10-Q 1 cog-09302017x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-10447
 
CABOT OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
 
04-3072771
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
Three Memorial City Plaza
840 Gessner Road, Suite 1400, Houston, Texas 77024
(Address of principal executive offices including ZIP code)
(281) 589-4600
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of October 23, 2017, there were 462,508,414 shares of Common Stock, Par Value $0.10 Per Share, outstanding.



CABOT OIL & GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.    Financial Statements
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(In thousands, except share amounts)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
510,256

 
$
498,542

Accounts receivable, net
 
161,690

 
191,045

Income taxes receivable
 
26,963

 
10,298

Inventories
 
12,997

 
13,304

Other current assets
 
6,123

 
2,692

Total current assets
 
718,029

 
715,881

Properties and equipment, net (Successful efforts method)
 
4,234,772

 
4,250,125

Equity method investments
 
148,920

 
129,524

Other assets
 
27,045

 
27,039

 
 
$
5,128,766

 
$
5,122,569

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
160,789

 
$
168,411

Current portion of long-term debt
 
237,000

 

Accrued liabilities
 
27,314

 
21,492

Interest payable
 
12,331

 
27,650

Derivative instruments
 
800

 
40,259

Total current liabilities
 
438,234

 
257,812

Long-term debt, net
 
1,284,551

 
1,520,530

Deferred income taxes
 
638,014

 
579,447

Asset retirement obligations
 
59,605

 
131,733

Postretirement benefits
 
27,360

 
36,259

Other liabilities
 
36,408

 
29,121

Total liabilities
 
2,484,172

 
2,554,902

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Stockholders' equity
 
 

 
 

Common stock:
 
 

 
 

Authorized — 960,000,000 shares of $0.10 par value in 2017 and 2016, respectively
 
 

 
 

Issued — 475,443,335 shares and 475,042,692 shares in 2017 and 2016, respectively
 
47,544

 
47,504

Additional paid-in capital
 
1,738,656

 
1,727,310

Retained earnings
 
1,230,002

 
1,098,703

Accumulated other comprehensive income
 
3,482

 
985

Less treasury stock, at cost:
 
 

 
 

12,935,926 and 9,892,680 shares in 2017 and 2016, respectively
 
(375,090
)
 
(306,835
)
Total stockholders' equity
 
2,644,594

 
2,567,667

 
 
$
5,128,766

 
$
5,122,569

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
OPERATING REVENUES
 
 

 
 

 
 

 
 

   Natural gas
 
$
323,319

 
$
260,200

 
$
1,152,089

 
$
711,010

   Crude oil and condensate
 
56,913

 
37,777

 
144,528

 
114,610

   Gain (loss) on derivative instruments
 
(836
)
 
6,904

 
46,353

 
(1,286
)
   Brokered natural gas
 
3,528

 
3,641

 
12,260

 
9,417

   Other
 
2,492

 
1,907

 
8,486

 
5,435

 
 
385,416

 
310,429

 
1,363,716

 
839,186

OPERATING EXPENSES
 
 

 
 

 
 

 
 

   Direct operations
 
26,282

 
24,626

 
78,185

 
77,139

   Transportation and gathering
 
117,891

 
105,671

 
361,909

 
322,883

   Brokered natural gas
 
2,797

 
2,939

 
10,262

 
7,526

   Taxes other than income
 
9,194

 
8,771

 
26,562

 
23,737

   Exploration
 
6,466

 
2,988

 
16,623

 
13,109

   Depreciation, depletion and amortization
 
146,267

 
139,490

 
425,689

 
448,910

   Impairment of oil and gas properties
 

 

 
68,555

 

   General and administrative
 
23,244

 
19,374

 
70,902

 
67,192

 
 
332,141

 
303,859

 
1,058,687

 
960,496

Earnings (loss) on equity method investments
 
(1,417
)
 
(1,727
)
 
(3,986
)
 
208

Loss on sale of assets
 
(11,872
)
 
(1,245
)
 
(13,498
)
 
(768
)
INCOME (LOSS) FROM OPERATIONS
 
39,986

 
3,598

 
287,545

 
(121,870
)
Interest expense, net
 
20,331

 
21,483

 
61,720

 
67,821

Loss on debt extinguishment
 

 

