Basis of Presentation and New Accounting Standards (Policy)

12 Months Ended

Dec. 31, 2011

Basis of Presentation and New Accounting Standards [Abstract]

Nature of Operations

        Southwestern Energy Company (including its subsidiaries, collectively, "Southwestern" or the "Company") is an independent energy company engaged in natural gas and oil exploration, development and production. The Company engages in natural gas and oil exploration and production, natural gas gathering and natural gas marketing through its subsidiaries. Southwestern's exploration, development and production ("E&P") activities are principally focused within the United States on development of an unconventional gas reservoir located on the Arkansas side of the Arkoma Basin, which the Company refers to as the Fayetteville Shale play.  The Company is also actively engaged in exploration and production activities in Pennsylvania, where we are targeting the unconventional gas reservoir known as the Marcellus Shale, and to a lesser extent in Texas and in Arkansas and Oklahoma in the Arkoma Basin.  The Company has recently commenced exploration operations in southern Arkansas and northern Louisiana testing a new unconventional horizontal oil play targeting the Lower Smackover Brown Dense formation.  Southwestern's natural gas gathering and marketing (Midstream Services) activities primarily support the Company's E&P activities in Arkansas, Pennsylvania and Texas.

Basis of Presentation

The consolidated financial statements included in this Annual Report on Form 10-K present the Company's financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.The Company evaluates subsequent events through the date the financial statements are issued.

Principles of Consolidation

The consolidated financial statements include the accounts of Southwestern and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In 2010, the Company purchased the non-controlling interest in Overton Partners, L.P.

Revenue Recognition

Gas and oil sales. Gas sales and oil sales are recognized when the products are sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is reasonably assured. The Company uses the entitlement method that requires revenue recognition for the Company's net revenue interest of sales from its properties. Accordingly, gas sales and oil sales are not recognized for deliveries in excess of the Company's net revenue interest, while gas sales and oil sales are recognized for any under delivered volumes. Production imbalances are generally recorded at estimated sales prices of the anticipated future settlements of the imbalances. At December 31, 2011, the Company had overproduction of 6.1 Bcf valued at $22.5 million and underproduction of 6.4 Bcf valued at $22.9 million. At December 31, 2010, the Company had overproduction of 3.9 Bcf valued at $13.3 million and underproduction of 3.7 Bcf valued at $12.8 million.

Gas marketing. The Company generally markets its natural gas, as well as some gas produced by third parties, to brokers, local distribution companies and end-users, pursuant to a variety of contracts. Gas marketing revenues are recognized when delivery of natural gas has occurred, title has transferred, the price is fixed or determinable and collectability of the revenue is reasonably assured.

Gas gathering. The Company gathers its natural gas, as well as some gas produced by third parties, pursuant to a variety of contracts. Gas gathering revenues are recognized when the service is performed, the price is fixed or determinable and collectability of the revenue is reasonably assured.

Other. The Company maintains an underground gas storage facility and generally sells natural gas from its storage facility during the winter gas withdrawal season. Revenue is recognized on natural gas storage sales when the natural gas is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is reasonably assured. Other revenues include gains of $0.9 million, $2.5 million and $3.4 million in 2011, 2010 and 2009, respectively, primarily related to the sale of gas in underground storage.

Cash and Cash Equivalents

Cash and cash equivalents are defined by the Company as short-term, highly liquid investments that have an original maturity of three months or less and deposits in money market mutual funds that are readily convertible into cash. Management considers cash and cash equivalents to have minimal credit and market risk.

Certain of the Company's cash accounts are zero-balance controlled disbursement accounts that do not have the right of offset against the Company's other cash balances. The Company presents the outstanding checks written against these zero-balance accounts as a component of accounts payable in the accompanying consolidated balance sheets. Outstanding checks included as a component of accounts payable totaled $47.7 million and $23.1 million at December 31, 2011 and 2010, respectively.

