Discontinued operations

In the second quarter of 2015, the Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. In the third and fourth quarters of 2015, the Company entered into purchase and sale agreements to sell the vast majority of Fidelity's assets, comprising greater than 90 percent of production for the nine months ended September 30, 2015. The completion of these sales is expected to occur in the fourth quarter of 2015 and the Company continues to market the remaining assets of Fidelity. The sale of Fidelity is part of the Company's strategic plan to grow its capital investments in the remaining business segments and to focus on creating a greater long-term value. The assets and liabilities for these operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. The Company's consolidated financial statements and accompanying notes for current and prior periods have been restated. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.

The carrying amounts of the major classes of assets and liabilities that are classified as held for sale on the Company's Consolidated Balance Sheets were as follows:



	September 30, 2015		September 30, 2014		December 31, 2014
	(In thousands)
Assets
Current assets:
Receivables, net	$	24,703	$	117,098	$	94,132
Inventories	7,034		13,504		11,401
Commodity derivative instruments	8,633		11,322		18,335
Prepayments and other current assets	42,762		2,114		7,309
Total current assets held for sale	83,132		144,038		131,177
Noncurrent assets:
Investments	37		37		37
Net property, plant and equipment	1,114,285		1,609,385		1,618,099
Deferred income taxes	141,556		—		—
Other	162		2,635		2,334
Less allowance for impairment of assets held for sale	756,127		—		—
Total noncurrent assets held for sale	499,913		1,612,057		1,620,470
Total assets held for sale	$	583,045	$	1,756,095	$	1,751,647
Liabilities
Current liabilities:
Long-term debt due within one year	$	—	$	528	$	897
Accounts payable	32,375		141,877		103,556
Taxes payable	3,769		39,693		19,900
Deferred income taxes	4,955		4,005		8,206
Accrued compensation	5,982		6,622		5,373
Commodity derivative instruments	—		44		—
Other accrued liabilities	11,820		27,342		16,796
Total current liabilities held for sale	58,901		220,111		154,728
Noncurrent liabilities:
Long-term debt	—		510		—
Deferred income taxes	—		212,640		238,391
Other liabilities	31,242		58,162		57,050
Total noncurrent liabilities held for sale	31,242		271,312		295,441
Total liabilities held for sale	$	90,143	$	491,423	$	450,169

The Company performed a fair value assessment of the assets and liabilities classified as held for sale. In the second quarter of 2015, the estimated fair value was determined using the income and the market approaches. The income approach was determined by using the present value of future estimated cash flows. The income approach considered management’s views on current operating measures as well as assumptions pertaining to market forces in the oil and gas industry including estimated reserves, estimated prices, market differentials, estimates of well operating and future development costs and timing of operations. The estimated cash flows were discounted using a rate believed to be consistent with those used by principal market participants. The market approach was provided by a third party and based on market transactions involving similar interests in oil and natural gas properties. The fair value assessment indicated an impairment based on the carrying value exceeding the estimated fair value, which resulted in the Company writing down Fidelity’s assets at June 30, 2015, and recording an impairment of $400.0 million ($252.0 million after tax) during the second quarter of 2015. In the third quarter of 2015, the estimated fair value of Fidelity was determined by agreed upon pricing in the purchase and sale agreements for the assets subject to the agreements, which are expected to close in the fourth quarter of 2015 including customary purchase price adjustments. The values received in the bid proposals were lower than originally anticipated due to lower commodity prices than those projected in the second quarter of 2015. For those assets for which a purchase and sale agreement has not been entered into, which the Company is continuing to market, the fair value has been determined based on the market approach utilizing multiples based on similar interests in oil and natural gas properties. This fair value assessment indicated an impairment based on the current carrying value exceeding the estimated fair value, which resulted in the Company writing down Fidelity’s assets at September 30, 2015, and recording an impairment of $356.1 million ($224.4 million after tax) during the third quarter of 2015. The impairments were included in operating expenses from discontinued operations. Included in the fair value assessment at September 30, 2015, are liabilities of approximately $3 million for estimated transaction costs which will result in future cash expenditures. The estimated fair value of Fidelity's assets have been categorized as Level 3 in the fair value hierarchy.

In addition to the estimated transaction costs in the preceding paragraph, and due in part to the change in plans to now sell the assets of Fidelity rather than sell Fidelity as a company, Fidelity expects to incur approximately $11 million of exit and disposal costs associated with severance and other related matters, excluding the office lease expenses discussed in the following paragraph. The majority of these exit and disposal activities are expected to be completed by the end of the second quarter of 2016.

Fidelity plans to vacate its office space in Denver, Colorado, and is currently attempting to sublease the space. The expected future payments required under the lease agreement are approximately $12 million. This future obligation will decrease if Fidelity successfully executes sublease agreements.

Unforeseen events and changes in circumstances and market conditions and material differences in the value of the assets held for sale due to changes in estimates of future cash flows could negatively affect the estimated fair value of Fidelity and result in additional impairment charges. Various factors, including oil and natural gas prices, market differentials and changes in estimates of reserve quantities could result in future impairments of the Company's assets held for sale.

Historically, the Company used the full-cost method of accounting for its oil and natural gas production activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units-of-production method based on total proved reserves.

Prior to the oil and natural gas properties being classified as held for sale, capitalized costs were subject to a "ceiling test" that limits such costs to the aggregate of the present value of future net cash flows from proved reserves discounted at 10 percent, as mandated under the rules of the SEC, plus the cost of unproved properties not subject to amortization, plus the effects of cash flow hedges, less applicable income taxes. Proved reserves and associated future cash flows are determined based on SEC Defined Prices and exclude cash outflows associated with asset retirement obligations that have been accrued on the balance sheet. If capitalized costs, less accumulated amortization and related deferred income taxes, exceed the full-cost ceiling at the end of any quarter, a permanent noncash write-down is required to be charged to earnings in that quarter regardless of subsequent price changes.

The Company's capitalized cost under the full-cost method of accounting exceeded the full-cost ceiling at March 31, 2015. SEC Defined Prices, adjusted for market differentials, were used to calculate the ceiling test. Accordingly, the Company was required to write down its oil and natural gas producing properties. The Company recorded a $500.4 million ($315.3 million after tax) noncash write-down in operating expenses from discontinued operations in the first quarter of 2015.

In 2007, Centennial Resources sold CEM to Bicent. In connection with the sale, Centennial Resources agreed to indemnify Bicent and its affiliates from certain third party claims arising out of or in connection with Centennial Resources' ownership or operation of CEM prior to the sale. In addition, Centennial had previously guaranteed CEM's obligations under a construction contract. The Company incurred legal expenses and had a benefit related to the resolution of this matter in the second quarter of 2014, which are reflected in discontinued operations in the consolidated financial statements and accompanying notes.

The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax net income (loss) from discontinued operations on the Company's Consolidated Statements of Income were as follows:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015			2014		2015			2014
	(In thousands)
Operating revenues	$	58,077		$	155,807	$	156,100		$	432,922
Operating expenses	378,361			97,982		1,394,039			299,290
Operating income (loss)	(320,284		)	57,825		(1,237,939		)	133,632
Other income	100			138		2,170			1,163
Interest expense	174			23		229			80
Income (loss) from discontinued operations before income taxes	(320,358		)	57,940		(1,235,998		)	134,715
Income taxes	(117,732		)	19,458		(457,351		)	47,240
Income (loss) from discontinued operations	$	(202,626	)	$	38,482	$	(778,647	)	$	87,475