duration of the instruments and (2) our historical and expected incurrence of bad debt expense. Non-financial liabilities initially measured at fair value include asset retirement obligations. For additional information, see Note 10.
Concentrations of Credit Risk
As of September 30, 2017, our primary concentrations of credit risk are the risks of not collecting accounts receivable and the risk of a counterparty’s failure to perform under derivative obligations. Most of our receivables are from a diverse group of companies, including major energy companies, pipeline companies, local distribution companies, financial institutions and end-users in various industries. Letters of credit or other appropriate securities are obtained as deemed necessary to limit our risk of loss. Our allowance for uncollectable receivables was $6.6 million at September 30, 2017 compared to $5.6 million at December 31, 2016. Our
22
derivative exposure to credit risk i
s diversified primarily among major investment grade financial institutions, where we have master netting agreements which provide for offsetting payables against receivables from separate derivative contracts. To manage counterparty risk associated with o
ur derivatives, we select and monitor our counterparties based on our assessment of their financial strength and/or credit ratings. We may also limit the level of exposure with any single counterparty. At September 30, 2017, our derivative counterparties i
nclude twenty-two financial institutions, of which all but five are secured lenders in our bank credit facility. At September 30, 2017, our net derivative asset includes a net payable of $20.8 million to these five counterparties that are not participants
in our bank credit facility.
(14) STOCK-BASED COMPENSATION PLANS
Stock-Based Awards
We have one active equity-based stock plan, our Amended and Restated 2005 Equity-Based Incentive Compensation Plan, which we refer to as the 2005 Plan. Under this plan, various awards may be issued to non-employee directors and employees pursuant to decisions of the Compensation Committee, which is composed of only non-employee, independent directors. In 2005, we granted SARs which represent the right to receive a payment equal to the excess of the fair market value of shares of our common stock on the date the right is exercised over the value of the stock on the date of grant. All SARs granted under the 2005 Plan will be settled in shares of stock, vest over a three-year period and have a maximum term of five years from the date they are granted. In 2011, the Compensation Committee of the Board of Directors began granting restricted stock units under this plan. These restricted stock units, which we refer to as restricted stock Equity Awards, vest over a three-year period. All awards granted have been issued at prevailing market prices at the time of grant and the vesting of these awards is based upon an employee’s continued employment with us, with the exception of employment termination due to death, disability or retirement.
In 2014, the Compensation Committee also began granting market-based performance share unit (“TSR”) awards under our 2005 Plan. The number of shares to be issued is determined by our total shareholder return compared to the total shareholder return of a predetermined group of peer companies over the performance period. The grant date fair value of the TSR awards is determined using a Monte Carlo simulation and is recognized as stock-based compensation expense over the three-year performance period. The actual payout of shares granted depends on our total shareholder return compared to our peer companies and will be between zero and 150%, unless our return is negative in which case the payout is capped at 100%. In first quarter 2017, the Compensation Committee also began granting performance-based unit awards based on production growth per share (“PGPS”) and reserve growth per share (“RGPS”). The number of shares to be issued depends on our level of success in achieving specifically identified performance targets. The grant date fair value is determined by the market value of our stock on the grant date and is recognized as stock-based compensation expense over the three-year performance period. The actual payout of shares granted will be between zero and 150%.
The Compensation Committee also grants restricted stock to certain employees and non-employee directors of the Board of Directors as part of their compensation. Upon grant of these restricted shares, which we refer to as restricted stock Liability Awards, the shares generally are placed in our deferred compensation plan and, upon vesting, employees are allowed to take withdrawals either in cash or in stock based on their distribution elections. Compensation expense is recognized over the vesting period, which is typically three years for employee grants and immediate vesting for non-employee directors. All restricted stock awards are issued at prevailing market prices at the time of the grant and vesting is based upon an employee’s continued employment with us, with the exception of employment termination due to death, disability or retirement. Prior to vesting, all restricted stock awards have the right to vote such shares and receive dividends thereon. These Liability Awards are classified as a liability and are remeasured at fair value each reporting period. This mark-to-market adjustment is reported as deferred compensation plan expense in the accompanying consolidated statements of operations.