 

 
4,709

Other expense (income)
 
(5,083
)
 
402

 
(4,974
)
 
1,207

Income (loss) before income taxes
 
24,738

 
(18,287
)
 
230,799

 
(195,607
)
Income tax expense (benefit)
 
7,151

 
(8,027
)
 
85,965

 
(71,243
)
NET INCOME (LOSS)
 
$
17,587

 
$
(10,260
)
 
$
144,834

 
$
(124,364
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
 
 

 
 

 
 

 
 

Basic
 
$
0.04

 
$
(0.02
)
 
$
0.31

 
$
(0.27
)
Diluted
 
$
0.04

 
$
(0.02
)
 
$
0.31

 
$
(0.27
)
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 

 
 

 
 

 
 

Basic
 
462,498

 
465,149

 
464,194

 
454,060

Diluted
 
464,780

 
465,149

 
466,010

 
454,060

 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
0.05

 
$
0.02

 
$
0.12

 
$
0.06

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
17,587

 
$
(10,260
)
 
$
144,834

 
$
(124,364
)
Postretirement benefits:
 
 
 
 
 
 
 
 
Net gain (loss) (1)
 
(1,429
)
 

 
(1,429
)
 

Prior service credit (2)
 
5,449

 

 
5,449

 

Amortization of prior service cost (3)
 
(1,551
)
 
17

 
(1,523
)
 
52

Amortization of (gain) net loss (4)
 
287

 

 

 

Total other comprehensive income
 
2,756

 
17

 
2,497

 
52

Comprehensive income (loss)
 
$
20,343

 
$
(10,243
)
 
$
147,331

 
$
(124,312
)
 

(1)
Net of income taxes of $837 for the three and nine months ended September 30, 2017.
(2)
Net of income taxes of $(3,194) for the three months and nine months ended September 30, 2017.
(3)
Net of income taxes of $909 and $(10) for the three months ended September 30, 2017 and 2016, respectively, and $893 and $(31) for the nine months ended September 30, 2017 and 2016, respectively.
(4)
Net of income taxes of $(168) for the three months ended September 30, 2017.

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

  Net income (loss)
 
$
144,834

 
$
(124,364
)
  Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 

 
 

Depreciation, depletion and amortization
 
425,689

 
448,910

Impairment of oil and gas properties
 
68,555

 

Deferred income tax expense (benefit)
 
89,731

 
(59,413
)
Loss on sale of assets
 
13,498

 
768

Exploratory dry hole cost
 
2,842

 
18

(Gain) loss on derivative instruments
 
(46,353
)
 
1,286

Net cash received in settlement of derivative instruments
 
3,587

 
3,204

(Earnings) loss on equity method investments
 
3,986

 
(208
)
Amortization of debt issuance costs
 
3,579

 
3,888

Stock-based compensation and other
 
26,011

 
23,051

  Changes in assets and liabilities:
 
 

 
 

Accounts receivable, net
 
29,276

 
(1,135
)
Income taxes
 
(16,665
)
 
(11,235
)
Inventories
 
(2,100
)
 
2,860

Other current assets
 
(896
)
 
(917
)
Accounts payable and accrued liabilities
 
(5,133
)
 
(12,174
)
Interest payable
 
(15,318
)
 
(17,618
)
Other assets and liabilities
 
(6,076
)
 
784

Net cash provided by operating activities
 
719,047

 
257,705

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(586,813
)
 
(245,033
)
Proceeds from sale of assets
 
32,711

 
49,068

Investment in equity method investments
 
(23,382
)
 
(24,176
)
Net cash used in investing activities
 
(577,484
)
 
(220,141
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Borrowings from debt
 

 
90,000

Repayments of debt
 

 
(587,000
)
Treasury stock repurchases
 
(68,255
)
 

Sale of common stock, net
 

 
995,279

Dividends paid
 
(55,707
)
 
(26,885
)
Tax withholdings on stock award vestings
 
(5,929
)
 
(5,056
)
Capitalized debt issuance costs
 

 
(3,223
)
Other
 
42

 

Net cash provided by (used in) financing activities
 
(129,849
)
 