Inventory

Inventory recorded in current assets includes $7.8 million at December 31, 2011 and $10.0 million at December 31, 2010, for natural gas in underground storage owned by the Company's E&P segment, and $38.4 million at December 31, 2011 and $25.1 million at December 31, 2010 for tubulars and other equipment used in the E&P segment.

The Company has one natural gas storage facility. The current portion of the natural gas is classified in inventory and carried at the lower of cost or market. The non-current portion of the natural gas is classified in property and equipment and carried at cost. The carrying value of the non-current natural gas is evaluated for recoverability whenever events or changes in circumstances indicate that it may not be recoverable. Withdrawals of current natural gas in underground storage are accounted for by a weighted average cost method whereby natural gas withdrawn from storage is relieved at the weighted average cost of current natural gas remaining in the facility.

Other assets include $19.5 million at December 31, 2011 and $20.6 million at December 31, 2010 for inventory held by the Midstream Services segment consisting primarily of pipe that will be used to construct gathering systems. Tubulars and other equipment are carried at the lower of cost or market and are accounted for by a moving weighted average cost method that is applied within specific classes of inventory items. Purchases of inventory are recorded at cost and inventory is relieved at the weighted average cost of items remaining within a specified class.

 

Property, Depreciation, Depletion and Amortization

Natural Gas and Oil Properties. The Company utilizes the full cost method of accounting for costs related to the exploration, development and acquisition of natural gas and oil properties. Under this method, all such costs (productive and nonproductive), including salaries, benefits and other internal costs directly attributable to these activities are capitalized on a country by country basis and amortized over the estimated lives of the properties using the units-of-production method. These capitalized costs, less accumulated amortization and related deferred income taxes, are subject to a ceiling test that limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved natural gas and oil reserves discounted at 10 percent (standardized measure) plus the lower of cost or market value of unproved properties. Any costs in excess of the ceiling are written off as a non-cash expense. The expense may not be reversed in future periods, even though higher natural gas and oil prices may subsequently increase the ceiling. Full cost companies must use the average quoted price from the first day of each month from the previous 12 months, including the impact of derivatives qualifying as cash flow hedges, to calculate the ceiling value of their reserves.

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $4.12 per MMBtu and $92.71 per barrel for West Texas Intermediate oil, adjusted for market differentials, the Company's net book value of its United States natural gas and oil properties did not exceed the ceiling amount and did not result in a ceiling test impairment at December 31, 2011. Cash flow hedges of natural gas production in place increased this ceiling amount by approximately $262.5 million at December 31, 2011. At December 31, 2010, this ceiling amount of the Company's reserves was calculated based upon average quoted market prices of $4.38 per MMBtu for Henry Hub natural gas and $75.96 per barrel for West Texas Intermediate oil, and at December 31, 2009, the ceiling value of the Company's reserves was calculated based upon year-end quoted market prices of $3.87 per MMBtu for Henry Hub natural gas and $57.65 per barrel for West Texas Intermediate oil. Decreases in market prices as well as changes in production rates, levels of reserves, evaluation of costs excluded from amortization, future development costs and production costs could result in future ceiling test impairments. At March 31, 2009, the net capitalized costs of our natural gas and oil properties exceeded the ceiling by approximately $558.3 million (net of tax) and resulted in a non-cash ceiling test impairment in the first quarter of 2009.

All of our costs directly associated with the acquisition and evaluation of properties in New Brunswick, Canada relating to our exploration program at December 31, 2011 were unproved and did not exceed the ceiling amount. If our exploration program in Canada is unsuccessful on all or a portion of these properties, a ceiling test impairment may result in the future.

