ITEM 1. Financial Statements
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
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 region of the United States. Our objective is to build stockholder value through returns-focused development of natural gas and oil properties. 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 consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the results for the periods reported. 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.
These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2020. The results of operations for the first quarter ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
(3) NEW ACCOUNTING STANDARDS
Not Yet Adopted
None that are expected to have a material impact on our financial statements.
Recently Adopted
Financial Instruments – Credit Losses
In June 2016, an accounting standards update was issued that changes the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. The standards update requires the use of a forward-looking “expected loss” model as opposed to the current “incurred loss” model. This new standards update was effective for us in first quarter 2020. The adoption of this standards update did not have a material impact on our financial statements.
Fair Value Measurement
In August 2018, an accounting standards update was issued which provides additional disclosure requirements for fair value measurements. This new standards update eliminates the requirement to disclose transfers between Level 1 and Level 2 of the fair value hierarchy and provides for additional disclosures for Level 3 fair value measurements. This new standards update was effective for us in first quarter 2020. The adoption of this standards update did not have a material impact on our financial statements.
Lease Accounting Standard
In February 2016, an accounting standards update was issued that requires an entity to recognize a right-of-use (“ROU”) asset and lease liability for all leases. Classification of leases as either a finance or operating lease determines the recognition, measurement and presentation of expenses. This accounting standards update also required certain quantitative and qualitative disclosures about leasing arrangements. The new standard was effective for us in first quarter 2019 and we adopted the new standard using a modified retrospective approach, with the date of initial application effective on January 1, 2019. Consequently, upon transition, we recognized a ROU asset (or operating lease right-of-use asset) and a lease liability with no retained earnings impact. Our adoption did not have a material impact on our consolidated balance sheet as of January 1, 2019, with the primary impact relating to the recognition of ROU assets and operating lease liabilities for operating leases which represents approximately a 1% change to total assets and total liabilities.
(4) DISPOSITIONS
9
We recognized a pretax net gain of $122.1 million on the sale of assets in first quarter 2020 compared to a pretax net loss of $189,000 in first quarter 2019. See discussion below for further details.
2020 Dispositions
Pennsylvania. In first quarter 2020, we completed the sale of our shallow legacy assets in Northwest Pennsylvania for proceeds of $1.0 million. Based upon the receipt of approval from state governmental authorities of a change in operatorship during the quarter, we recognized a pretax gain of $122.7 million primarily due to the elimination of the asset retirement obligation associated with these properties.
Other. In first quarter 2020, we sold miscellaneous inventory and other assets for proceeds of $59,000, resulting in a pretax loss of $617,000.
2019 Dispositions
Other. In first quarter 2019, we sold miscellaneous inventory and other assets for proceeds of $332,000 resulting in a pretax loss of $189,000.
(5) REVENUES FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
We have three material revenue streams in our business: natural gas sales, NGLs sales and crude oil and condensate sales (referred to below as “oil sales”). Brokered revenue attributable to each product sales type is included here because the volume of product that we purchase is subsequently sold to separate counterparties in accordance with existing sales contracts under which we also sell our production. Accounts receivable attributable to our revenue contracts with customers was $142.4 million at March 31, 2020 and $237.0 million at December 31, 2019. Revenue attributable to each of our identified revenue streams is disaggregated below (in thousands):
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Natural gas sales
|
$
|
253,249
|
|
|
$
|
434,720
|
|
|
NGLs sales
|
|
143,239
|
|
|
|
197,813
|
|
|
Oil sales
|
|
35,608
|
|
|
|
39,121
|
|
|
Total natural gas, NGLs and oil sales
|
|
432,096
|
|
|
|
671,654
|
|
|
Sales of purchased natural gas
|
|
24,875
|
|
|
|
134,801
|
|
|
Sales of purchased NGLs
|
|
1,140
|
|
|
|
424
|
|
|
Other marketing revenue
|
|
2,634
|
|
|
|
2,989
|
|
|
Total
|
$
|
460,745
|
|
|
$
|
809,868
|
|
|
(6) INCOME TAXES
We evaluate and update our annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of our actual earnings compared to annual projections, our effective tax rate may vary quarterly and may make comparisons not meaningful. Income tax expense was as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Income tax expense
|
$
|
50,218
|
|
|
$
|
5,688
|
|
|
Effective tax rate
|
|
25.7
|
%
|
|
|
80.0
|
%
|
|
10
Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For the three months ended March 31, 2020 and 2019, our overall effective tax rate was different than the federal statutory rate due primarily to state income taxes (including adjustments to state income tax valuation allowances), equity compensation and other tax items which are detailed below (in thousands).