Total Stock-Based Compensation Expense
Stock-based compensation represents amortization of restricted stock and performance share expense. Unlike the other forms of stock-based compensation, the mark-to-market adjustment of the liability related to the vested restricted stock held in our deferred compensation plan is directly tied to the change in our stock price and not directly related to the functional expenses and therefore, is not allocated to the functional categories. The following table details the allocation of stock-based compensation to functional expense categories (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
Direct operating expense
|
$
|
517
|
|
|
$
|
497
|
|
|
$
|
1,563
|
|
|
$
|
1,781
|
|
Brokered natural gas and marketing expense
|
|
389
|
|
|
|
455
|
|
|
|
1,040
|
|
|
|
1,349
|
|
Exploration expense
|
|
561
|
|
|
|
608
|
|
|
|
1,596
|
|
|
|
1,669
|
|
General and administrative expense
|
|
9,959
|
|
|
|
11,126
|
|
|
|
35,156
|
|
|
|
37,682
|
|
Termination costs
|
|
(31
|
)
|
|
|
—
|
|
|
|
1,665
|
|
|
|
—
|
|
Total stock-based compensation
|
$
|
11,395
|
|
|
$
|
12,686
|
|
|
$
|
41,020
|
|
|
$
|
42,481
|
|
23
Market-Based TSR Awards
The following is a summary of our non-vested TSR awards outstanding at September 30, 2017:
|
|
Number of
Units
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Outstanding at December 31, 2016
|
|
|
395,908
|
|
|
$
|
44.39
|
|
Units granted
(a)
|
|
|
358,519
|
|
|
|
26.26
|
|
Units vested
|
|
|
(221,274
|
)
|
|
|
43.01
|
|
Units forfeited
|
|
|
(3,679
|
)
|
|
|
44.21
|
|
Outstanding at September 30, 2017
|
|
|
529,474
|
|
|
$
|
32.69
|
|
(a)
Amounts granted reflect the number of performance units granted; however, the actual payout of shares will be between zero and 150% of the performance units granted depending on the total shareholder return ranking compared to the peer companies at the end of the three-year performance period.
The following assumptions were used to estimate the fair value of TSRs granted during first nine months 2017 and 2016:
|
|
Nine Months
Ended September 30,
|
|
|
2017
|
|
|
|
2016
|
|
Risk-free interest rate
|
|
1.49
|
%
|
|
|
0.94
|
%
|
Expected annual volatility
|
|
44
|
%
|
|
|
49
|
%
|
Weighted average grant date fair value per unit
|
$
|
26.26
|
|
|
$
|
36.64
|
|
We recorded TSR compensation expense of $9.7 million in first nine months 2017 compared to $9.1 million in the same period of 2016. During first nine months 2017, 89,000 TSR awards (or approximately 40% of the 2014-2016 performance period grants) were forfeited due to our final total shareholder return being less than the original performance target (included in “Units vested” in the table above).
Performance-Based PGPS/RGPS Awards
The following is a summary of our non-vested PGPS/RGPS awards outstanding at September 30, 2017:
|
|
|
|
|
Number of
Units
|
|
|
|
Weighted
Average
Grant Date Fair
Value
of Range Stock
|
|
Outstanding at December 31, 2016
|
|
—
|
|
|
|
—
|
|
Units granted
(a)
|
|
122,921
|
|
|
$
|
25.53
|
|
Units vested
|
|
(20,231
|
)
|
|
|
25.64
|
|
Outstanding at September 30, 2017
|
|
102,690
|
|
|
$
|
25.51
|
|
(a)
Amounts granted reflect the number of performance units granted; however, the actual payout of shares will be between zero and 150% depending on achievement of specifically identified performance targets.
We recorded PGPS/RGPS compensation expense of $124,000 in first nine months 2017.
Restricted Stock Awards
Equity Awards
In first nine months 2017, we granted 883,000 restricted stock Equity Awards to employees at an average grant price of $32.81 compared to 940,000 restricted stock Equity Awards granted to employees at an average grant price of $28.18 in first nine months 2016. These awards generally vest over a three-year period. We recorded compensation expense for these Equity Awards of $18.1 million in first nine months 2017 compared to $17.2 million in the same period of 2016. Equity Awards are not issued to employees until they are vested. Employees do not have the option to receive cash.
