NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statement Presentation
During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 (Form 10-K) filed with the Securities and Exchange Commission (SEC), except for any new accounting pronouncements adopted during the period as discussed below. The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.
Recently Adopted Accounting Pronouncements
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. This ASU does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an optional transition method that permits an entity to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The guidance is effective for interim and annual periods beginning after December 15, 2018. This ASU was adopted using a modified retrospective approach. The Company adopted this guidance effective January 1, 2019 by applying the optional transition approach as of the beginning of the period of adoption. Comparative periods, including the disclosures related to those periods, were not restated.
On the adoption date, the Company elected the following practical expedients which are provided in the lease standard:
|
|
•
|
an election not to apply the recognition requirements in the lease standard to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise);
|
|
|
•
|
a package of practical expedients to not reassess whether a contract is or contains a lease, lease classification and initial direct costs;
|
|
|
•
|
a practical expedient to use hindsight when determining the lease term;
|
|
|
•
|
a practical expedient that permits combining lease and non-lease components in a contract and accounting for the combination as a lease (elected by asset class); and
|
|
|
•
|
a practical expedient to not reassess certain land easements in existence prior to January 1, 2019.
|
On January 1, 2019, the Company recognized a right of use asset for operating leases and an operating lease liability of $44.6 million, representing the present value of the future minimum lease payment obligations associated with office leases, drilling rig commitments, surface use agreements and other leases. The adoption of this guidance did not have an impact on the Company’s results of operations or cash flows.
Refer to Note 8 for more details regarding leases.
2. Properties and Equipment, Net
Properties and equipment, net are comprised of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2019
|
|
December 31,
2018
|
Proved oil and gas properties
|
|
$
|
6,339,234
|
|
|
$
|
5,717,145
|
|
Unproved oil and gas properties
|
|
164,100
|
|
|
194,435
|
|
Land, buildings and other equipment
|
|
101,901
|
|
|
94,797
|
|
|
|
6,605,235
|
|
|
6,006,377
|
|
Accumulated depreciation, depletion and amortization
|
|
(2,817,654
|
)
|
|
(2,542,771
|
)
|
|
|
$
|
3,787,581
|
|
|
$
|
3,463,606
|
|
At September 30, 2019, the Company did not have any projects that had exploratory well costs capitalized for a period of greater than one year after drilling.
3. Equity Method Investments
The Company holds a 25 percent equity interest in Constitution Pipeline Company, LLC (Constitution) and a 20 percent equity interest in Meade Pipeline Co LLC (Meade). Activity related to these equity method investments is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constitution
|
|
Meade
|
|
Total
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
732
|
|
|
$
|
163,181
|
|
|
$
|
85,345
|
|
|
$
|
163,181
|
|
|
$
|
86,077
|
|
Contributions
|
|
500
|
|
|
250
|
|
|
8,477
|
|
|
72,616
|
|
|
8,977
|
|
|
72,866
|
|
Distributions
|
|
—
|
|
|
—
|
|
|
(14,266
|
)
|
|
—
|
|
|
(14,266
|
)
|
|
—
|
|
Earnings (loss) on equity method investments
|
|
(500
|
)
|
|
(982
|
)
|
|
11,694
|
|
|
(27
|
)
|
|
11,194
|
|
|
(1,009
|
)
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
169,086
|
|
|
$
|
157,934
|
|
|
$
|
169,086
|
|
|
$
|
157,934
|
|
For further information regarding the Company’s equity method investments, refer to Note 4 of the Notes to the Consolidated Financial Statements in the Form 10-K.
Constitution Pipeline Company, LLC
In August 2019, the Federal Energy Regulatory Committee issued an order concluding the New York Department of Environmental Conservation has waived its authority under Section 401 of the Clean Water Act "to issue or deny a water quality certification" for the proposed Constitution pipeline. This decision removed one of the major remaining regulatory hurdles for the continuation of the project. In light of this decision, in September 2019, the Company, the other members of Constitution and Williams Partners L.P., the project sponsor, resumed discussions regarding the construction of the project, including evaluating the commercial feasibility of the project, the remaining legal and regulatory hurdles, projected costs and capital requirements and other aspects of the development and construction of the pipeline. The Company remains committed to continuing the process of evaluating the next steps for advancing the project.