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
Total income before income taxes
|
$
|
195,193
|
|
|
$
|
7,107
|
|
|
|
U.S. federal statutory rate
|
|
21
|
%
|
|
|
21
|
%
|
|
|
Total tax expense at statutory rate
|
|
40,991
|
|
|
|
1,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
|
5,803
|
|
|
|
818
|
|
|
|
Equity compensation
|
|
3,843
|
|
|
|
3,391
|
|
|
|
Change in valuation allowances:
|
|
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards
|
|
(1,313
|
)
|
|
|
—
|
|
|
|
State net operating loss carryforwards and other
|
|
2,800
|
|
|
|
352
|
|
|
|
Other
|
|
(537
|
)
|
|
|
231
|
|
|
|
Permanent differences and other
|
|
(1,369
|
)
|
|
|
(596
|
)
|
|
|
Total expense for income taxes
|
$
|
50,218
|
|
|
$
|
5,688
|
|
|
|
Effective tax rate
|
|
25.7
|
%
|
|
|
80.0
|
%
|
|
|
(7) INCOME (LOSS) PER COMMON SHARE
Basic income or loss per share attributable to common shareholders is computed as (1) income or loss attributable to common shareholders (2) less income allocable to participating securities (3) divided by weighted average basic shares outstanding. Diluted income or loss per share attributable to common shareholders is computed as (1) basic income or loss attributable to common shareholders (2) plus diluted adjustments to income allocable to participating securities (3) divided by weighted average diluted shares outstanding. The following sets 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
March 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Net income, as reported
|
$
|
144,975
|
|
|
$
|
1,419
|
|
|
Participating earnings (a)
|
|
(1,855
|
)
|
|
|
(14
|
)
|
|
Basic net income attributed to common shareholders
|
|
143,120
|
|
|
|
1,405
|
|
|
Reallocation of participating earnings (a)
|
|
11
|
|
|
|
—
|
|
|
Diluted net income attributed to common shareholders
|
$
|
143,131
|
|
|
$
|
1,405
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.58
|
|
|
$
|
0.01
|
|
|
Diluted
|
$
|
0.58
|
|
|
$
|
0.01
|
|
|
(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 provides a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Weighted average common shares outstanding – basic
|
|
246,218
|
|
|
|
247,776
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Director and employee restricted stock and performance based equity awards
|
|
1,466
|
|
|
|
1,378
|
|
Weighted average common shares outstanding – diluted
|
|
247,684
|
|
|
|
249,154
|
|
11
Weighted average common shares outstanding-basic for first quarter 2020 excludes 3.2 million shares of restricted stock held in our deferred compensation plan compared to 2.5 million shares in first quarter 2019 (although all awards are issued and outstanding upon grant). For first quarter 2020, equity grants of 2.5 million, compared to equity grants of 1.6 million for first quarter 2019, were outstanding but not included in the computation of diluted net income per share because the grant prices were greater than the average market price of our common shares and would be anti-dilutive to the computation. Nonvested restricted stock and performance based equity awards are included in the computation using the treasury stock method with the deemed proceeds equal to the average unrecognized compensation during the period.
(8) Capitalized Costs and Accumulated Depreciation, Depletion and Amortization (a)
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Natural gas and oil properties:
|
|
|
|
|
|
|
|
|
Properties subject to depletion
|
|
$
|
9,395,279
|
|
|
$
|
9,345,557
|
|
Unproved properties
|
|
|
866,635
|
|
|
|
868,180
|
|
Total
|
|
|
10,261,914
|
|
|
|
10,213,737
|
|
Accumulated depletion and depreciation
|
|
|
(4,271,947
|
)
|
|
|
(4,172,702
|
)
|
Net capitalized costs
|
|
$
|
5,989,967
|
|
|
$
|
6,041,035
|
|
(a)
|
Includes capitalized asset retirement costs and the associated accumulated amortization.
|
(9) INDEBTEDNESS
We had the following debt outstanding as of the dates shown below (bank debt interest rate at March 31, 2020 is shown parenthetically). No interest was capitalized during the three months ended March 31, 2020 or the year ended December 31, 2019 (in thousands).
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
|
|
December 31,
2019
|
|
Bank debt (3.0%)
|
$
|
557,000
|
|
|
$
|
477,000
|
|
Senior notes:
|
|
|
|
|
|
|
|
4.875% senior notes due 2025
|
|
750,000
|
|
|
|
750,000
|
|
5.00% senior notes due 2023
|
|
684,886
|
|
|
|
741,531
|
|
5.00% senior notes due 2022
|
|
463,431
|
|
|
|
511,886
|
|
5.75% senior notes due 2021
|
|
50,059
|
|
|
|
374,139
|
|
5.875% senior notes due 2022
|
|
115,865
|
|
|
|
297,617
|
|
9.25% senior notes due 2026
|
|
550,000
|
|
|
|
—
|
|
Other senior notes due 2022
|
|
490
|
|
|
|
590
|
|
Total senior notes
|
|
2,614,731
|
|
|
|
2,675,763
|
|
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
|
|
3,220,711
|
|
|
|
3,201,743
|
|
Unamortized premium
|
|
1,305
|
|
|
|
3,013
|
|
Unamortized debt issuance costs
|
|
(34,987
|
)
|
|
|
(31,819
|
)
|
Total debt net of debt issuance costs
|
$
|
3,187,029
|
|
|
$
|
3,172,937
|
|
Bank Debt
In April 2018, 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 April 13, 2023. The bank credit facility provides for a maximum facility amount of $4.0 billion and an initial borrowing base of $3.0 billion. The bank credit facility also provides for a borrowing base subject to periodic redeterminations and for event-driven unscheduled redeterminations. As of March 31, 2020, our bank group was composed of twenty-seven financial institutions with no one bank holding more than 7.0% 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.
12
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 3.1% for first quarter 2020 compared to 4.0% for first quarter 2019. A commitment fee is paid on the undrawn balance based on an annual rate of 0.30% to 0.375%. At March 31, 2020, the commitment fee was 0.30% and the interest rate margin was 2.00% on our LIBOR loans and 1.0% on our base rate loans.
As part of our redetermination completed on March 27, 2020, our borrowing base was reaffirmed for $3.0 billion and our bank commitment was also reaffirmed at $2.4 billion. Effective on that date, we also agreed to return to a semi-annual borrowing base redetermination with the next scheduled redetermination to occur by November 2020, an increase in the applicable margin of 50 basis points on drawn facility balances and an increase to the letter of credit sublimit. On March 31, 2020, bank commitments totaled $2.4 billion and the outstanding balance under our bank credit facility was $557.0 million, before deducting debt issuance costs. Additionally, we had $333.0 million of undrawn letters of credit leaving $1.5 billion of committed borrowing capacity available under the facility.
New Senior Notes
In January 2020, we issued $550.0 million aggregate principal amount of 9.25% senior notes due 2026 (the “9.25% Notes”) for an estimated net proceeds of $541.6 million after underwriting expenses and commissions of $8.4 million. The notes were issued at par. The 9.25% 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 of the Securities Act of 1933, as amended (the “Securities Act”). Interest due on the 9.25% Notes is payable semi-annually in February and August and is unconditionally guaranteed on a senior unsecured basis by all of our subsidiary guarantors. On or after February 1, 2025, we may redeem the 9.25% Notes, in whole or in part and from time to time, at 100% of the principal amounts plus accrued and unpaid interest. We may redeem the notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indenture governing the 9.25% Notes. Upon occurrence of certain changes in control, we must offer to repurchase the 9.25% Notes. The 9.25% Notes are unsecured and are subordinated to all of our existing and future secured debt, rank equally with all of our existing and future unsecured debt and rank senior to all of our existing and future subordinated debt. On the closing of the issuance of the 9.25% Notes, we used the proceeds to redeem $324.1 million of our 5.75% senior notes due 2021 and $175.9 million of our 5.875% senior notes due 2022 with the remainder used to repay a portion of our borrowings under our bank credit facility.
