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Organization and Summary of Significant Accounting Policies (Policy)

12 Months Ended

Dec. 31, 2018

Organization and Summary of Significant Accounting Policies [Abstract]

Southwestern Energy Company (including its subsidiaries, collectively “Southwestern” or the “Company”) is an independent energy company engaged in natural gas, oil and NGL exploration, development and production (“E&P”). The Company is also focused on creating and capturing additional value through its marketing business and, until the Fayetteville Shale sale, its gathering business in Arkansas (“Midstream”). Southwestern conducts most of its business through subsidiaries and operates principally in two segments: E&P and Midstream. The Company also has drilling rigs located in Pennsylvania and West Virginia and provides oilfield products and services, principally serving its E&P operations.

E&P. Southwestern’s primary business is the exploration for and production of natural gas, oil and NGLs, with ongoing operations focused on the development of unconventional natural gas and oil reservoirs located in Pennsylvania and West Virginia. The Company’s operations in northeast Pennsylvania, herein referred to as “Northeast Appalachia,” are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Operations in West Virginia and southwest Pennsylvania, herein referred to as “Southwest Appalachia,” are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs. Collectively, Southwestern refers to its properties located in Pennsylvania and West Virginia as the “Appalachian Basin.”

Midstream. Southwestern’s marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil and NGLs produced in its E&P operations.

In September 2018, the Company announced that it had signed an agreement to sell 100% of the equity in certain of its subsidiaries that owned and operated its Fayetteville Shale E&P and related midstream gathering assets for $1,865 million in cash, subject to customary closing adjustments (“Fayetteville Shale sale”). The sale closed December 3, 2018 resulting in net proceeds of approximately $1,650 million, following adjustments of $215 million primarily related to the net cash flows from the economic effective date to the closing date and certain other working capital adjustments, and is discussed in further detail in Note 3. The historical financial and operating results of the assets sold are included in these financial statements for the period of time during which we owned the assets.

Basis of Presentation

The consolidated financial statements included in this Annual Report 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 accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the 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. Certain reclassifications have been made to the prior year financial statements to conform to the 2018 presentation. In the first quarter of 2018, the Company adopted ASU 2017-07 which required that all non-service costs related to the Company’s pension plan be reclassified from general and administrative expenses to other income (loss), net for all periods presented. The adoption of ASU 2017-07 resulted in a reclassification of $5 million of curtailment and settlement costs from restructuring charges to other income (loss), net on the Company’s consolidated statements of operations for the year ended December 31, 2016.

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 2015, the Company purchased an 86% ownership in a limited partnership which owns and operates a gathering system in Northeast Appalachia. Because the Company owns a controlling interest in the partnership, the operating and financial results are consolidated with the Company’s E&P segment results. The investor’s share of the partnership activity is reported in retained earnings in the consolidated financial statements. Net income attributable to noncontrolling interest for the years ended December 31, 2018, 2017 and 2016 was insignificant.

Major Customers

The Company sells the vast majority of its E&P natural gas, oil and NGL production to third-party customers through its marketing subsidiary. For the years ended December 31, 2018 and 2017, two subsidiaries of Royal Dutch Shell Plc in aggregate accounted for approximately 10.4% and 10.3%, respectively, of total natural gas, oil and NGL sales. In 2016, no single customer accounted for 10% or greater of our total sales. The Company believes that the loss of a major customer would not have a material adverse effect on its ability to sell its natural gas, oil and NGL production because alternative purchasers are available.

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 as the Company monitors the credit status of the financial institutions holding its cash and marketable securities. The following table presents a summary of cash and cash equivalents as of December 31, 2018 and December 31, 2017:


	For the years ended December 31,
(in millions)	2018		2017
Cash	$	32	$	261
Marketable securities (1)		169		605
Other cash equivalents		–		50	(2)
Total	$	201	$	916

(1)

Consists of government stable value money market funds.

(2)

Consists of time deposits.

Certain of the Company’s cash accounts are zero-balance controlled disbursement accounts. 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 $34 million and $17 million as of December 31, 2018 and 2017, respectively.

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 are subject to a ceiling test that limits such pooled costs, net of applicable deferred taxes, to the aggregate of the present value of future net revenues attributable to proved natural gas, oil and NGL reserves discounted at 10% (standardized measure). 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, oil and NGL prices may subsequently increase the ceiling. Companies using the full cost method are required to use the average quoted price from the first day of each month from the previous 12 months, including the impact of derivatives designated for hedge accounting, to calculate the ceiling value of their reserves. 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.