Meade Pipeline Co LLC
In September 2019, the Company entered into an agreement to sell its 20 percent ownership interest in Meade to a subsidiary of NextEra Energy Partners, LP for $256.0 million. This transaction is expected to close in the fourth quarter of 2019, subject to customary closing conditions and adjustments.
4. Debt and Credit Agreements
The Company’s debt and credit agreements consisted of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2019
|
|
December 31,
2018
|
6.51% weighted-average senior notes(1)
|
|
$
|
124,000
|
|
|
$
|
124,000
|
|
5.58% weighted-average senior notes
|
|
175,000
|
|
|
175,000
|
|
3.65% weighted-average senior notes
|
|
925,000
|
|
|
925,000
|
|
Revolving credit facility
|
|
—
|
|
|
7,000
|
|
Unamortized debt issuance costs
|
|
(4,210
|
)
|
|
(4,896
|
)
|
|
|
$
|
1,219,790
|
|
|
$
|
1,226,104
|
|
_______________________________________________________________________________
|
|
(1)
|
Includes $87.0 million of current portion of long-term debt at September 30, 2019 due in July 2020.
|
At September 30, 2019, the Company was in compliance with all restrictive financial covenants for both its revolving credit facility and senior notes.
Revolving Credit Agreement
On April 22, 2019, the Company entered into a second amended and restated credit agreement (revolving credit facility). The Company's revolving credit facility is unsecured and the borrowing base is redetermined annually on April 1. In addition, either the Company or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. The Company’s borrowing base and available commitments under the revolving credit facility were $3.2 billion and $1.5 billion, respectively. The maximum revolving credit available to the Company is the lesser of the available commitments or the difference of the borrowing base less outstanding senior notes. The Company's revolving credit facility matures in April 2024 and can be extended by one year upon the agreement of the Company and lenders holding at least 50 percent of the commitments under the revolving credit facility.
Interest rates under the revolving credit facility are based on LIBOR or ABR indications, plus a margin which ranges from 150 to 225 basis points for LIBOR loans and from 50 to 125 basis points for ABR loans when not in an Investment Grade Period (as defined in the amended and restated credit agreement) and from 112.5 to 175 basis points for LIBOR loans and from 12.5 to 75 basis points for ABR loans during an Investment Grade Period. The revolving credit facility also provides for a commitment fee on the unused available balance and is calculated at annual rates ranging from 30 to 42.5 basis points when not in an Investment Grade Period and from 12.5 to 27.5 basis points during an Investment Grade Period. The Company is currently not in an Investment Grade Period.
The revolving credit facility contains various customary covenants, which include the following (with all calculations based on definitions contained in the amended and restated credit agreement):
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•
|
Maintenance of a minimum asset coverage ratio of 1.75 to 1.0;
|
|
|
•
|
Maintenance of a minimum annual coverage ratio of consolidated cash flow to interest expense for the trailing four quarters of 2.8 to 1.0; and
|
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|
•
|
Maintenance of a minimum current ratio of 1.0 to 1.0.
|
At September 30, 2019, the Company had no borrowings outstanding under its revolving credit facility and had unused commitments of $1.5 billion.
The Company incurred $7.4 million of debt issuance costs in connection with the amended and restated credit agreement, which were capitalized and will be amortized over the term of the amended and restated agreement. The remaining unamortized costs of $3.4 million will also be amortized over the term of the amended and restated agreement in accordance with ASC 470-50, Debt Modifications and Extinguishments.