On December 31, 2009, the Company implemented certain provisions of FASB ASC 932, "Extractive Activities-Oil and Gas," as updated by Accounting Standards Update No. 2010-03, "Extractive Activities-Oil and Gas (Topic 932)" ("FASB ASC 932"), which (a) expand the definition of oil- and gas-producing activities; (b) require energy companies to value their proved reserves by averaging the price from the first day of each month from the previous 12 months instead of using a year-end price; and (c) allow for additional drilling locations to be classified as proved undeveloped reserves assuming such locations are supported by reliable technologies. The Company accounted for the FASB ASC 932 changes as a change in accounting principle that is inseparable from a change in accounting estimate and will account for the change prospectively. The Company is not able to disclose the effects resulting from the implementation of these changes on the amount of proved reserves and disclosed quantities because personnel and time constraints made it infeasible for the Company to perform a second internal reserve estimation process under the prior standards on its approximately 4,850 properties.

Gathering Systems. The Company's investment in gathering systems is primarily related to its Fayetteville Shale play in Arkansas and Marcellus Shale play in Pennsylvania. These assets are being depreciated on a straight-line basis over 25 years.

Capitalized Interest. Interest is capitalized on the cost of unevaluated gas and oil properties that are excluded from amortization and actively being evaluated.

Asset Retirement Obligations. An asset retirement obligation associated with the retirement of a tangible long-lived asset is recognized as a liability in the period incurred or when it becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The Company owns natural gas and oil properties which require expenditures to plug and abandon the wells when reserves in the wells are depleted.

 

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Deferred income taxes are provided to recognize the income tax effect of reporting certain transactions in different years for income tax and financial reporting purposes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.

The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management's estimates of the ultimate outcome of various tax uncertainties.

Derivative Financial Instruments

The Company uses derivative financial instruments to manage defined commodity price risks and does not use them for speculative trading purposes. The Company uses commodity swaps and options contracts to hedge sales of natural gas. Gains and losses resulting from the settlement of hedge contracts have been recognized in gas sales in the consolidated statements of operations when the contracts expire and the related physical transactions of the commodity hedged are recognized. Changes in the fair value of derivative instruments designated as cash flow hedges are reported in other comprehensive income (loss) to the extent that they are effective in offsetting the changes in the cash flows of the hedged item. In contrast, gains and losses from the ineffective portion of swaps and option contacts as well as basis swap contracts that do not qualify for hedge accounting treatment are recognized currently in gas sales in the consolidated statements of operations. Changes in the fair value of derivative instruments designated as fair value hedges as well as the offsetting gain or loss on the hedged item are recognized in earnings immediately. See Note 5 for a discussion of the Company's hedging activities.

Earnings Per Share

Earnings Per Share

Basic earnings per common share attributable to Southwestern Energy stockholders is computed by dividing net income (loss) attributable to Southwestern Energy by the weighted average number of common shares outstanding during each year. The diluted earnings per share attributable to Southwestern Energy stockholders calculation adds to the weighted average number of common shares outstanding the incremental shares that would have been outstanding assuming the exercise of dilutive stock options and the vesting of unvested restricted shares of common stock.

For the year ended December 31, 2011, outstanding options for 3,577,104 shares with an average exercise price of $11.78 were included in the calculation of diluted shares. Options for 881,254 shares were excluded from the calculation because they would have had an antidilutive effect. For the year ended December 31, 2010, outstanding options for 4,753,530 shares with an average exercise price of $9.42 were included in the calculation of diluted shares. Options for 548,160 shares were excluded from the calculation because they would have had an antidilutive effect. For the year ended December 31, 2009, 6,683,085 of the Company's outstanding options with an average exercise price of $8.33 were excluded from the calculation of diluted shares because they would have had an antidilutive effect.

For the year ended December 31, 2011,  241,044 shares of restricted stock were included from the calculation of diluted shares. The calculation excluded 135,352 shares of restricted stock because they would have had an antidilutive effect. For the year ended December 31, 2010, 700,512 shares of restricted stock were included from the calculation of diluted shares. The calculation excluded 39,600 shares of restricted stock because they would have had an antidilutive effect. For the year ended December 31, 2009, the number of shares of restricted stock excluded from the calculation of diluted shares was 836,861 because they would have had an antidilutive effect.