Costs associated with unevaluated properties are excluded from the amortization base until the properties are evaluated or impairment is indicated. The costs associated with unevaluated leasehold acreage and related seismic data, wells currently drilling and related capitalized interest are initially excluded from the amortization base. Leasehold costs are either transferred to the amortization base with the costs of drilling a well on the lease or are assessed at least annually for possible impairment or reduction in value. The Company’s decision to withhold costs from amortization and the timing of the transfer of those costs into the amortization base involves a significant amount of judgment and may be subject to changes over time based on several factors, including drilling plans, availability of capital, project economics and drilling results from adjacent acreage. At December 31, 2018, the Company had a total of $1,755 million of costs excluded from the amortization base, all of which related to its properties in the United States. Inclusion of some or all of these costs in the Company’s United States properties in the future, without adding any associated reserves, could result in additional ceiling test impairments.

At December 31, 2018, using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $3.10 per MMBtu, West Texas Intermediate oil of $65.56 per barrel and NGLs of $17.64 per barrel, 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, 2018. The Company had no derivative positions that were designated for hedge accounting as of December 31, 2018.

Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $2.98 per MMBtu, West Texas Intermediate oil of $47.79 per barrel and NGLs of $14.41 per barrel, 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, 2017. The Company had no derivative positions that were designated for hedge accounting as of December 31, 2017.

The net book value of the Company’s United States and Canada natural gas and oil properties exceeded the ceiling by approximately $641 million (net of tax) at March 31, 2016, $297 million (net of tax) at June 30, 2016 and $506 million (net of tax) at September 30, 2016 and resulted in non-cash ceiling test impairments for the quarters ended those dates. Using the average quoted price from the first day of each month from the previous 12 months for Henry Hub natural gas of $2.48 per MMBtu, West Texas Intermediate oil of $39.25 per barrel and NGLs of $6.74 per barrel, 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 results in a ceiling test impairment at December 31, 2016. The Company had no derivative positions that were designated for hedge accounting as of December 31, 2016.

Gathering Systems. The Company’s investment in gathering systems was primarily in a system serving its Fayetteville Shale operations in Arkansas. These assets were included in the Fayetteville Shale sale that closed in December 2018.

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

Asset Retirement Obligations. The Company owns natural gas and oil properties, which require expenditures to plug and abandon the wells and reclaim the associated pads when the wells are no longer producing. 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.

Impairment of Long-Lived Assets. The carrying value of non-full cost pool long-lived assets is evaluated for recoverability whenever events or changes in circumstances indicate that it may not be recoverable. In accordance with accounting guidance for Property, Plant and Equipment, assets held for sale are measured at the lower of carrying value or fair value less costs to sell. This accounting guidance does not apply to the Company’s full cost pool assets, which are governed under SEC Regulation S-X 4-10, and thus were not classified as held for sale. Because the assets excluding the full cost pool met the criteria for held for sale accounting in the third quarter of 2018 due to their inclusion in the Fayetteville Shale sale, the Company determined the carrying value of certain non-full cost pool assets exceeded the fair value less costs to sell. As a result, an impairment charge of $160 million was recorded for the year ended December 31, 2018, of which $145 million related to midstream gathering assets held for sale and $15 million related to E&P assets held for sale. Separately, the Company recorded an $11 million impairment of other non-core assets that were not included in the Fayetteville Shale sale, for the year ended December 31, 2018.

Intangible Assets. The carrying value of intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate that it may not be recoverable. Intangible assets are amortized over their useful life. The Company amortized $9 million of its marketing-related intangible asset in each of the years ended December 31, 2018, 2017 and 2016.

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 expected to be 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. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations. Additional information regarding uncertain tax positions along with the impact of recent tax reform legislation can be found in Note 10.

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 derivative instruments to financially protect sales of natural gas, oil and NGLs. In addition, the Company uses interest rate swaps to manage exposure to unfavorable interest rate changes. Since the Company does not designate its derivatives for hedge accounting treatment, gains and losses resulting from the settlement of derivative contracts have been recognized in gain (loss) on derivatives in the consolidated statements of operations when the contracts expire and the related physical transactions of the underlying commodity are settled. Additionally, changes in the fair value of the unsettled portion of derivative contracts are also recognized in gain (loss) on derivatives in the consolidated statement of operations. See Note 5 – “Derivatives and Risk Management” and Note 7 – “Fair Value Measurements” for a discussion of the Company’s hedging activities.