Early Extinguishment of Debt
In January 2020, we purchased for cash $500.0 million aggregate principal amount of our 5.75% senior notes due 2021 and our 5.875% senior notes due 2022. An early cash tender of $15.1 million was paid to note holders who tendered their notes within the ten business day early offer period. We recorded a loss on early extinguishment of debt in first quarter 2020 of $17.5 million, net of transaction call premium costs and the expenses of the remaining deferred financing costs on the repurchased debt. The cash tender offer and early cash tender premium were financed from the issuance of our new 9.25% Notes. See New Senior Notes above.
In first quarter 2020, we also purchased in the open market $48.5 million principal amount of our 5.00% senior notes due 2022, $5.8 million principal amount of our 5.875% senior notes due 2022 and $56.6 million principal amount of our 5.00% senior notes due 2023. We recognized a gain on early extinguishment of debt in first quarter 2020 of $30.4 million, net of transaction costs and the expensing of the remaining deferred financing costs on the repurchased debt.
Senior Notes and Senior Subordinated Notes
If we experience a change of control, noteholders may require us to repurchase all or a portion of our senior notes and 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 to existing and future senior debt that we or our subsidiary guarantors are permitted to incur.
13
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 bank credit facility 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 March 31, 2020.
(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 three months ended March 31, 2020 and the year ended December 31, 2019 is as follows (in thousands):
|
|
Three Months
Ended
March 31,
2020
|
|
|
Year
Ended
December 31,
2019
|
|
Beginning of period
|
|
$
|
251,076
|
|
|
$
|
312,754
|
|
Liabilities incurred
|
|
|
651
|
|
|
|
4,063
|
|
Acquisitions
|
|
|
102
|
|
|
|
—
|
|
Liabilities settled
|
|
|
(729
|
)
|
|
|
(5,953
|
)
|
Disposition of wells (a)
|
|
|
(126,117
|
)
|
|
|
(82,576
|
)
|
Accretion expense
|
|
|
2,800
|
|
|
|
15,658
|
|
Change in estimate
|
|
|
497
|
|
|
|
7,130
|
|
End of period
|
|
|
128,280
|
|
|
|
251,076
|
|
Less current portion
|
|
|
(2,393
|
)
|
|
|
(2,393
|
)
|
Long-term asset retirement obligations
|
|
$
|
125,887
|
|
|
$
|
248,683
|
|
(a) The three months ended March 31, 2020 primarily represents the completion of the sale of our shallow legacy assets in Northwest Pennsylvania.
Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying consolidated statements of operations.
14
(11) DERIVATIVE ACTIVITIES
We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We utilize commodity swaps, collars, three-way collars, calls or swaptions to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. The fair value of our derivative contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”) for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net gain of $256.0 million at March 31, 2020. These contracts expire monthly through December 2021. The following table sets forth our commodity-based derivative volumes by year as of March 31, 2020, excluding our basis and freight swaps which are discussed separately below:
Period
|
|
Contract Type
|
|
Volume Hedged
|
|
Weighted Average Hedge Price
|
|
|
|
|
|
|
Swap
|
|
Sold Put
|
|
Floor
|
|
Ceiling
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Swaps
|
|
1,155,600 Mmbtu/day
|
|
$
|
2.57 (1)
|
|
|
|
|
|
|
2021
|
|
Swaps
|
|
50,000 Mmbtu/day
|
|
$
|
2.62 (1)
|
|
|
|
|
|
|
April – June 2020
|
|
Calls
|
|
40,000 Mmbtu/day
|
|
$
|
2.30
|
|
|
|
|
|
|
April – October 2020
|
|
Three-way Collars
|
|
20,000 Mmbtu/day
|
|
|
|
|
$ 1.75
|
|
$ 2.00
|
|
$ 2.50
|
2021
|
|
Three-way Collars
|
|
240,000 Mmbtu/day
|
|
|
|
|
$ 1.99
|
|
$ 2.31
|
|
$ 2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Swaps
|
|
7,331 bbls/day
|
|
$
|
58.22 (1)
|
|
|
|
|
|
|
2021
|
|
Swaps
|
|
1,000 bbls/day
|
|
$
|
55.00 (1)
|
|
|
|
|
|
|
April – September 2020
|
|
Calls
|
|
500 bbls/day
|
|
$
|
59.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGLs (C3-Propane)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April – June 2020
|
|
Swaps
|
|
8,242 bbls/day
|
|
$
|
0.63/gallon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGLs (NC4-Normal Butane)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April – September 2020
|
|
Swaps
|
|
2,913 bbls/day
|
|
$
|
0.57/gallon
|
|
|
|
|
|
|
April – September 2020
|
|
Calls
|
|
2,251 bbls/day
|
|
$
|
0.57/gallon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGLs (iC4-Isobutane)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2020
|
|
Swaps
|
|
2,000 bbls/day
|
|
$
|
0.64/gallon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NGLs (C5-Natural Gasoline)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2020
|
|
Swaps
|
|
1,500 bbls/day
|
|
$
|
1.21/gallon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We also sold natural gas call swaptions of 120,000 Mmbtu/day for July – December 2020 at a weighted average price of $2.51 and 100,000 Mmbtu/day for 2021 at a weighted average price of $2.69. In addition, we sold oil call swaptions of 3,000 bbls per day for 2021 at a weighted average price of $56.50.
|
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.
Basis Swap Contracts
In addition to the swaps, collars, calls and swaptions described above, at March 31, 2020, we had natural gas basis swap contracts which lock in the differential between NYMEX Henry Hub and certain of our physical pricing indices. These contracts settle monthly through December 2021, monthly in 2023 and 2024 and include a total volume of 125,180,000 Mmbtu. The fair value of these contracts was a gain of $4.8 million at March 31, 2020.