Supplemental Disclosures of Cash Flow Information

Supplemental disclosures of cash flow information (in thousands): 

	For the years ended December 31,
	2011	2010	2009
	(in thousands)
Cash paid during the year for interest, net of amounts capitalized	$              19,159	$              24,049	$              16,453
Cash paid (received) during the year for income taxes	4,198	14,368	(41,469)
Increase in noncash property additions	30,389	46,588	28,951

Stock-Based Compensation

The Company accounts for stock-based compensation transactions using a fair value method and recognizes an amount equal to the fair value of the stock options and stock-based payment cost in either the consolidated statement of operations or capitalizes the cost into natural gas and oil properties or gathering systems included in property and equipment. Costs are capitalized when they are directly related to the acquisition, exploration and development activities of the Company's natural gas and oil properties or directly related to the construction of the Company's gathering systems.

Treasury Stock

The Company maintains a non-qualified deferred compensation supplemental retirement savings plan for certain key employees whereby participants may elect to defer and contribute a portion of their compensation to a Rabbi Trust, as permitted by the plan. The Company includes the assets and liability of its supplemental retirement savings plan in its consolidated balance sheet. Shares of the Company's common stock purchased under the non-qualified deferred compensation arrangement are held in the Rabbi Trust and are presented as treasury stock and carried at cost. As of December 31, 2011, 98,889 shares were accounted for as treasury stock, compared to 156,636 shares at December 31, 2010.

Foreign Currency Translation

We have designated the Canadian dollar as the functional currency for our operations in Canada.

Accounting Standards Implemented in this Report

In January, 2011, we implemented certain provisions of Accounting Standards Update No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements" ("Update 2010-06").  Update 2010-06 requires entities to provide a reconciliation of purchases, sales, issuance and settlements of anything valued with a Level 3 method, which is used to price the hardest to value instruments. The implementation did not have an impact on our results of operations, financial position or cash flows. 

In July, 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income ("Update 2011-05"), which amends Topic 200, Comprehensive Income. Update 2011-05 eliminates the option to present components of 'other comprehensive income' ("OCI") in the statement of changes in stockholders' equity, and requires presentation of total comprehensive income and components of net income in a single statement of comprehensive income, or in two separate, consecutive statements. Update 2011-05 requires presentation of reclassification adjustments for items transferred from OCI to net income on the face of the financial statements where the components of net income and the components of OCI are presented. The amendments do not change current treatment of items in OCI, transfer of items from OCI, or reporting items in OCI net of the related tax impact. Update 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. The implementation of these changes did not have an impact on the Company's results of operations, financial position or cash flows.

Accounting Standards Not Yet Implemented

In May 2011, the FASB issued guidance on fair value measurement and disclosure requirements outlined in Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820)–Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("Update 2011-04"). Update 2011-04 expands existing fair value disclosure requirements, particularly for Level 3 inputs, including: quantitative disclosure of the unobservable inputs and assumptions used in the measurement; description of the valuation processes in place and sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs; the level of items (in the fair value hierarchy) that are not measured at fair value in the balance sheet but whose fair value must be disclosed; and the use of a nonfinancial asset if it differs from the highest and best use assumed in the fair value measurement. The amendments in Update 2011-04 must be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. The implementation of the disclosure requirement is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

In December 2011, the FASB issued guidance on offsetting assets and liabilities and disclosure requirements in Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities ("Update 2011-11"). Update 2011-11 requires that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transaction s subject to an agreement similar to a master netting agreement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. Update 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The implementation of the disclosure requirement is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

In December 2011, the FASB issued guidance on accumulated other comprehensive income in Accounting Standards Update No. 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("Update 2011-12").  Update 2011-12 defers the specific requirement to present items that are classified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income, as promulgated under Update 2011-05.  Update 2011-12 is effective for annual reporting periods beginning on or after December 15, 2011, and interim periods within those annual periods.  The Company is currently evaluating the impact that the implementation of the disclosure requirement is expected to have on the Company's consolidated results of operations, financial position or cash flows.