463,115

Net increase in cash and cash equivalents
 
11,714

 
500,679

Cash and cash equivalents, beginning of period
 
498,542

 
514

Cash and cash equivalents, end of period
 
$
510,256

 
$
501,193

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


CABOT OIL & GAS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statement Presentation
During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016 (Form 10-K) filed with the Securities and Exchange Commission (SEC). The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.
Certain reclassifications have been made to prior year statements to conform with the current year presentation. These reclassifications had no impact on previously reported stockholders' equity, net income (loss) or cash flows, except as discussed in "Recently Adopted Accounting Pronouncements" below.
Recently Adopted Accounting Pronouncements
Stock-Based Compensation. In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, as an amendment to Accounting Standards Codification (ASC) Topic 718. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company elected to apply this guidance on a prospective basis.
The Company adopted this guidance effective January 1, 2017. The recognition of previously unrecognized windfall tax benefits resulted in a cumulative-effect adjustment of $42.2 million, which increased retained earnings and decreased net deferred tax liabilities by the same amount as of the beginning of 2017. Effective January 1, 2017, cash paid by the Company when directly withholding shares from employee awards for tax-withholding purposes will be classified as a financing activity. This change has been recognized retrospectively beginning January 1, 2015. Prior periods have been adjusted as follows:
 
 
Net Cash Provided by Operating Activities
 
Net Cash Provided by Financing Activities
(In thousands)
 
As Reported
 
As Adjusted
 
As Reported
 
As Adjusted
Year ended December 31, 2015
 
$
740,737

 
$
749,598

 
$
232,157

 
$
223,296

Three months ended March 31, 2016
 
62,090

 
67,112

 
570,773

 
565,751

Six months ended June 30, 2016
 
147,244

 
152,290

 
497,474

 
492,428

Nine months ended September 30, 2016
 
252,649

 
257,705

 
468,171

 
463,115

Year ended December 31, 2016
 
392,377

 
397,441

 
458,869

 
453,805

The remaining provisions of this amendment did not have a material effect on the Company's financial position, results of operations or cash flows.
Accounting Changes and Error Corrections. In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Venture (Topic 323), which states that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance in certain issued but not yet adopted ASUs, including Leases and Revenue Recognition, was also updated to reflect this amendment. This guidance is effective immediately. The Company adopted this guidance during the first quarter of 2017. The adoption of this guidance impacted the Company's disclosures but had no effect on its financial position, results of operations or cash flows.

7


Retirement Benefits. In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). The amendments in this update require that an employer report the service cost component of postretirement benefits in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic benefit cost in assets.
The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. The Company elected to early adopt this guidance effective January 1, 2017. The reclassification of interest and amortization of prior service cost resulted in an increase in operating income and an increase in other expense (non-operating expense) of $1.6 million and $1.4 million for the years ended December 31, 2016 and 2015, respectively, and $1.2 million for the nine months ended September 30, 2016.
Recently Issued Accounting Pronouncements
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall, as an amendment to ASC Subtopic 825-10. The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other items, this update will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. This impairment assessment reduces the complexity of the other-than-temporary impairment guidance that entities follow currently. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption of this amendment is not permitted. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, results of operation or cash flows.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases, as a new Topic, ASC Topic 842. The new lease guidance supersedes Topic 840. The core principle of the guidance is that a company should recognize the assets and liabilities that arise from leases. This ASU does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. The guidance is effective for interim and annual periods beginning after December 15, 2018. This ASU is to be adopted using a modified retrospective approach. The Company plans to adopt this guidance effective January 1, 2019 and is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as a new Topic, ASC Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which deferred the effective date of ASU No. 2014-09 by one year, making the new standard effective for interim and annual periods beginning after December 15, 2017. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus agent considerations (reporting revenue gross versus net), which clarifies the implementation guidance on principal versus agent considerations on such matters. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying performance obligations and licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope improvements and practical expedients, which addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies the guidance or corrects unintended application of guidance.