24
Liability Awards
In first nine months 2017, we granted 451,000 shares of restricted stock Liability Awards as compensation to employees at an average price of $25.95 with vesting over a three-year period and 90,000 shares were granted to non-employee directors at an average price of $25.01 with immediate vesting. In first nine months 2016, we granted 457,000 shares of Liability Awards as compensation to employees at an average price of $35.70 with vesting generally over a three-year period and 56,000 shares were granted to non-employee directors at an average price of $38.62 with immediate vesting. We recorded compensation expense for Liability Awards of $12.0 million in first nine months 2017 compared to $14.6 million in the same period of 2016. Substantially all of these awards are held in our deferred compensation plan, are classified as a liability and are remeasured at fair value at the end of each reporting period. This mark-to-market adjustment is reported as deferred compensation expense in our consolidated statements of operations (see additional discussion below). The following is a summary of the status of our non-vested restricted stock outstanding at September 30, 2017:
|
|
Equity Awards
|
|
|
Liability Awards
|
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at December 31, 2016
|
|
|
765,971
|
|
|
$
|
33.62
|
|
|
|
425,018
|
|
|
$
|
43.48
|
|
Granted
|
|
|
882,826
|
|
|
|
32.81
|
|
|
|
540,878
|
|
|
|
25.96
|
|
Vested
|
|
|
(546,565
|
)
|
|
|
35.10
|
|
|
|
(325,629
|
)
|
|
|
37.45
|
|
Forfeited
|
|
|
(90,850
|
)
|
|
|
32.85
|
|
|
|
(4,342
|
)
|
|
|
31.10
|
|
Outstanding at September 30, 2017
|
|
|
1,011,382
|
|
|
$
|
32.18
|
|
|
|
635,925
|
|
|
$
|
31.75
|
|
Stock Appreciation Right Awards
There were 383,000 SARs outstanding at September 30, 2017. Information with respect to SARs activity is summarized below:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2016
|
|
|
1,003,600
|
|
|
$
|
69.08
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired/forfeited
|
|
|
(620,821
|
)
|
|
|
62.29
|
|
Outstanding at September 30, 2017
|
|
|
382,779
|
|
|
$
|
76.54
|
|
Deferred Compensation Plan
Our deferred compensation plan gives non-employee directors and officers the ability to defer all or a portion of their salaries, bonuses or director fees and invest in Range common stock or make other investments at the individual’s discretion. Range provides a partial matching contribution to officers which vests over three years. The assets of the plan are held in a grantor trust, which we refer to as the Rabbi Trust, and are therefore available to satisfy the claims of our general creditors in the event of bankruptcy or insolvency. Our stock held in the Rabbi Trust is treated as a liability award as employees are allowed to take withdrawals from the Rabbi Trust either in cash or in Range stock. The liability for the vested portion of the stock held in the Rabbi Trust is reflected as deferred compensation liability in the accompanying consolidated balance sheets and is adjusted to fair value each reporting period by a charge or credit to deferred compensation plan expense on our consolidated statements of operations. The assets of the Rabbi Trust, other than our common stock, are invested in marketable securities and reported at their market value as other assets in the accompanying consolidated balance sheets. The deferred compensation liability reflects the vested market value of the marketable securities and Range stock held in the Rabbi Trust. Changes in the market value of the marketable securities and changes in the fair value of the deferred compensation plan liability are charged or credited to deferred compensation plan expense each quarter. We recorded mark-to-market gain of $9.2 million in third quarter 2017 compared to mark-to-market gain of $11.6 million in third quarter 2016. We recorded a mark-to-market gain of $36.8 million in first nine months 2017 compared to a mark-to-market loss of $30.2 million in first nine months 2016. The Rabbi Trust held 2.9 million shares (2.2 million of which were vested) of Range stock at September 30, 2017 compared to 2.7 million shares (2.3 million of which were vested) at December 31, 2016.
25
(15) SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Net cash provided from operating activities included:
|
|
|
|
|
|
|
|
|
Income taxes paid to (refunded from) taxing authorities
|
|
$
|
98
|
|
|
$
|
(101
|
)
|
Interest paid
|
|
|
136,863
|
|
|
|
134,583
|
|
Non-cash investing and financing activities included:
|
|
|
|
|
|
|
|
|
Increase in asset retirement costs capitalized
|
|
|
6,460
|
|
|
|
4,655
|
|
Increase in accrued capital expenditures
|
|
|
52,289
|
|
|
|
12,523
|
|
|
|
|
|
|
|
|
|
|
(16) COMMITMENTS AND CONTINGENCIES
Litigation
We are the subject of, or party to, a number of pending or threatened legal actions, administrative proceedings and claims arising in the ordinary course of our business. While many of these matters involve inherent uncertainty, we believe that the amount of the liability, if any, ultimately incurred with respect to these actions, proceedings or claims will not have a material adverse effect on our consolidated financial position as a whole or on our liquidity, capital resources or future annual results of operations. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. We will continue to evaluate our litigation and regulatory proceedings quarterly and will establish and adjust any estimated liability as appropriate to reflect our assessment of the then current status of litigation and regulatory proceedings. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
We have been named as a defendant in a lawsuit styled
Seagraves v Range Resources Corporation
; Cause No. 2:17-CV-01009-MRH, filed in the United States District Court for the Western District of Pennsylvania. The lawsuit asserts claims under the federal Fair Labor Standards Act as well as the comparable Pennsylvania state law statute seeking certification of a class of individuals or assertion of a collective action on behalf of individuals who were paid a day rate directly or indirectly by one of our subsidiaries and who the Plaintiff alleges were misclassified as independent contractors. We cannot predict with certainty the outcome of the litigation, but we intend to defend the litigation and the claims asserted against us.