At March 31, 2020, we also had propane spread swap contracts which lock in the differential between Mont Belvieu and international propane indices. The contracts settle monthly in 2020 and include a total volume of 1,500,000 barrels. The fair value of these contracts was a gain of $651,000 at March 31, 2020.
15
Freight Swap Contracts
In connection with our international propane sales, we utilize propane swaps. To further hedge our propane price, at March 31, 2020, we had freight swap contracts on the Baltic Exchange which lock in the freight rate for a specific trade route. These contracts settle monthly through December 2021 with the fair value of these contracts equal to a loss of $4.7 million at March 31, 2020.
Derivative Assets and Liabilities
The combined fair value of derivatives included in the accompanying consolidated balance sheets as of March 31, 2020 and December 31, 2019 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):
|
|
|
March 31, 2020
|
|
|
|
|
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
|
|
$
|
192,244
|
|
|
$
|
(448
|
)
|
|
$
|
191,796
|
|
|
–swaptions
|
|
|
—
|
|
|
|
(3,719
|
)
|
|
|
(3,719
|
)
|
|
–calls
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
–three-way collars
|
|
|
1,914
|
|
|
|
(8,612
|
)
|
|
|
(6,698
|
)
|
|
–basis swaps
|
|
|
5,597
|
|
|
|
(436
|
)
|
|
|
5,161
|
|
Crude oil
|
–swaps
|
|
|
67,765
|
|
|
|
(4,024
|
)
|
|
|
63,741
|
|
|
–swaptions
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
–calls
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
NGLs
|
–C3 propane spread swaps
|
|
|
23,039
|
|
|
|
(22,388
|
)
|
|
|
651
|
|
|
–C3 propane swaps
|
|
|
8,753
|
|
|
|
—
|
|
|
|
8,753
|
|
|
–iC4 iso butane swaps
|
|
|
673
|
|
|
|
—
|
|
|
|
673
|
|
|
–NC4 normal butane swaps
|
|
|
5,046
|
|
|
|
—
|
|
|
|
5,046
|
|
|
–NC4 normal butane calls
|
|
|
—
|
|
|
|
(44
|
)
|
|
|
(44
|
)
|
|
−C5 natural gasoline swaps
|
|
|
1,589
|
|
|
|
—
|
|
|
|
1,589
|
|
Freight
|
−swaps
|
|
|
—
|
|
|
|
(3,354
|
)
|
|
|
(3,354
|
)
|
|
|
|
$
|
306,620
|
|
|
$
|
(43,065
|
)
|
|
$
|
263,555
|
|
|
|
|
March 31, 2020
|
|
|
|
|
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
|
|
$
|
(448
|
)
|
|
$
|
448
|
|
|
$
|
—
|
|
|
–swaptions
|
|
|
(4,171
|
)
|
|
|
3,719
|
|
|
|
(452
|
)
|
|
–calls
|
|
|
(23
|
)
|
|
|
23
|
|
|
|
—
|
|
|
–three-way collars
|
|
|
(13,276
|
)
|
|
|
8,612
|
|
|
|
(4,664
|
)
|
|
–basis swaps
|
|
|
(777
|
)
|
|
|
436
|
|
|
|
(341
|
)
|
Crude oil
|
–swaps
|
|
|
(4,024
|
)
|
|
|
4,024
|
|
|
|
—
|
|
|
–swaptions
|
|
|
(11
|
)
|
|
|
11
|
|
|
|
—
|
|
|
–calls
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
—
|
|
NGLs
|
–C3 propane spread swaps
|
|
|
(22,388
|
)
|
|
|
22,388
|
|
|
|
—
|
|
|
–NC4 normal butane calls
|
|
|
(44
|
)
|
|
|
44
|
|
|
|
—
|
|
Freight
|
–swaps
|
|
|
(4,720
|
)
|
|
|
3,354
|
|
|
|
(1,366
|
)
|
|
|
|
$
|
(49,888
|
)
|
|
$
|
43,065
|
|
|
$
|
(6,823
|
)
|
16
|
|
|
December 31, 2019
|
|
|
|
|
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
|
|
$
|
134,364
|
|
|
$
|
(2,913
|
)
|
|
$
|
131,451
|
|
|
–swaptions
|
|
|
—
|
|
|
|
(1,325
|
)
|
|
|
(1,325
|
)
|
|
–basis swaps
|
|
|
10,766
|
|
|
|
(1,092
|
)
|
|
|
9,674
|
|
Crude oil
|
–swaps
|
|
|
3,893
|
|
|
|
(4,794
|
)
|
|
|
(901
|
)
|
|
–swaptions
|
|
|
—
|
|
|
|
(1,597
|
)
|
|
|
(1,597
|
)
|
|
–calls
|
|
|
—
|
|
|
|
(349
|
)
|
|
|
(349
|
)
|
NGLs
|
–C3 propane spread swaps
|
|
|
1,913
|
|
|
|
(1,913
|
)
|
|
|
—
|
|
|
–NC4 butane swaps
|
|
|
167
|
|
|
|
—
|
|
|
|
167
|
|
|
–C5 natural gasoline swaps
|
|
|
60
|
|
|
|
(127
|
)
|
|
|
(67
|
)
|
Freight
|
–swaps
|
|
|
1,529
|
|
|
|
(1,028
|
)
|
|
|
501
|
|
|
|
|
$
|
152,692
|
|
|
$
|
(15,138
|
)
|
|
$
|
137,554
|
|
|
|
|
December 31, 2019
|
|
|
|
|
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
|
|
$
|
(1,657
|
)
|
|
$
|
2,913
|
|
|
$
|
1,256
|
|
|
–swaptions
|
|
|
(2,594
|
)
|
|
|
1,325
|
|
|
|
(1,269
|
)
|
|
–basis swaps
|
|
|
(1,371
|
)
|
|
|
1,092
|
|
|
|
(279
|
)
|
Crude oil
|
–swaps
|
|
|
(4,814
|
)
|
|
|
4,794
|
|
|
|
(20
|
)
|
|
–swaptions
|
|
|
(2,254
|
)
|
|
|
1,597
|
|
|
|
(657
|
)
|
|
–calls
|
|
|
(349
|
)
|
|
|
349
|
|
|
|
—
|
|
NGLs
|
–C3 propane spread swaps
|
|
|
(16,040
|
)
|
|
|
1,913
|
|
|
|
(14,127
|
)
|
|
–C5 natural gasoline swaps
|
|
|
(127
|
)
|
|
|
127
|
|
|
|
—
|
|
Freight
|
–swaps
|
|
|
—
|
|
|
|
1,028
|
|
|
|
1,028
|
|
|
|
|
$
|
(29,206
|
)
|
|
$
|
15,138
|
|
|
$
|
(14,068
|
)
|
The effects of our derivatives on our consolidated statements of operations are summarized below (in thousands):
|
|
|
|
Derivative Fair Value Income (Loss)
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Commodity swaps
|
$
|
228,354
|
|
|
$
|
(57,418
|
)
|
|
Swaptions
|
|
666
|
|
|
|
(3,291
|
)
|
|
Three-way collars
|
|
(11,362
|
)
|
|
|
—
|
|
|
Collars
|
|
—
|
|
|
|
(4,524
|
)
|
|
Calls
|
|
275
|
|
|
|
—
|
|
|
Basis swaps
|
|
21,343
|
|
|
|
3,415
|
|
|
Freight swaps
|
|
(6,101
|
)
|
|
|
87
|
|
|
Total
|
$
|
233,175
|
|
|
$
|
(61,731
|
)
|
|
17
(12) 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 does 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; and
|
|
•
|
recorded value of derivative instruments and trading securities.