8


The Company plans to adopt this guidance effective January 1, 2018 using the modified retrospective method applied to contracts that are not completed as of that date. To date, the Company has not identified changes to its revenue recognition policies that would result in a material adjustment to the opening balance of retained earnings on January 1, 2018; however, it is continuing to evaluate the effect, if any, that adopting this guidance will have on its financial position, results of operations or cash flows. The Company is also evaluating its agreements with royalty and nonoperated partners for principal versus agent consideration. Adopting this guidance will result in increased disclosures related to revenue recognition policies and disaggregation of revenue. As allowed under Topic 606, the Company does not plan to disclose the value of unsatisfied performance obligations for contracts with variable consideration or with an original term of one year or less.
Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses eight specific cash flow issues for which current GAAP is either unclear or does not include specific guidance. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. This ASU must be adopted using a retrospective transition method.
Upon adopting this guidance, the Company will be required to make an accounting policy election to classify distributions it receives from its equity method investees under either (1) the cumulative earnings approach in which distributions received are considered returns on investment and classified as cash inflows from operating activities unless the cumulative distributions received exceed cumulative equity in earnings recognized by the Company, or (2) the nature of distributions approach in which distributions received are classified on the basis of the nature of the activity that generated the distribution as either a return on investment (cash inflows from operating activities) or a return of investment (cash inflows from investing activities). The Company has not yet determined which policy election it will make. Currently, the Company is not receiving any distributions from its equity method investees; therefore, the selection between the policy elections would not have a material effect on its presentation of cash flows. If material distributions are received in the future, the impact of the policy election could be material. The Company expects to adopt this guidance effective January 1, 2018 and is currently evaluating the effect that adopting the remaining areas of this guidance will have on its presentation of cash flows. Adoption of this guidance is not expected to have a material effect on the Company's financial position or results of operations.
2. Properties and Equipment, Net
Properties and equipment, net are comprised of the following:
(In thousands)
 
September 30,
2017
 
December 31,
2016
Proved oil and gas properties
 
$
6,967,205

 
$
7,437,604

Unproved oil and gas properties
 
287,147

 
260,543

Gathering and pipeline systems
 
1,451

 
187,846

Land, building and other equipment
 
88,371

 
84,462

 
 
7,344,174

 
7,970,455

Accumulated depreciation, depletion and amortization
 
(3,109,402
)
 
(3,720,330
)
 
 
$
4,234,772

 
$
4,250,125

Proved oil and gas properties, gathering and pipeline systems and accumulated depreciation, depletion and amortization decreased from December 31, 2016 to September 30, 2017 primarily as a result of the sale of assets in West Virginia, Virginia and Ohio discussed below.
At September 30, 2017, the Company did not have any projects that had exploratory well costs capitalized for a period of greater than one year after drilling.
Divestitures
In September 2017, the Company sold certain proved and unproved oil and gas properties and related pipeline assets located in West Virginia, Virginia and Ohio for $41.3 million, subject to customary purchase price adjustments. During the second quarter of 2017, the Company classified these assets as held for sale and recorded an impairment charge of $68.6 million associated with the proposed sale of these properties. Upon closing the sale in the third quarter of 2017, the Company recognized a loss on sale of oil and gas properties of $11.9 million.

9


The fair value of the impaired properties was determined using a market approach that took into consideration the expected sales price included in the purchase and sale agreement the Company executed on June 30, 2017. Accordingly, the inputs associated with the fair value of these assets were considered Level 3 in the fair value hierarchy. Refer to Note 1 of the Notes to the Consolidated Financial Statements in the Form 10-K for a description of the fair value hierarchy.
In February 2016, the Company completed the divestiture of certain proved and unproved oil and gas properties in east Texas for approximately $56.4 million resulting in a $0.5 million gain on sale of assets.
3. Equity Method Investments
The Company holds a 25% equity interest in Constitution Pipeline Company, LLC (Constitution) and a 20% equity interest in Meade Pipeline Co LLC (Meade). Activity related to these equity method investments is as follows:
 
 
Constitution
 
Meade
 
Total
 
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
 
$
96,850

 
$
90,345

 
$
32,674

 
$
13,172

 
$
129,524

 
$
103,517

Contributions
 
3,750

 
8,325

 
19,632

 
15,851

 
23,382

 
24,176

Earnings (loss) on equity method investments
 
(3,971
)
 
211

 
(15
)
 
(3
)
 
(3,986
)
 
