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Summary of Significant Accounting Policies (Policy)
12 Months Ended
Dec. 31, 2018
Summary Of Significant Accounting Policies [Abstract]  
Basis of Presentation

Basis of Presentation

 

The consolidated financial statements for the Successor and Predecessor include the operations of the Company and all of its wholly owned subsidiaries and the operations of the Partnership and all of its wholly owned subsidiaries, respectively. All intercompany accounts and transactions have been eliminated in consolidation.

Bankruptcy Accounting

Bankruptcy Accounting

 

The consolidated financial statements have been prepared as if the Company is a going concern and reflect the application of Accounting Standards Codification 852 Reorganizations (“ASC 852”). ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that were realized or incurred related to the bankruptcy proceedings are recorded in “Reorganization items, net” on the Company’s consolidated statements of operations.

 

Upon emergence from bankruptcy on June 4, 2018, the Company elected to adopt and apply the relevant guidance provided in GAAP (as defined below) with respect to the accounting and financial statement disclosures for entities that have emerged from Chapter 11 (“fresh start accounting”) effective May 31, 2018 to coincide with the timing of the Company’s normal accounting period close. As a result of the application of fresh start accounting and the effects of the implementation of the plan of reorganization, the consolidated financial statements as of or after May 31, 2018, are not comparable with the consolidated financial statements prior to that date. To facilitate the financial statement presentations, the Company refers to the reorganized company in these consolidated financial statements and notes as the “Successor” for periods subsequent to May 31, 2018 and “Predecessor” for periods prior to June 1, 2018. Furthermore, the consolidated financial statements and notes have been presented with a “black line” division to delineate the lack of comparability between the Predecessor and Successor. See Note 2 and Note 3 for additional information.

Use of Estimates

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. While the Company believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. All of its cash and cash equivalents are maintained with several major financial institutions in the United States. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, the Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant default risk.

Accounts Receivable

Accounts Receivable

 

Accounts receivable from oil, natural gas and natural gas liquids sales are recorded at the invoiced amount and do not bear interest. The Company routinely assesses the financial strength of its customers and bad debts are recorded based on an account–by–account review after all means of collection have been exhausted, and the potential recovery is considered remote.

 

The Company did not have any reserves for doubtful accounts as of December 31, 2018, and did not incur any expense related to bad debts for the year ended December 31, 2018. The Predecessor did not have any reserves for doubtful accounts as of December 31, 2017, and did not incur any expense related to bad debts during the year ended December 31, 2017. The Company does not have any off–balance sheet credit exposure related to customers.

Property and Depreciation

Property and Depreciation

 

Oil, natural gas and natural gas liquids producing activities are accounted for under the successful efforts method of accounting. Under this method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Capitalized costs associated with unproved properties totaled $8.5 million as of December 31, 2018. There were no capitalized costs associated with unproved properties as of December 31, 2017. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain non–producing leasehold costs are expensed as incurred.

 

Sales proceeds are credited to the carrying value of the properties, and no gains or losses are recognized upon the disposition of proved oil and natural gas properties except in transactions such as the significant disposition of an amortizable base that significantly affects the unit–of–production amortization rate.

 

The capitalized costs of producing oil and natural gas properties are depreciated and depleted by the units–of–production method based on the ratio of current production to estimated total net proved reserves as estimated by independent petroleum engineers. Proved developed reserves are used in computing unit rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold and pipeline costs.

 

Other property is stated at cost less accumulated depreciation, which is computed using the straight–line method based on estimated economic lives ranging from three to 25 years. The Company expenses costs for maintenance and repairs in the period incurred. Significant improvements and betterments are capitalized if they extend the useful life of the asset.

Impairment of Oil and Natural Gas Properties

Impairment of Oil and Natural Gas Properties

 

The Company evaluates its proved oil and natural gas properties and related equipment and facilities for impairment whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. For the seven months ended December 31, 2018, the Company recorded impairment charges of $3.1 million related to proved oil and natural gas properties as the carrying amounts of such properties were determined not to be recoverable. For the five months ended May 31, 2018, the Predecessor did not record any impairment charges related to proved oil and natural gas properties. In 2017 and 2016, the Predecessor recorded impairment charges of $69.9 million and $89.5 million respectively, related to proved oil and natural gas properties as the carrying amounts of such properties were determined not to be recoverable. The $3.1 million of impairment during the seven months ended December 31, 2018, related to properties located in Central Texas and Karnes County, Texas which were sold in August 2018 (see Note 8). If commodity prices significantly decrease in future quarters, the Company could have additional impairments of oil and natural gas properties.

 

Unproved oil and natural gas properties are assessed periodically on a property–by–property basis, and any impairment in value is recognized. For the seven months ended December 31, 2018, the Company did not record any impairment charges related to unproved oil and natural gas properties. For the five months ended May 31, 2018, the Predecessor recorded an insignificant amount of impairment charges related to unproved oil and natural gas properties. For 2017 and 2016, the Predecessor recorded impairment charges of $23.7 million and $41.8 million, respectively, related to unproved oil and natural gas properties where it had a change in development plans for the acreage.