5. Derivative Instruments
As of September 30, 2019, the Company had the following outstanding financial commodity derivatives:
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|
|
|
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|
Swaps
|
|
Basis Swaps
|
Type of Contract
|
|
Volume (Mmbtu)
|
|
Contract Period
|
|
Weighted-Average ($/Mmbtu)
|
|
Weighted-Average ($/Mmbtu)
|
Natural gas (IFERC TRANSCO Z6 non-NY)
|
|
2,760,000
|
|
|
Oct. 2019 - Dec. 2019
|
|
|
|
$
|
0.41
|
|
Natural gas (IFERC TRANSCO Z6 non-NY)
|
|
4,650,000
|
|
|
Oct. 2019
|
|
$
|
2.61
|
|
|
|
Natural gas (IFERC TRANSCO Leidy Line Receipts)
|
|
13,800,000
|
|
|
Oct. 2019 - Dec. 2019
|
|
|
|
$
|
(0.53
|
)
|
Natural gas (NYMEX)
|
|
10,850,000
|
|
|
Oct. 2019
|
|
$
|
2.85
|
|
|
|
Natural gas (NYMEX)
|
|
27,600,000
|
|
|
Oct. 2019 - Dec. 2019
|
|
$
|
2.86
|
|
|
|
Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(In thousands)
|
|
Balance Sheet Location
|
|
September 30,
2019
|
|
December 31,
2018
|
|
September 30,
2019
|
|
December 31,
2018
|
Commodity contracts
|
|
Derivative instruments (current)
|
|
$
|
25,700
|
|
|
$
|
57,665
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
$
|
25,700
|
|
|
$
|
57,665
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2019
|
|
December 31,
2018
|
Derivative assets
|
|
|
|
|
|
|
Gross amounts of recognized assets
|
|
$
|
25,700
|
|
|
$
|
60,105
|
|
Gross amounts offset in the statement of financial position
|
|
—
|
|
|
(2,440
|
)
|
Net amounts of assets presented in the statement of financial position
|
|
25,700
|
|
|
57,665
|
|
Gross amounts of financial instruments not offset in the statement of financial position
|
|
—
|
|
|
—
|
|
Net amount
|
|
$
|
25,700
|
|
|
$
|
57,665
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
—
|
|
|
$
|
2,440
|
|
Gross amounts offset in the statement of financial position
|
|
—
|
|
|
(2,440
|
)
|
Net amounts of liabilities presented in the statement of financial position
|
|
—
|
|
|
—
|
|
Gross amounts of financial instruments not offset in the statement of financial position
|
|
—
|
|
|
—
|
|
Net amount
|
|
$
|
—
|
|
|
$
|
—
|
|
Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cash received (paid) on settlement of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
$
|
46,555
|
|
|
$
|
(41
|
)
|
|
$
|
114,931
|
|
|
$
|
(20,354
|
)
|
Non-cash gain (loss) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
(35,495
|
)
|
|
(3,496
|
)
|
|
(31,965
|
)
|
|
18,726
|
|
|
|
$
|
11,060
|
|
|
$
|
(3,537
|
)
|
|
$
|
82,966
|
|
|
$
|
(1,628
|
)
|
6. Fair Value Measurements
The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For further information regarding the fair value hierarchy, refer to Note 1 of the Notes to the Consolidated Financial Statements in the Form 10-K.
Financial Assets and Liabilities
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Balance at
September 30, 2019
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
17,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,080
|
|
Derivative instruments
|
|
—
|
|
|
16,542
|
|
|
9,158
|
|
|
25,700
|
|
|
|
$
|
17,080
|
|
|
$
|
16,542
|
|
|
$
|
9,158
|
|
|
$
|
42,780
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
25,791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,791
|
|
Derivative instruments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
25,791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Balance at
December 31, 2018
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
14,699
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,699
|
|
Derivative instruments
|
|
—
|
|
|
35,689
|
|
|
24,416
|
|
|
60,105
|
|
|
|
$
|
14,699
|
|
|
$
|
35,689
|
|
|
$
|
24,416
|
|
|
$
|
74,804
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
25,780
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,780
|
|
Derivative instruments
|
|
—
|
|
|
—
|
|
|
2,440
|
|
|
2,440
|
|
|
|
$
|
25,780
|
|
|
$
|
—
|
|
|
$
|
2,440
|
|
|
$
|
28,220
|
|
The Company's investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company's common stock that are publicly traded and for which market prices are readily available.