208

Balance at end of period
 
$
96,629

 
$
98,881

 
$
52,291

 
$
29,020

 
$
148,920

 
$
127,901

During 2017, the Company expects to contribute approximately $70.0 million to its equity method investments. For further information regarding the Company’s equity method investments, refer to Note 4 of the Notes to the Consolidated Financial Statements in the Form 10-K.
Constitution
On April 22, 2016, Constitution announced that the New York State Department of Environmental Conservation (NYSDEC) denied Constitution's application for a Section 401 Water Quality Certification (Certification) for the New York State portion of its proposed 126-mile route. During the second quarter of 2016, Constitution filed legal actions in the U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Northern District of New York challenging the legality and appropriateness of the NYSDEC’s decision. On March 16, 2017, the U.S. District Court for the Northern District of New York issued an order ruling, without prejudice, that it lacked subject matter jurisdiction to hear Constitution’s complaint.  On August 18, 2017, the Second Circuit issued a decision denying in part and dismissing in part Constitution’s appeal.  The Second Circuit determined that it lacked jurisdiction to address Constitution’s argument that the NYSDEC waived its ability to issue a Certification by unreasonably delaying action on Constitution's application.  Instead, the Second Circuit found that jurisdiction over the waiver issue lies exclusively with the United States Court of Appeals for the District of Columbia Circuit.  The Second Circuit, however, rejected Constitution’s assertion that the denial of the Certification by the NYSDEC was “arbitrary and capricious” and denied Constitution’s complaint in that regard. On October 11, 2017, Constitution filed a petition for a declaratory order requesting the Federal Energy Regulatory Commission (FERC) to find that, by operation of law, the Section 401 Water Quality Certification requirement for the New York State portion of the pipeline project was waived due to the failure of the NYSDEC to act on Constitution’s application within a reasonable period of time, as required by the Clean Water Act.  The FERC has not yet ruled on this petition.
Constitution stated that it remains committed to pursuing the project and that it intends to pursue all available options to challenge the NYSDEC’s decision. In light of the current status of the litigation and the regulatory challenges, Constitution estimates its target in-service date to be as early as the first half of 2019. This assumes the timely receipt of a notice to proceed from the FERC and the timely receipt of all other state and federal permits required for the project. 
In light of the NYSDEC’s denial and actions taken to challenge the denial, the Company evaluated its investment in Constitution for other-than-temporary impairment (OTTI) as of September 30, 2017 and does not believe there is an indication of an OTTI. The Company’s evaluation considered various factors, including but not limited to prior FERC approval and the related economic viability of the project, the pending legal and regulatory actions filed by Constitution and the other members’ commitment to the project. To the extent that the legal and regulatory proceedings have unfavorable outcomes, or if Constitution concludes that the project is no longer viable or elects to not go forward as legal and regulatory actions progress, the Company will reevaluate the facts and circumstances relative to its conclusions with respect to OTTI. In the event that facts and circumstances change, the Company may be required to recognize an impairment charge up to its investment value at such time, net of any cash and working capital held by Constitution. The Company will continue to monitor the carrying value of its investment as required.

10




At this time, the Company remains committed to funding the project in an amount proportionate to its ownership interest for the development and construction of the new pipeline. As of September 30, 2017, the Company has made contributions of $92.3 million since inception of the project.
4. Debt and Credit Agreements
The Company’s debt and credit agreements consisted of the following:
(In thousands)
 
September 30,
2017
 
December 31,
2016
Total debt
 
 
 
 
6.51% weighted-average senior notes
 
$
361,000

 
$
361,000

9.78% senior notes
 
67,000

 
67,000

5.58% weighted-average senior notes
 
175,000

 
175,000

3.65% weighted-average senior notes
 
925,000

 
925,000

Current maturities
 
 
 
 
6.51% weighted-average senior notes
 
(237,000
)
 

Long-term debt, excluding current maturities
 
$
1,291,000

 
$
1,528,000

Unamortized debt issuance costs
 
(6,449
)
 
(7,470
)
 