Earnings Per Share

Basic earnings per common share is computed by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding during the reportable period. The diluted earnings per share 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, the vesting of unvested restricted shares of common stock, performance units and the assumed conversion of mandatory convertible preferred stock. An antidilutive impact is an increase in earnings per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.

In July 2016, the Company completed an underwritten public offering of 98,900,000 shares of its common stock, with an offering price to the public of $13.00 per share. Net proceeds from the common stock offering were approximately $1,247 million, after underwriting discount and offering expenses. The proceeds from the offering were used to repay $375 million of the $750 million term loan entered into in November 2015 and to settle certain tender offers by purchasing an aggregate principal amount of approximately $700 million of the Company’s outstanding senior notes due in 2018. The remaining proceeds of the offering were used for general corporate purposes.

In January 2015, the Company issued 34,500,000 depositary shares that entitled the holder to a proportional fractional interest in the rights and preferences of the mandatory convertible preferred stock, including conversion, dividend, liquidation and voting rights. The mandatory convertible preferred stock had the non-forfeitable right to participate on an as-converted basis at the conversion rate then in effect in any common stock dividends declared and, therefore, was considered a participating security. Accordingly, it has been included in the computation of basic and diluted earnings per share, pursuant to the two-class method. In the calculation of basic earnings per share attributable to common shareholders, earnings are allocated to participating securities based on actual dividend distributions received plus a proportionate share of undistributed net income attributable to common shareholders, if any, after recognizing distributed earnings. The Company’s participating securities do not participate in undistributed net losses because they are not contractually obligated to do so. On January 12, 2018, all outstanding shares of mandatory convertible preferred stock were converted to 74,998,614 shares of the Company’s common stock.

The Company declared dividends on its mandatory convertible preferred stock in the first, second and third quarters of 2017 that were settled partially in common stock for a total of 10,040,306 shares as well as each quarter in 2016 that were settled in common stock for a total of 9,917,799 shares.

In 2018, the Company repurchased 39,061,269 of its outstanding common stock for approximately $180 million at an average price of $4.63 per share.

The following table presents the computation of earnings per share for the years ended December 31, 2018, 2017 and 2016:



	For the years ended December 31,
(in millions, except share/per share amounts)	2018		2017		2016
Net income (loss)	$	537	$	1,046	$	(2,643)
Mandatory convertible preferred stock dividend		–		108		108
Participating securities – mandatory convertible preferred stock		2		123		–
Net income (loss) attributable to common stock	$	535	$	815	$	(2,751)

Number of common shares:
Weighted average outstanding	574,631,756		498,264,321		435,337,402
Issued upon assumed exercise of outstanding stock options		–		–		–
Effect of issuance of non-vested restricted common stock		698,103		1,061,056		–
Effect of issuance of non-vested performance units		1,312,949		1,478,920		–
Weighted average and potential dilutive outstanding	576,642,808		500,804,297		435,337,402

Earnings (loss) per common share:
Basic	$	0.93	$	1.64	$	(6.32)
Diluted	$	0.93	$	1.63	$	(6.32)

The following table presents the common stock shares equivalent excluded from the calculation of diluted earnings per share for the years ended December 31, 2018, 2017 and 2016, as they would have had an antidilutive effect:


	For the years ended December 31,
	2018	2017	2016
Unexercised stock options	5,909,082	116,717	3,692,697
Unvested share-based payment	3,692,794	5,361,849	959,233
Performance units	642,568	765,689	884,644
Mandatory convertible preferred stock	2,465,708	74,999,895	74,999,895
Total	12,710,152	81,244,150	80,536,469

Supplemental Disclosures of Cash Flow Information

The following table provides additional information concerning interest and income taxes paid as well as changes in noncash investing activities for the years ended December 31, 2018, 2017 and 2016:


	For the years ended December 31,
(in millions)	2018		2017		2016
Cash paid during the year for interest, net of amounts capitalized	$	135	$	130	$	75
Cash paid (received) during the year for income taxes		6		(5)		(15)
Increase (decrease) in noncash property additions		(42)		25		55

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. See Note 13 for a discussion of the Company’s stock-based compensation.

Liability-Classified Awards

The fair value of a liability-classified award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value of liability-classified awards are recorded to general and administrative expense or capitalized expense over the vesting period of the award. The Company’s liability-classified performance unit awards include a performance condition based on cash flow per debt-adjusted share and two market conditions, one based on absolute total shareholder return and the other on relative total shareholder return as compared to a group of the Company’s peers. The fair values of the two market conditions are calculated by Monte Carlo models on a quarterly basis.