The derivative instruments were measured based on quotes from the Company's counterparties and/or internal models. Such quotes and models have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward commodity prices, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are derived from or verified using relevant NYMEX futures contracts and/or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk. The Company measured the non-performance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions with which it has derivative transactions while non-performance risk of the Company is evaluated using a market credit spread provided by the Company's bank. The Company has not incurred any losses related to non-performance risk of its counterparties and does not anticipate any material impact on its financial results due to non-performance by third parties.
The most significant unobservable inputs relative to the Company's Level 3 derivative contracts are basis differentials. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties' valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
Balance at beginning of period
|
|
$
|
21,976
|
|
|
$
|
(28,398
|
)
|
Total gain (loss) included in earnings
|
|
24,931
|
|
|
6,333
|
|
Settlement (gain) loss
|
|
(37,749
|
)
|
|
17,114
|
|
Balance at end of period
|
|
$
|
9,158
|
|
|
$
|
(4,951
|
)
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held at the end of the period
|
|
$
|
7,388
|
|
|
$
|
(6,685
|
)
|
There were no transfers between Level 1, Level 2 and Level 3 fair value measurements for the nine months ended September 30, 2019 and 2018.
Non-Financial Assets and Liabilities
The Company discloses or recognizes its non-financial assets and liabilities, such as impairments or acquisitions, at fair value on a nonrecurring basis. As none of the Company’s other non-financial assets and liabilities were measured at fair value as of September 30, 2019, additional disclosures were not required.
The estimated fair value of the Company’s asset retirement obligations at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the 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. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. Cash and cash equivalents are classified as Level 1 in the fair value hierarchy and the remaining financial instruments are classified as Level 2.
The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes is based on interest rates currently available to the Company. The Company’s debt is valued using an income approach and classified as Level 3 in the fair value hierarchy.
The carrying amount and fair value of debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
(In thousands)
|
|
Carrying
Amount
|
|
Estimated Fair
Value
|
|
Carrying
Amount
|
|
Estimated Fair
Value
|
Long-term debt
|
|
$
|
1,219,790
|
|
|
$
|
1,258,674
|
|
|
$
|
1,226,104
|
|
|
$
|
1,202,994
|
|
Current maturities
|
|
(87,000
|
)
|
|
(89,210
|
)
|
|
—
|
|
|
—
|
|
Long-term debt, excluding current maturities
|
|
$
|
1,132,790
|
|
|
$
|
1,169,464
|
|
|
$
|
1,226,104
|
|
|
$
|
1,202,994
|
|
7. Asset Retirement Obligations
Activity related to the Company’s asset retirement obligations is as follows:
|
|
|
|
|
|
(In thousands)
|
|
Nine Months Ended
September 30, 2019
|
Balance at beginning of period(1)
|
|
$
|
51,622
|
|
Liabilities incurred
|
|
4,776
|
|
Liabilities settled
|
|
(1,232
|
)
|
Liabilities divested
|
|
(187
|
)
|
Accretion expense
|
|
2,489
|
|
Balance at end of period(2)
|
|
$
|
57,468
|
|
_______________________________________________________________________________
|
|
(1)
|
Includes $1.0 million of current asset retirement obligations included in accrued liabilities at December 31, 2018.
|
|
|
(2)
|
Includes $0.5 million of current asset retirement obligations included in accrued liabilities at September 30, 2019.
|
8. Commitments and Contingencies
Contractual Obligations
The Company has various contractual obligations in the normal course of its operations. There have been no material changes to the Company’s contractual obligations described under “Transportation and Gathering Agreements” as disclosed in Note 9 of the Notes to Consolidated Financial Statements in the Form 10-K.