Asset Retirement Obligations

Asset Retirement Obligations

 

An asset retirement obligation (“ARO”) represents the future abandonment costs of tangible assets, such as wells, service assets, and other facilities. The Company records an ARO and capitalizes the asset retirement cost in oil and natural gas properties in the period in which the retirement obligation is incurred based upon the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells. After recording these amounts, the ARO is accreted to its future estimated value using an assumed cost of funds and the additional capitalized costs are depreciated on a unit–of–production basis. If the ARO is settled for an amount other than the recorded amount, a gain or loss is recognized.

Revenue Recognition

Revenue Recognition

 

Oil, natural gas and natural gas liquids revenues are recognized upon the transfer of control of the products to a purchaser. Transfer of control typically occurs when the products are delivered to the purchaser, title and/or risk of loss has transferred and collectability of the revenue is reasonably assured. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products.

 

The Company’s oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the NYMEX price or at purchaser posted prices for the producing area. For oil contracts, the Company generally records sales based on the net amount received.

 

The Company’s natural gas production is primarily sold under market-sensitive contracts that are typically priced at a differential to the published natural gas index price for the producing area due to the natural gas quality and the proximity to major consuming markets. For natural gas contracts, the Company generally records wet gas sales at the wellhead or inlet of the gas processing plant as revenues net of transportation, gathering and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company at the tailgate of the plant. Conversely, the Company generally records residual natural gas and natural gas liquids sales at the tailgate of the plant on a gross basis along with the associated transportation, gathering and processing expenses if the processor is a service provider and there is redelivery of commodities to the Company at the tailgate of the plant. All facts and circumstances of an arrangement are considered and judgment is often required in making this determination.

 

In addition, the Company recognizes processing expenses for commodities paid as noncash consideration in exchange for processing services and recognizes the associated revenues for those same commodities. This recognition results in an increase to revenues and expenses with no impact on net income.

 

The Company follows the sales method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which the Company is entitled based on its working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under–produced owner(s) to recoup its entitled share through future production. Under the sales method, no receivables are recorded where the Company has taken less than its share of production. There were no significant gas imbalances at December 31, 2018 or 2017.

 

Harvest owns and operates a network of natural gas gathering systems in the Appalachian Basin and the Monroe Field in Northern Louisiana which gather and transport owned natural gas and a small amount of third party natural gas to intrastate, interstate and local distribution pipelines. Natural gas gathering and transportation revenue is recognized when the natural gas has been delivered to a custody transfer point.

 

See Note 5 for additional information regarding revenue recognition.

Income Taxes

Income Taxes

 

Effective June 4, 2018, pursuant to the Plan, the Successor became a corporation subject to federal and state income taxes. Prior to the Plan being effective, the Predecessor was a limited partnership and organized as a pass-through entity for federal and most state income tax purposes. As a result, the Predecessor’s limited partners were responsible for federal and state income taxes on their share of taxable income. The Predecessor was subject to the Texas margin tax for partnership activity in the state of Texas. See Note 15 for additional information regarding income taxes.

Earnings per Share / Limited Partner Unit

Earnings per Share / Limited Partner Unit

 

Basic earnings (loss) per share is computed by dividing net earnings attributable to stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by adjusting the average number of shares outstanding for the dilutive effect, if any, of potential common shares. The Company uses the treasury stock method to determine the dilutive effect.

 

The Predecessor used the two–class method to compute earnings per limited partner unit. The two-class method is an earnings allocation formula that determines earnings per unit for common units and participating securities as if all earnings for the period had been distributed. As the unvested phantom units and the earned but unvested performance units participated in dividends on an equal basis with the common units, they were considered to be participating securities. Earnings used in the determination of earnings per limited partner unit for the reporting period were reduced by the amount of earnings allocated to the general partner and available cash that would be distributed to the limited partners and the participating securities. The undistributed earnings, if any, were then allocated to the limited partners and the participating securities in accordance with the terms of the partnership agreement. Basic and diluted earnings per limited partner unit were then calculated by dividing earnings, after deducting the amount allocated to the general partner and the earnings attributable to the participating securities, by the weighted average number of outstanding limited partner units during the period.

Derivatives

Derivatives

 

The Company monitors its exposure to various business risks, including commodity price and interest rate risks, and uses derivatives to manage the impact of certain of these risks. The Company’s policies do not permit the use of derivatives for speculative purposes. Harvest uses energy derivatives for the purpose of mitigating risk resulting from fluctuations in the market price of oil, natural gas and natural gas liquids.

 

The Company has elected not to designate its derivatives as hedging instruments. Changes in the fair value of derivatives are recorded immediately to earnings as “Gain (loss) on derivatives, net” in the consolidated statements of operations.

 

Concentration of Credit Risk

Concentration of Credit Risk

 

All of the Company’s derivative contracts are with major financial institutions who are also lenders under the Exit Credit Facility. Should one of these financial counterparties not perform, Harvest may not realize the benefit of some of its derivative contracts and could incur a loss. As of December 31, 2018, all of the Company’s counterparties have performed pursuant to their derivative contracts.