 
$
1,284,551

 
$
1,520,530

The borrowing base under the terms of the Company's revolving credit facility is redetermined annually in April. In addition, either the Company or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. Effective April 11, 2017, the borrowing base and available commitments were reaffirmed at $3.2 billion and $1.7 billion, respectively.
At September 30, 2017, the Company was in compliance with all restrictive financial covenants for both its revolving credit facility and senior notes. As of September 30, 2017, based on the Company's asset coverage and leverage ratios, there were no interest rate adjustments required for the Company's senior notes.
At September 30, 2017, the Company had no borrowings outstanding under its revolving credit facility and had unused commitments of $1.7 billion. The Company’s weighted-average effective interest rate for the revolving credit facility for the nine months ended September 30, 2016 was approximately 2.3%.
5. Derivative Instruments and Hedging Activities
As of September 30, 2017, the Company had the following outstanding commodity derivatives:
 
 
 
 
 
 
 
Collars
 
 
 
Basis Swaps
 
 
 
 
 
 
 
Floor
 
Ceiling
 
Swaps
 
Type of Contract
 
Volume
 
Contract Period
 
Range
 
Weighted-Average
 
Range
 
Weighted-Average
 
Weighted-Average
 
Weighted-Average
Natural gas - NYMEX
 
8.9

Bcf
 
Oct. 2017 - Dec. 2017
 
 
 
 
 
 
 
 
 
$
3.12

 
 
Natural gas - TCO
 
4.5

Bcf
 
Oct. 2017 - Dec. 2017
 
 
 
 
 
 
 
 
 
$
3.46

 
 
Natural gas - NYMEX
 
8.9

Bcf
 
Oct. 2017 - Dec. 2017
 
$

 
$
3.09

 
$3.42-$3.45
 
$
3.43

 
 
 
 
Natural gas - Transco
 
21.3

Bcf
 
Jan. 2018 - Dec. 2019
 
 
 
 
 
 
 
 
 
 
 
$
0.42

Crude oil
 
0.5

Mmbbl
 
Oct. 2017 - Dec. 2017
 
$

 
$
50.00

 
$56.25-$56.50
 
$
56.39

 
 
 
 
In the table above, natural gas prices are stated per Mcf and crude oil prices are stated per barrel.

11


Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet
 
 
 
 
Derivative Assets
 
Derivative Liabilities
(In thousands)
 
Balance Sheet Location
 
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
Commodity contracts
 
Other current assets
 
$
2,536

 
$

 
$

 
$

Commodity contracts
 
Other assets (non-current)
 
3,763

 
2,991

 

 

Commodity contracts
 
Derivative instruments (current)
 

 

 
800

 
40,259

 
 
 
 
$
6,299

 
$
2,991

 
$
800

 
$
40,259

Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet
(In thousands)
 
September 30,
2017
 
December 31,
2016
Derivative assets
 
 

 
 

Gross amounts of recognized assets
 
$
6,605

 
$
2,991

Gross amounts offset in the statement of financial position
 
(306
)
 

Net amounts of assets presented in the statement of financial position
 
6,299

 
2,991

Gross amounts of financial instruments not offset in the statement of financial position
 
18

 

Net amount
 
$
6,317

 
$
2,991

 
 
 
 
 
Derivative liabilities
 
 

 
 

Gross amounts of recognized liabilities
 
$
1,106

 
$
40,259

Gross amounts offset in the statement of financial position
 
(306
)
 

Net amounts of liabilities presented in the statement of financial position
 
800

 
40,259

Gross amounts of financial instruments not offset in the statement of financial position
 

 
757

Net amount
 
$
800

 
$
41,016

Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Cash received (paid) on settlement of derivative instruments
 
 

 
 

 
 

 
 

Gain (loss) on derivative instruments
 
$
3,906

 
$
(8,101
)
 
$
3,587

 
$
3,204

Non-cash gain (loss) on derivative instruments
 
 

 
 

 
 

 
 

Gain (loss) on derivative instruments
 
(4,742
)
 
15,005

 
42,766

 
(4,490
)
 
 
$
(836
)
 
$
6,904

 
$
46,353

 
$
(1,286
)
6. Fair Value Measurements
The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For further information regarding the fair value hierarchy, refer to Note 1 of the Notes to the Consolidated Financial Statements in the Form 10-K.