Lease Commitments (Topic 840)
Future minimum rental commitments under non-cancelable leases in effect at December 31, 2018 are as follows:
|
|
|
|
|
(In thousands)
|
|
2019
|
$
|
5,571
|
|
2020
|
5,684
|
|
2021
|
4,777
|
|
2022
|
1,659
|
|
2023
|
1,691
|
|
Thereafter
|
2,852
|
|
|
$
|
22,234
|
|
The table above was prepared under the guidance of Topic 840. As discussed in Note 1 above, the Company adopted the guidance of Topic 842 effective January 1, 2019.
Leases (Topic 842)
The Company determines if an arrangement is, or contains, a lease at inception based on whether that contract conveys the right to control the use of an identified asset in exchange for consideration for a period of time. Operating leases are included in operating lease right-of-use assets (ROU assets) and operating lease liabilities (current and noncurrent) on the Condensed Consolidated Balance Sheet. The Company does not have any finance leases at September 30, 2019.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. Most leases do not provide an implicit interest rate; therefore, the Company used its incremental borrowing rate based on the information available at the inception date to determine the present value of the lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease cost for lease payments is recognized on a straight-line basis over the lease term. Certain leases have payment terms that vary based on the usage of the underlying assets. Variable lease payments are not included in ROU assets and lease liabilities.
For all operating leases, lease and non-lease components are accounted for as a single lease component.
The Company has operating leases for office space, drilling rig commitments, surface use agreements, compressor services and other leases. The leases have remaining terms ranging from two months to 26.3 years, including options to extend leases that the Company is reasonably certain to exercise. During the nine months ended September 30, 2019, the Company recognized operating lease cost and variable lease cost of $9.0 million and $3.7 million, respectively.
Short-term leases. The Company leases drilling rigs, fracturing and other equipment under lease terms ranging from 30 days to one year. Lease cost of $224.0 million was recognized on short-term leases during the nine months ended September 30, 2019. Certain lease costs are capitalized and included in Properties and equipment, net in the Condensed Consolidated Balance Sheet because they relate to drilling and completion activities, while other costs are expensed because they relate to production and administrative activities.
As of September 30, 2019, the Company’s future undiscounted minimum cash payment obligations for its operating lease liabilities are as follows:
|
|
|
|
|
|
(In thousands)
|
|
Year Ending December 31,
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
2,419
|
|
2020
|
|
4,819
|
|
2021
|
|
4,755
|
|
2022
|
|
4,577
|
|
2023
|
|
4,613
|
|
Thereafter
|
|
29,824
|
|
Total undiscounted lease payments
|
|
51,007
|
|
Present value adjustment
|
|
(13,401
|
)
|
Net operating lease liabilities
|
|
$
|
37,606
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,149
|
|
|
$
|
3,395
|
|
Investing cash flows from operating leases
|
|
$
|
1,831
|
|
|
$
|
5,433
|
|
Information regarding the weighted-average remaining lease term and the weighted-average discount rate for operating leases is summarized below:
|
|
|
|
|
|
|
September 30, 2019
|
Weighted-average remaining lease term (in years)
|
|
|
Operating leases
|
|
11.9
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
5.0
|
%
|
Legal Matters
The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.
Contingency Reserves. When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters for which reserves have been established. The Company believes that any
such amount above the amounts accrued would not be material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.