|
The need to test long-lived assets can be based on several indicators, including a significant reduction in prices of natural gas, oil and condensate, NGLs, 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.
18
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 March 31, 2020 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
March 31,
2020
|
|
|
Trading securities held in the deferred compensation plans
|
$
|
51,457
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity price derivatives –swaps
|
|
—
|
|
|
|
271,598
|
|
|
|
—
|
|
|
|
271,598
|
|
–three-way collars
|
|
—
|
|
|
|
(11,362
|
)
|
|
|
—
|
|
|
|
(11,362
|
)
|
–calls
|
|
—
|
|
|
|
(29
|
)
|
|
|
(44
|
)
|
|
|
(73
|
)
|
–basis swaps
|
|
—
|
|
|
|
5,471
|
|
|
|
—
|
|
|
|
5,471
|
|
–swaptions
|
|
—
|
|
|
|
—
|
|
|
|
(4,182
|
)
|
|
|
(4,182
|
)
|
Derivatives–freight swaps
|
|
—
|
|
|
|
(4,720
|
)
|
|
|
—
|
|
|
|
(4,720
|
)
|
|
Fair Value Measurements at December 31, 2019 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,
2019
|
|
Trading securities held in the deferred compensation plans
|
$
|
62,009
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,009
|
|
Commodity price derivatives –swaps
|
|
—
|
|
|
|
131,886
|
|
|
|
—
|
|
|
|
131,886
|
|
–calls
|
|
—
|
|
|
|
(349
|
)
|
|
|
—
|
|
|
|
(349
|
)
|
–basis swaps
|
|
—
|
|
|
|
(4,732
|
)
|
|
|
—
|
|
|
|
(4,732
|
)
|
–swaptions
|
|
—
|
|
|
|
—
|
|
|
|
(4,848
|
)
|
|
|
(4,848
|
)
|
Derivatives–freight swaps
|
|
—
|
|
|
|
1,529
|
|
|
|
—
|
|
|
|
1,529
|
|
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 March 31, 2020, 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
March 31,
2020
|
|
Balance at December 31, 2019
|
|
$
|
(4,848
|
)
|
Total gains:
|
|
|
|
|
Included in earnings
|
|
|
132
|
|
Settlements, net
|
|
|
490
|
|
Balance at March 31, 2020
|
|
$
|
(4,226
|
)
|
19
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 first quarter 2020, interest and dividends were $148,000 and the mark-to-market adjustment was a loss of $10.5 million compared to interest and dividends of $179,000 and a mark-to-market gain of $5.1 million in first quarter 2019.
Fair Values – Non-recurring
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. 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. As a result of such a proved property review in fourth quarter 2019, we recorded noncash impairment charges to reduce the carrying value of our North Louisiana assets. We calculated the fair value of these assets using a discounted cash flow model which uses Level 3 inputs. There were no proved property impairment charges in first quarter 2019. The following table presents the value of these assets measured at fair value on a nonrecurring basis at the time impairment was recorded (in thousands):
|
|
Year Ended December 31, 2019
|
|
|
|
|
Fair Value
|
|
|
|
Impairment
|
|
|
North Louisiana
|
|
$ 370,500
|
|
|
|
$ 1,093,531
|
|
|
|
|
|
|
|
|
|
|
|
In first quarter 2020, we recognized additional impairment charges of $77.0 million that reduced the carrying value to the anticipated sales proceeds for these North Louisiana assets which is a market approach using Level 2 inputs. We have a gas processing agreement that extends through 2030 in North Louisiana where we must pay a quarterly deficiency payment if the minimum volume commitment is not met. In the event these properties are sold in the future and any or all of these charges are retained by us, at that time we would recognize and accrue these future divestiture-related charges, which could be significant. In first quarter 2020, our deficiency charges were approximately $17.0 million and are included in transportation, gathering and processing expense in the accompanying consolidated statement of operations.