 

Oil, natural gas and natural gas liquids revenues are derived principally from uncollateralized sales to numerous companies in the oil and natural gas industry; therefore, Harvest customers may be similarly affected by changes in economic and other conditions within the industry. The Company has experienced no significant credit losses on such sales in the past.

 

During 2018, one customer accounted for 15.5% of the consolidated oil, natural gas and natural gas liquids revenues. In 2017, two customers accounted for 15.5% and 11.0%, respectively, of the Predecessor’s consolidated oil, natural gas and natural gas liquids revenues. In 2016, three customers accounted for 18.5%,  13.4% and 10.4%, respectively, of the Predecessor’s consolidated oil, natural gas and natural gas liquids revenues. Harvest believes that the loss of a major customer would have a temporary effect on its revenues but, that over time, the Company would be able to replace its major customers.

Recent Accounting Standards

Recent Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014–09, Revenue from Contracts with Customers (“ASU 2014-09”).  This ASU, as amended, superseded virtually all of the revenue recognition guidance in generally accepted accounting principles in the United States. The core principle of the five–step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. The Partnership implemented ASU 2014-09 as of January 1, 2018 using the modified retrospective method. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. See Note 5 for additional details about the impact upon adoption and related disclosures.

 

In January 2016, the FASB issued ASU No. 2016–01, Financial Instruments: Overall (Subtopic 825-10) (“ASU 2016-01”).  This main objective of this ASU was to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. One of the provisions of this ASU was to require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The Company implemented ASU 2016-01 as of January 1, 2018. Changes in fair value of the Company’s equity investments are included in “Gain on equity securities” in the consolidated statements of operations. See Note 10 for additional details regarding the fair value measurement of the equity securities.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The main objective of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 requires lessees to recognize assets and liabilities arising from leases on the balance sheet. ASU 2016-02 further defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefit from the use of the asset and (2) the right to direct the use of the asset. ASU 2016-02 requires disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842 (“ASU 2018-01”), which permits an entity an optional election to not evaluate under ASU 2016-02 those existing or expired land easements that were not previously accounted for as leases prior to the adoption of ASU 2016-02. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”), which permits an entity (i) to apply the provisions of ASU 2016-02 at the adoption date instead of the earliest period presented in the financial statements, and, as a lessor, (ii) to account for lease and nonlease components as a single component as the nonlease components would otherwise be accounted for under the provisions of ASU 2014-09. For public entities, ASU 2016-02 and other related ASUs are effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will apply the new standard for its interim and annual reporting periods starting January 1, 2019 using a modified retrospective approach. The Company also plans to elect the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases or (iii) initial direct costs for any existing leases. Additionally, the Company plans to elect the practical expedient under ASU 2018-01 and not evaluate existing or expired land easements not previously accounted for as leases prior to the effective date. The adoption of this standard will result in an increase in the assets and liabilities on the Company’s consolidated balance sheets. The quantitative impacts of the new standard are dependent on the leases in force at the time of adoption. At January 1, 2019, the operating lease liability is estimated to be insignificant. As a result, the adoption of this ASU is not expected to have a material impact on the consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016–15, Statement of Cash Flows (“ASU 2016-15”). This ASU addresses certain cash flow issues with the objective of reducing the existing diversity in practice in how the cash receipts and cash payments are presented and classified in the statement of cash flows. The Partnership adopted ASU 2016-15 on January 1, 2018. The adoption of this ASU did not have a material impact on the Predecessor’s consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016‑18: Statement of Cash Flows– Restricted Cash (“ASU 2016-18”). The main objective of ASU 2016‑18 is to address the diversity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in ASU 2016‑18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The Partnership adopted ASU 2016-18 on January 1, 2018. The adoption of this ASU resulted in a change to the consolidated statements of cash flows for the years ended December 31, 2017 and 2016. For the year ended December 31, 2017, the $5.5 million cash and cash equivalents – beginning of period was revised to $57.6 million cash, cash equivalents and restricted cash – beginning of period and the net cash used in investing activities was increased from $30.3 million to $82.4 million.  For the year ended December 31, 2016, the $5.5 million cash and cash equivalents – end of period was revised to $57.6 million cash, cash equivalents and restricted cash – end of period and the net cash used in investing activities was revised from $9.8 million to net cash provided by investing activities of $42.3 million.

 

In January 2017, the FASB issued ASU No. 2017‑01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017‑01”). The main objective of ASU 2017‑01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments of this ASU (i) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (ii) remove the evaluation of whether a market participant could replace missing elements. The Partnership adopted ASU 2017-01 on January 1, 2018.

 

In August 2018, the FASB issued ASU No. 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The FASB issued ASU 2018-13 as part of its disclosure framework project. The amendments of this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; early application is permitted. The Company does not expect that adopting this ASU will have a material impact on its consolidated financial statements.

 

No other new accounting pronouncements issued or effective during the year ended December 31, 2018 have had or are expected to have a material impact on the Company’s consolidated financial statements.

Subsequent Events

Subsequent Events

 

Harvest evaluated subsequent events for appropriate accounting and disclosure through the date these consolidated financial statements were issued.