9. Revenue Recognition
Disaggregation of Revenue
The following table presents revenues disaggregated by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
Natural gas
|
|
$
|
418,133
|
|
|
$
|
440,835
|
|
|
$
|
1,521,789
|
|
|
$
|
1,217,603
|
|
Crude oil and condensate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,722
|
|
Brokered natural gas
|
|
—
|
|
|
105,849
|
|
|
—
|
|
|
203,375
|
|
Other
|
|
(82
|
)
|
|
2,026
|
|
|
154
|
|
|
3,775
|
|
Total revenue from contracts with customers
|
|
418,051
|
|
|
548,710
|
|
|
1,521,943
|
|
|
1,473,475
|
|
Gain (loss) on derivative instruments
|
|
11,060
|
|
|
(3,537
|
)
|
|
82,966
|
|
|
(1,628
|
)
|
|
|
$
|
429,111
|
|
|
$
|
545,173
|
|
|
$
|
1,604,909
|
|
|
$
|
1,471,847
|
|
All of the Company’s revenues from contracts with customers represent products transferred at a point in time as control is transferred to the customer and generated in the United States of America.
Transaction Price Allocated to Remaining Performance Obligations
A significant number of the Company’s product sales contracts are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
As of September 30, 2019, the Company has $9.7 billion of unsatisfied performance obligations related to natural gas sales that have a fixed pricing component and a contract term greater than one year. The Company expects to recognize these obligations over periods ranging from four to 19 years.
Contract Balances
Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $159.2 million and $363.0 million as of September 30, 2019 and December 31, 2018, respectively, and are reported in accounts receivable, net on the Condensed Consolidated Balance Sheet. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront payments or rights to deficiency payments.
10. Capital Stock
Treasury Stock
In July 2019, the Board of Directors authorized an increase of 25.0 million shares to the Company’s share repurchase program. During the first nine months of 2019, the Company repurchased 15.5 million shares for a total cost of $316.1 million. As of September 30, 2019, 21.0 million shares were available for repurchase under the share repurchase program.
Dividends
In April 2019, the Board of Directors approved an increase in the quarterly dividend on the Company's common stock from $0.07 per share to $0.09 per share. In October 2019, the Board of Directors approved an additional increase in the quarterly dividend on the Company's common stock from $0.09 per share to $0.10 per share.
11. Stock-based Compensation
General
The Company grants certain stock-based compensation awards, including restricted stock awards, restricted stock units and performance share awards. Stock-based compensation expense associated with these awards was $2.1 million and $6.5 million in the third quarter of 2019 and 2018, respectively, and $24.0 million and $17.6 million during the first nine months of
2019 and 2018, respectively. Stock-based compensation expense is included in general and administrative expense in the Condensed Consolidated Statement of Operations.
For the first nine months of 2019, the Company recorded a decrease to tax expense of $0.9 million as a result of federal and state tax deductions exceeding the book compensation expense for employee stock-based compensation awards that vested during the period. For the first nine months of 2018, the Company recorded an increase to tax expense of $0.3 million as a result of book compensation expense exceeding the federal and state tax deductions for employee stock-based compensation awards that vested during the period.
Refer to Note 13 of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.
Restricted Stock Units
During the first nine months of 2019, 80,675 restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date value of $24.96 per unit. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.
Performance Share Awards
The performance period for the awards granted during the first nine months of 2019 commenced on January 1, 2019 and ends on December 31, 2021. The Company used an annual forfeiture rate assumption ranging from zero percent to seven percent for purposes of recognizing stock-based compensation expense for its performance share awards.
Performance Share Awards Based on Internal Performance Metrics
The fair value of performance share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to 100 percent of the award in shares of common stock. Based on the Company’s probability assessment at September 30, 2019, it is considered probable that the criteria for all performance awards based on internal metrics awards will be met.
Employee Performance Share Awards. During the first nine months of 2019, 526,730 Employee Performance Share Awards were granted at a grant date value of $24.95 per share. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a three-year performance period.
Hybrid Performance Share Awards. During the first nine months of 2019, 315,029 Hybrid Performance Share Awards were granted at a grant date value of $24.95 per share. The 2019 awards vest 25 percent on each of the first and second anniversary dates and 50 percent on the third anniversary, provided that the Company has $100 million or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.