Fair Values – Reported
The following presents the carrying amounts and the fair values of our financial instruments as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps, options and basis swaps
|
|
$
|
263,555
|
|
|
$
|
263,555
|
|
|
$
|
137,554
|
|
|
$
|
137,554
|
|
Marketable securities (a)
|
|
|
51,457
|
|
|
|
51,457
|
|
|
|
62,009
|
|
|
|
62,009
|
|
(Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps, options and basis swaps
|
|
|
(6,823
|
)
|
|
|
(6,823
|
)
|
|
|
(14,068
|
)
|
|
|
(14,068
|
)
|
Bank credit facility (b)
|
|
|
(557,000
|
)
|
|
|
(557,000
|
)
|
|
|
(477,000
|
)
|
|
|
(477,000
|
)
|
5.75% senior notes due 2021 (b)
|
|
|
(50,059
|
)
|
|
|
(42,179
|
)
|
|
|
(374,139
|
)
|
|
|
(375,909
|
)
|
5.00% senior notes due 2022 (b)
|
|
|
(463,431
|
)
|
|
|
(347,448
|
)
|
|
|
(511,886
|
)
|
|
|
(501,582
|
)
|
5.875% senior notes due 2022 (b)
|
|
|
(115,865
|
)
|
|
|
(83,154
|
)
|
|
|
(297,617
|
)
|
|
|
(294,757
|
)
|
Other senior notes due 2022 (b)
|
|
|
(490
|
)
|
|
|
(455
|
)
|
|
|
(590
|
)
|
|
|
(592
|
)
|
5.00% senior notes due 2023 (b)
|
|
|
(684,886
|
)
|
|
|
(499,980
|
)
|
|
|
(741,531
|
)
|
|
|
(683,291
|
)
|
4.875% senior notes due 2025 (b)
|
|
|
(750,000
|
)
|
|
|
(430,800
|
)
|
|
|
(750,000
|
)
|
|
|
(645,098
|
)
|
9.25% senior notes due 2026 (b)
|
|
|
(550,000
|
)
|
|
|
(337,865
|
)
|
|
|
—
|
|
|
|
—
|
|
5.75% senior subordinated notes due 2021 (b)
|
|
|
(22,214
|
)
|
|
|
(17,910
|
)
|
|
|
(22,214
|
)
|
|
|
(21,539
|
)
|
5.00% senior subordinated notes due 2022 (b)
|
|
|
(19,054
|
)
|
|
|
(8,660
|
)
|
|
|
(19,054
|
)
|
|
|
(17,011
|
)
|
5.00% senior subordinated notes due 2023 (b)
|
|
|
(7,712
|
)
|
|
|
(4,747
|
)
|
|
|
(7,712
|
)
|
|
|
(7,654
|
)
|
Deferred compensation plan (c)
|
|
|
(56,676
|
)
|
|
|
(56,676
|
)
|
|
|
(74,472
|
)
|
|
|
(74,472
|
)
|
(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.
|
20
Our current assets and liabilities include 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 and operating lease liabilities.
Concentrations of Credit Risk
As of March 31, 2020, 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, end-users in various industries and joint interest owners on properties we operate. Letters of credit or other appropriate securities are obtained as deemed necessary to limit our risk of loss. Our allowance for uncollectable receivables was $9.5 million at March 31, 2020 and $8.8 million at December 31, 2019. Our derivative exposure to credit risk is diversified primarily among major investment grade financial institutions, where we have master netting agreements which provide for offsetting payables against receivables from separate derivative contracts. To manage counterparty risk associated with our derivatives, we select and monitor our counterparties based on our assessment of their financial strength and/or credit ratings. We may also limit the level of exposure with any single counterparty. At March 31, 2020, our derivative counterparties include twenty financial institutions, of which all but four are secured lenders in our bank credit facility. At March 31, 2020, our net derivative asset includes a net receivable of $8.2 million related to these four counterparties that are not participants in our bank credit facility.
Allowance for Expected Credit Losses. Each reporting period, we assess the recoverability of material receivables using historical data, current market conditions and reasonable and supported forecasts of future economic conditions to determine their expected collectability. The loss given default method is used when, based on management’s judgment, an allowance for expected credit losses should be accrued on a material receivable to reflect the net amount to be collected. See Note 3 for a discussion on adoption of the new accounting standards update on financial instruments-credit losses.
(13) STOCK-BASED COMPENSATION PLANS
Stock-Based Awards
We have two active equity-based stock plans, our Amended and Restated 2005 Equity-Based Incentive Compensation Plan, which we refer to as the 2005 Plan and the new 2019 Equity-Based Compensation Plan, which was approved by our stockholders in May 2019. Under these plans, 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.
Total Stock-Based Compensation Expense
Stock-based compensation represents amortization of restricted stock and performance units. 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 details the allocation of stock-based compensation to functional expense categories (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Direct operating expense
|
$
|
450
|
|
|
$
|
591
|
|
|
Brokered natural gas and marketing expense
|
|
413
|
|
|
|
385
|
|
|
Exploration expense
|
|
330
|
|
|
|
373
|
|
|
General and administrative expense
|
|
8,029
|
|
|
|
8,815
|
|
|
Total stock-based compensation
|
$
|
9,222
|
|
|
$
|
10,164
|
|
|
Stock-Based Awards
Restricted Stock Awards. We grant restricted stock units under our equity-based stock compensation plans. These restricted stock units, which we refer to as restricted stock Equity Awards, generally vest over a three-year period, contingent on the recipient’s continued employment. The grant date fair value of the Equity Awards is based on the fair market value of our common stock on the date of grant.
The Compensation Committee also grants restricted stock to certain employees and non-employee directors of the board of directors as part of their compensation. We also grant restricted stock to certain employees for retention purposes. Compensation expense is recognized over the balance of the vesting period, which is typically three years for employee grants
21
and immediate vesting for non-employee directors. All restricted stock awards are issued at prevailing market prices at the time of the grant and the vesting is based upon an employee’s continued employment with us. Prior to vesting, all restricted stock awards have the right to vote such stock and receive dividends thereon. Upon grant of these restricted shares, which we refer to as restricted stock Liability Awards, the majority of these shares are generally placed in our deferred compensation plan and, upon vesting, withdrawals are allowed in either cash or in stock. These Liability Awards are classified as a liability and are remeasured at fair value each reporting period. This mark-to-market amount is reported in deferred compensation plan expense in the accompanying consolidated statements of operations. Historically, we have used authorized but unissued shares of stock when restricted stock is granted. However, we also utilize treasury shares when available.