Transportation and Gathering Contracts
In first nine months 2017, our transportation and gathering commitments increased by approximately $402.0
million over the next twenty-two years (through 2038) primarily due to extension of terms and pricing changes for current contracts.
(17) OFFICE CLOSING AND TERMINATION COSTS
In first quarter 2017, we recorded accruals for severance, other personnel costs and accelerated vesting of stock-based compensation as part of a continuing effort to reduce our general and administrative expenses due, in part, to the lower commodity price environment. The following summarizes our termination costs for the three months and nine months ended September 30, 2017 and 2016 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
Severance costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,422
|
|
|
$
|
—
|
Building lease
|
|
(16
|
)
|
|
|
136
|
|
|
|
(37
|
)
|
|
|
303
|
Stock-based compensation
|
|
(31
|
)
|
|
|
—
|
|
|
|
1,664
|
|
|
|
—
|
Total termination costs
|
$
|
(47
|
)
|
|
$
|
136
|
|
|
$
|
4,049
|
|
|
$
|
303
|
26
The following details our accrued liability as of September 30, 2017 (in thousands):
|
|
September 30,
2017
|
|
Beginning balance at December 31, 2016
|
$
|
2,460
|
|
Accrued severance costs
|
|
2,422
|
|
Accrued building rent
|
|
(37
|
)
|
Payments
|
|
(2,290
|
)
|
Ending balance at September 30, 2017
|
$
|
2,555
|
|
(18)
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
(a)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Natural gas and oil properties:
|
|
|
|
|
|
|
|
|
Properties subject to depletion
|
|
$
|
10,172,411
|
|
|
$
|
9,462,350
|
|
Unproved properties
|
|
|
2,888,979
|
|
|
|
2,923,803
|
|
Total
|
|
|
13,061,390
|
|
|
|
12,386,153
|
|
Accumulated depreciation, depletion and amortization
|
|
|
(3,492,614
|
)
|
|
|
(3,129,816
|
)
|
Net capitalized costs
|
|
$
|
9,568,776
|
|
|
$
|
9,256,337
|
|
|
(a)
|
Includes capitalized asset retirement costs and the associated accumulated amortization.
|
(19)
Costs Incurred for Property Acquisition, Exploration and Development
(a)
|
|
Nine Months
Ended
September 30,
2017
|
|
|
Year
Ended
December 31, 2016
|
|
|
|
(in thousands)
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
Acreage purchases
|
|
$
|
41,817
|
|
|
$
|
33,142
|
|
Oil and gas properties
|
|
|
7,875
|
|
|
|
3,098,772
|
|
Asset retirement obligations
|
|
|
—
|
|
|
|
21,908
|
|
Development
|
|
|
809,961
|
|
|
|
497,795
|
|
Exploration:
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
1,008
|
|
|
|
37,680
|
|
Expense
|
|
|
44,173
|
|
|
|
30,027
|
|
Stock-based compensation expense
|
|
|
1,596
|
|
|
|
2,298
|
|
Gas gathering facilities:
|
|
|
|
|
|
|
|
|
Development
|
|
|
6,292
|
|
|
|
3,595
|
|
Subtotal
|
|
|
912,722
|
|
|
|
3,725,217
|
|
Asset retirement obligations
|
|
|
6,460
|
|
|
|
(24,064
|
)
|
Total costs incurred
|
|
$
|
919,182
|
|
|
$
|
3,701,153
|
|
|
(a)
|
Includes costs incurred whether capitalized or expensed.
|
27