Performance Share Awards Based on Market Conditions
These awards have both an equity and liability component, with the right to receive up to the first 100 percent of the award in shares of common stock and the right to receive up to an additional 100 percent of the value of the award in excess of the equity component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.
TSR Performance Share Awards. During the first nine months of 2019, 536,673 TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a three-year performance period.
The following assumptions were used to determine the grant date fair value of the equity component (February 19, 2019) and the period-end fair value of the liability component of the TSR Performance Share Awards:
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
September 30, 2019
|
Fair value per performance share award
|
|
$
|
20.63
|
|
|
$7.92-$16.23
|
Assumptions:
|
|
|
|
|
|
Stock price volatility
|
|
31.3
|
%
|
|
29.0%-37.1%
|
Risk free rate of return
|
|
2.46
|
%
|
|
1.61%-1.87%
|
12. Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted-average shares - basic
|
|
412,456
|
|
|
440,772
|
|
|
419,199
|
|
|
450,445
|
|
Dilution effect of stock awards at end of period
|
|
2,006
|
|
|
2,338
|
|
|
1,902
|
|
|
1,868
|
|
Weighted-average shares - diluted
|
|
414,462
|
|
|
443,110
|
|
|
421,101
|
|
|
452,313
|
|
The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted-average stock awards excluded from diluted EPS due to the anti-dilutive effect calculated using the treasury stock method
|
|
484
|
|
|
1
|
|
|
633
|
|
|
1
|
|
13. Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30,
2019
|
|
December 31,
2018
|
Accounts receivable, net
|
|
|
|
|
|
|
Trade accounts
|
|
$
|
159,167
|
|
|
$
|
362,973
|
|
Joint interest accounts
|
|
393
|
|
|
101
|
|
Other accounts
|
|
863
|
|
|
567
|
|
|
|
160,423
|
|
|
363,641
|
|
Allowance for doubtful accounts
|
|
(1,184
|
)
|
|
(1,238
|
)
|
|
|
$
|
159,239
|
|
|
$
|
362,403
|
|
Other assets
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
17,080
|
|
|
$
|
14,699
|
|
Debt issuance costs
|
|
9,450
|
|
|
4,572
|
|
Income taxes receivable
|
|
—
|
|
|
8,165
|
|
Operating lease right-of-use assets
|
|
37,715
|
|
|
—
|
|
Other accounts
|
|
74
|
|
|
61
|
|
|
|
$
|
64,319
|
|
|
$
|
27,497
|
|
Accounts payable
|
|
|
|
|
|
|
Trade accounts
|
|
$
|
29,157
|
|
|
$
|
30,033
|
|
Royalty and other owners
|
|
30,242
|
|
|
61,507
|
|
Accrued transportation
|
|
50,795
|
|
|
50,540
|
|
Accrued capital costs
|
|
44,643
|
|
|
43,207
|
|
Taxes other than income
|
|
13,105
|
|
|
19,824
|
|
Income taxes payable
|
|
—
|
|
|
1,134
|
|
Other accounts
|
|
4,790
|
|
|
35,694
|
|
|
|
$
|
172,732
|
|
|
$
|
241,939
|
|
Accrued liabilities
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
18,411
|
|
|
$
|
21,761
|
|
Taxes other than income
|
|
3,660
|
|
|
1,472
|
|
Operating lease liabilities
|
|
4,280
|
|
|
—
|
|
Asset retirement obligations
|
|
500
|
|
|
1,000
|
|
Other accounts
|
|
929
|
|
|
994
|
|
|
|
$
|
27,780
|
|
|
$
|
25,227
|
|
Other liabilities
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
25,791
|
|
|
$
|
25,780
|
|
Operating lease liabilities
|
|
33,326
|
|
|
—
|
|
Other accounts
|
|
8,529
|
|
|
34,391
|
|
|
|
$
|
67,646
|
|
|
$
|
60,171
|
|