Stock-Based Performance Units. We grant three types of performance share awards: two based on performance conditions measured against internal debt-adjusted performance metrics (Production Per Share Awards or “PS-PSUs” and Reserve Per Share Awards or “RS-PSUs”) and one based on market conditions measured based on Range’s performance relative to a predetermined peer group (TSR Awards or “TSR-PSUs”).
Each unit granted represents one share of our common stock. These units are settled in stock and the amount of the payout is based on (1) the vesting percentage, which can be from zero to 200% based on performance achieved and (2) the value of our common stock on the vesting date which is determined by the Compensation Committee. Dividend equivalents may accrue during the performance period and are paid in stock at the end of the performance period. The performance period for the TSR-PSUs is three years. The performance period for the PS/RS-PSUs is based on annual performance targets earned over a three-year period.
Restricted Stock – Equity Awards
In first quarter 2020, we granted 4.5 million restricted stock Equity Awards to employees at an average grant date fair value of $3.42 which generally vest over a three-year period compared to 2.8 million at an average grant date fair value of $10.59 in first quarter 2019. We recorded compensation expense for these outstanding awards of $5.3 million in first quarter 2020 compared to $7.1 million in the same period of 2019. Restricted stock Equity Awards are not issued to employees until such time as they are vested and the employees do not have the option to receive cash.
Restricted Stock – Liability Awards
In first quarter 2020, we granted 3.3 million shares of restricted stock Liability Awards as compensation to employees at an average grant date fair value of $3.02 which generally vest over a three-year period. In first quarter 2019, we granted 1.0 million shares of restricted stock Liability Awards as compensation to employees at an average grant date of fair value of $10.46 with vesting generally over a three-year period. We recorded compensation expense for these Liability Awards of $2.8 million in first quarter 2020 compared to $1.0 million in first quarter 2019. The majority of these awards are held in our deferred compensation plan, are classified as a liability and are remeasured at fair value each reporting period. This mark-to-market amount 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 March 31, 2020:
|
Restricted Stock
Equity Awards
|
|
|
Restricted Stock
Liability Awards
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at December 31, 2019
|
|
2,002,239
|
|
|
$
|
12.32
|
|
|
|
411,126
|
|
|
$
|
10.94
|
|
Granted
|
|
4,462,711
|
|
|
|
3.42
|
|
|
|
3,301,344
|
|
|
|
3.02
|
|
Vested
|
|
(811,670
|
)
|
|
|
8.95
|
|
|
|
(529,484
|
)
|
|
|
5.17
|
|
Forfeited
|
|
(86,865
|
)
|
|
|
11.75
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2020
|
|
5,566,415
|
|
|
$
|
5.69
|
|
|
|
3,182,986
|
|
|
$
|
3.69
|
|
22
Stock-Based Performance Units
Production Per Share and Reserve Per Share Awards (debt-adjusted). The PS-PSUs and RS-PSUs vest at the end of the three-year performance period. The performance metrics for each year are set by the Compensation Committee no later than March 31 of such year. If the performance metric for the applicable period is not met, that portion is considered forfeited and there is an adjustment to the expense recorded. The following is a summary of our non-vested PG/RG-PSUs awards outstanding at March 31, 2020:
|
|
|
|
|
Number of
Units
|
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding at December 31, 2019
|
|
881,573
|
|
|
$
|
11.70
|
|
Units granted (a)
|
|
777,847
|
|
|
|
2.33
|
|
Outstanding at March 31, 2020
|
|
1,659,420
|
|
|
$
|
5.50
|
|
(a)
|
Amounts granted reflect the number of performance units granted; however, the actual payout of shares will be between zero and 200% depending on achievement of specifically identified performance targets.
|
We recorded PG/RG-PSUs compensation income of $285,000 in first quarter 2020 compared to expense of $1.6 million in first quarter 2019.
TSR Awards. TSR-PSUs granted are earned, or not earned, based on the comparative performance of Range’s common stock measured against a predetermined group of companies in the peer group over a three-year performance period. The fair value of the TSR-PSUs is estimated on the date of grant using a Monte Carlo simulation model which utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. The fair value is recognized as stock-based compensation expense over the three-year performance period. Expected volatilities utilized in the model were estimated using a combination of a historical period consistent with the remaining performance period of three years and option implied volatilities. The risk-free interest rate was based on the United States Treasury rate for a term commensurate with the life of the grant. The following assumptions were used to estimate the fair value of TSR-PSUs granted during first quarter 2020 and 2019:
|
|
Three Months
Ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
2.4
|
%
|
|
Expected annual volatility
|
|
|
65
|
%
|
|
|
46
|
%
|
|
Grant date fair value per unit
|
|
$
|
3.85
|
|
|
$
|
11.34
|
|
|
The following is a summary of our non-vested TSR – PSUs award activities:
|
|
Number of
Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Outstanding at December 31, 2019
|
|
|
993,452
|
|
|
$
|
19.00
|
|
|
Units granted (a)
|
|
|
610,155
|
|
|
|
3.85
|
|
|
Outstanding at March 31, 2020
|
|
|
1,603,607
|
|
|
$
|
13.23
|
|
|
(a)
|
These amounts reflect the number of performance units granted. The actual payout of shares may be between zero and 200% of the performance units granted depending on the total shareholder return ranking compared to our peer companies at the vesting date.
|
We recorded TSR-PSUs compensation expense of $936,000 in first quarter 2020 compared to $443,000 in the same period of 2019. Fair value is amortized over the performance period with no adjustment to the expense recorded for actual targets achieved.
Other Post Retirement Benefits
Effective fourth quarter 2017, as part of our officer succession plan, we implemented a post retirement benefit plan to assist in providing health care to officers who are active employees (including their spouses) and have met certain age and service requirements. These benefits are not funded in advance and are provided up to age 65 or at the date they become eligible for Medicare, subject to various cost-sharing features. There was approximately $92,000 of estimated prior service
23
costs amortized from accumulated other comprehensive income into general and administrative expense in both the three months ended March 31, 2020 and 2019. Those employees that qualified for this new retirement health care plan were also fully vested in all equity grants. Effective October 2018, officers who qualify for the plan are required to provide reasonable notice of retirement and beginning in 2019 must provide one year of service after the grant date to be fully vested in an equity grant.