Treasury Stock

In the third quarter of 2018, the Company announced its intention to repurchase up to $200 million of its outstanding common stock using a portion of the net proceeds from the Fayetteville Shale sale. As of December 31, 2018, approximately $180 million has been spent to repurchase 39,061,269 shares at an average price of $4.63 per share.

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 liabilities 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, are presented as treasury stock and are carried at cost. As of December 31, 2018 and 2017, 10,653 shares and 31,269 shares, respectively, were held in the Rabbi Trust and were accounted for as treasury stock. In 2018, 20,616 shares were released from the Rabbi Trust due to a reduction in our workforce. These shares are still held as treasury stock.

Foreign Currency Translation

The Company has designated the Canadian dollar as the functional currency for its activities in Canada. The cumulative translation effects of translating the accounts from the functional currency into the U.S. dollar at current exchange rates are included as a separate component of other comprehensive income within stockholders’ equity.

New Accounting Standards Implemented in this Report

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606, as subsequently amended). ASC 606 supersedes the revenue recognition requirements in topic 605, Revenue Recognition, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which an entity expects to be entitled to in exchange for those goods or services. The Company adopted ASC 606 with an effective date of January 2018 using the modified retrospective approach. For public entities, ASC 606 became effective for fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material effect on the Company’s consolidated results of operations, financial position or cash flows. Additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flow from contracts with customers are available in Note 4 – “Revenue Recognition”.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715) (“Update 2017-07”), which provides additional guidance on the presentation of net benefit cost in the statement of operations and on the components eligible for capitalization in assets, and requires retrospective adoption. The guidance requires employers to disaggregate the service cost component from the other components of net benefit cost. The service cost component of the net periodic benefit cost shall be reported in the same line item as other compensation costs arising from services rendered by the employees during the period, except for amounts capitalized. All other components of net benefit cost shall be presented outside of a subtotal for income from operations. The Company adopted Update 2017-07 during the first quarter of 2018 resulting in no material impact to its consolidated statement of operations, financial position or cash flows. The non-service cost components of net periodic benefit cost are no longer presented as a component of general and administrative expense, but are now presented as a component of Other Income, Net for the years ended December 31, 2018, 2017 and 2016, and are disclosed in Note 12 – “Retirement and Employment Benefit Plans”. The Company ceased capitalizing the non-service components of net periodic benefit costs prospectively as of the beginning of the first quarter of 2018.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) (“Update 2016-15”), which seeks to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this update during the first quarter of 2018 resulting in no impact on its consolidated statement of cash flows.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 that will amend the FASB Accounting Standards relating to tax effects in accumulated other comprehensive income (Topic 220) (“Updated 2018-02”). Update 2018-02 permits a company to reclassify the stranded income tax effects of the Tax Reform Act on items within accumulated comprehensive income to retained earnings. Although the amendments in Update 2018-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, the Company elected to early adopt the amendments of Update 2018-02 in the third quarter of 2018. The implementation did not have a material impact on the Company’s consolidated statement of operations, financial position or cash flows due to the tax valuation allowance currently in place. Any adjustments required under this update were fully offset by valuation allowance adjustments for both continuing operations and accumulated other comprehensive income.

New Accounting Standards Not Yet Implemented in this Report

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“Update 2016-02”), which seeks to increase transparency and comparability among organizations by, among other things, recognizing lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous GAAP and disclosing key information about leasing arrangements. The codification was amended through additional ASUs. Through the year ended December 31, 2018, the Company finalized its contract reviews for leases in effect at year-end, drafted its accounting policies, evaluated the new disclosure requirements and implemented a software solution. Upon adoption, the Company expects to recognize a discounted right-of-use asset and corresponding lease liability between $95 million and $115 million. The Company continues to review new contracts commenced during 2019 to determine the appropriate lease accounting treatment where applicable.

ASC 842 allows issuers to elect the date of initial application as either the beginning of the period of adoption or the beginning of the earliest comparative period presented in the financial statements. The Company plans to elect the period of adoption, January 1, 2019, as its initial application date which would not result in restating prior comparative periods. The adoption of this standard is not expected to materially change the Company’s consolidated statement of operations or its consolidated statement of cash flows. The Form 10-Q filing for the quarter ended March 31, 2019 will include the full impact of ASC 842, along with the presentation of the discounted right-of-use asset and lease liability on the consolidated balance sheet.