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 $8.5 million in first quarter 2020 compared to a mark-to-market loss of $3.6 million in first quarter 2019. The Rabbi Trust held 6.4 million shares (3.2 million of which were vested) of Range stock at March 31, 2020 compared to 3.2 million shares (2.7 million of which were vested) at December 31, 2019.
(14) TERMINATION COSTS
In first quarter 2020, we completed the sale of our shallow legacy assets in Northwest Pennsylvania. We recorded $1.6 million of severance costs in first quarter 2020 which are primarily related to this sale, compared to no severance costs in first quarter 2019. The following summarizes our termination costs for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Severance costs
|
$
|
1,595
|
|
|
$
|
—
|
|
|
Stock-based compensation
|
|
—
|
|
|
|
—
|
|
|
|
$
|
1,595
|
|
|
$
|
—
|
|
|
The following details the accrued liability activity for the quarter ended March 31, 2020 (in thousands):
|
As of
|
|
|
March 31,
2020
|
|
Balance at December 31, 2019
|
$
|
4,692
|
|
Accrued severance costs
|
|
1,595
|
|
Payments
|
|
(2,704
|
)
|
Balance at March 31, 2020
|
$
|
3,583
|
|
24
(15) 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 2019:
|
|
Three Months
Ended
March 31,
2020
|
|
|
Year
Ended
December 31,
2019
|
|
Beginning balance
|
|
|
249,630,803
|
|
|
|
249,510,022
|
|
Restricted stock grants
|
|
|
3,301,344
|
|
|
|
1,186,290
|
|
Restricted stock units vested
|
|
|
944,549
|
|
|
|
720,212
|
|
Performance stock units issued
|
|
|
—
|
|
|
|
12,747
|
|
Treasury shares acquired
|
|
|
(7,999,194
|
)
|
|
|
(1,798,468
|
)
|
Ending balance
|
|
|
245,877,502
|
|
|
|
249,630,803
|
|
Stock Repurchase Program
In October 2019, our board of directors authorized a $100.0 million common stock repurchase program. Under this program, we may repurchase shares in open market transactions, from time to time, in accordance with applicable SEC rules and federal securities laws. The stock repurchase program has no time limit, may be modified or suspended based on our financial condition or changes in market conditions or terminated at any time by our board of directors. The following is a schedule of the change in treasury shares for the three months ended March 31, 2020:
|
Three Months Ended
|
|
|
March 31,
2020
|
|
Beginning balance
|
|
1,808,133
|
|
Rabbi trust shares distributed/sold
|
|
(806
|
)
|
Shares repurchased
|
|
8,000,000
|
|
Ending balance
|
|
9,807,327
|
|
(16) SUPPLEMENTAL CASH FLOW INFORMATION
|
|
Three Months
Ended
March 31,
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
(in thousands)
|
|
Net cash provided from operating activities included:
|
|
|
|
|
|
|
|
|
Income taxes refunded from taxing authorities
|
|
$
|
1,789
|
|
|
$
|
—
|
|
Interest paid
|
|
|
(50,832
|
)
|
|
|
(54,632
|
)
|
Non-cash investing and financing activities included:
|
|
|
|
|
|
|
|
|
Increase in asset retirement costs capitalized
|
|
|
1,250
|
|
|
|
1,532
|
|
(Decrease) increase in accrued capital expenditures
|
|
|
(8,645
|
)
|
|
|
22,764
|
|
|
|
|
|
|
|
|
|
|
25
(17) COMMITMENTS AND CONTINGENCIES
Litigation
We are the subject of, or party to, a number of pending or threatened legal actions, administrative proceedings arising in the ordinary course of our business including, but not limited to, royalty claims, contract claims and environmental claims. 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.
When deemed necessary, we establish 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 we could incur additional losses with respect to those matters in which reserves have been established. We will continue to evaluate our litigation on a quarterly basis and will establish and adjust any litigation reserves as appropriate to reflect our assessment of the then current status of litigation.
We have incurred and will continue to incur capital, operating and remediation expenditures as a result of environmental laws and regulations. As of March 31, 2020, liabilities for remediation were not material. We are not aware of any environmental claims existing as of March 31, 2020 that have not been provided for or would otherwise have a material impact on our financial position or results of operations. Environmental liabilities normally involve estimates that are subject to revision until final resolution, settlement or remediation occurs.
Pennsylvania Office of Attorney General Matter
In April 2020, the Office of Attorney General informed our subsidiary Range Resources – Appalachia, LLC that it will pursue certain misdemeanor charges against the subsidiary related to alleged violations of the Pennsylvania Solid Waste Management Act and the Pennsylvania Clean Streams Law arising from an unintentional release of produced and reuse water at one location and unintentional discharges from a drilling reserve pit containing drill cuttings and a water impoundment at another. We intend to defend ourselves against such charges, however the proceedings could result in fines or penalties against the subsidiary. At this time, it is not possible to estimate the amount of any fines or penalties, or the range of such fines or penalties, that are reasonably possible in this case.
(18) Costs Incurred for Property Acquisition, Exploration and Development (a)
|
|
Three Months
Ended
March 31,
2020
|
|
|
Year
Ended
December 31, 2019
|
|
|
|
(in thousands)
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
Acreage purchases
|
|
$
|
4,061
|
|
|
$
|
57,324
|
|
Development
|
|
|
124,180
|
|
|
|
666,984
|
|
Exploration:
|
|
|
|
|
|
|
|
|
Expense
|
|
|
6,747
|
|
|
|
35,117
|
|
Stock-based compensation expense
|
|
|
330
|
|
|
|
1,566
|
|
Gas gathering facilities:
|
|
|
|
|
|
|
|
|
Development
|
|
|
2,047
|
|
|
|
3,583
|
|
Subtotal
|
|
|
137,365
|
|
|
|
764,574
|
|
Asset retirement obligations
|
|
|
1,250
|
|
|
|
11,193
|
|
Total costs incurred
|
|
$
|
138,615
|
|
|
$
|
775,767
|
|
(a)
|
Includes costs incurred whether capitalized or expensed.
|
26