12


Financial Assets and Liabilities
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Balance at  
 September 30, 2017
Assets
 
 

 
 

 
 

 
 

Deferred compensation plan
 
$
14,336

 
$

 
$

 
$
14,336

Derivative instruments
 

 

 
6,605

 
6,605

     Total assets
 
$
14,336

 
$

 
$
6,605

 
$
20,941

Liabilities
 
 
 
 

 
 

 
 

Deferred compensation plan
 
$
27,598

 
$

 
$

 
$
27,598

Derivative instruments
 

 
178

 
928

 
1,106

     Total liabilities
 
$
27,598

 
$
178

 
$
928

 
$
28,704

(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Balance at  
 December 31, 2016
Assets
 
 

 
 

 
 

 
 

Deferred compensation plan
 
$
12,587

 
$

 
$

 
$
12,587

Derivative instruments
 

 

 
2,991

 
2,991

     Total assets
 
$
12,587

 
$

 
$
2,991

 
$
15,578

Liabilities
 
 
 
 

 
 

 
 

Deferred compensation plan
 
$
24,169

 
$

 
$

 
$
24,169

Derivative instruments
 

 
21,400

 
18,859

 
40,259

     Total liabilities
 
$
24,169

 
$
21,400

 
$
18,859

 
$
64,428

The Company’s investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company’s common stock that are publicly traded and for which market prices are readily available.
The derivative instruments were measured based on quotes from the Company’s counterparties. Such quotes have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are verified using relevant NYMEX futures contracts and/or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk. The Company measured the non-performance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions with which it has derivative transactions, while non-performance risk of the Company is evaluated using a market credit spread provided by the Company’s bank. The Company has not incurred any losses related to non-performance risk of its counterparties and does not anticipate any material impact on its financial results due to non-performance by third parties.
The most significant unobservable inputs relative to the Company’s Level 3 derivative contracts are basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

13


The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
Balance at beginning of period
 
$
(15,868
)
 
$

Total gain (loss) included in earnings
 
28,659

 
381

Settlement (gain) loss
 
(7,114
)
 
83

Transfers in and/or out of level 3
 

 

Balance at end of period
 
$
5,677

 
$
464

 
 
 
 
 
Change in unrealized gains (losses) relating to assets and liabilities still held at the end of the period
 
$
14,431

 
$
464

There were no transfers between Level 1 and Level 2 fair value measurements for the nine months ended September 30, 2017 and 2016.
Non-Financial Assets and Liabilities
The Company discloses or recognizes its non-financial assets and liabilities, such as impairments, at fair value on a nonrecurring basis. The Company recorded an impairment charge related to certain oil and gas properties during the quarter ended June 30, 2017. Refer to Note 2 of the Notes to the Condensed Consolidated Financial Statements for additional disclosures related to fair value associated with the impaired assets. As none of the Company’s other non-financial assets and liabilities were measured at fair value as of September 30, 2017, additional disclosures were not required.
The estimated fair value of the Company’s asset retirement obligations at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. Cash and cash equivalents are classified as Level 1 in the fair value hierarchy and the remaining financial instruments are classified as Level 2.
The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes and the revolving credit facility is based on interest rates currently available to the Company. The Company’s debt is valued using an income approach and classified as Level 3 in the fair value hierarchy.
The carrying amount and fair value of debt is as follows:
 
 
September 30, 2017
 
December 31, 2016
(In thousands)
 
Carrying
Amount
 
Estimated Fair
Value
 
Carrying
Amount
 
Estimated Fair
Value
Debt, net
 
$
1,521,551

 
$
1,536,360

 
$
1,520,530

 
$
1,463,643

Current maturities
 
(237,000
)
 
(243,569
)
 

 

Long-term debt, excluding current maturities
 
$
1,284,551

 
$
1,292,791

 
$
1,520,530

 
$
1,463,643


14


7. Asset Retirement Obligations
Activity related to the Company’s asset retirement obligations is as follows:
(In thousands)
 
Nine Months Ended 
 September 30, 2017
Balance at beginning of period
 
$
133,733

Liabilities incurred
 
3,788

Liabilities settled
 
(1,225
)
Liabilities divested
 
(75,014
)
Accretion expense
 
4,396

Balance at end of period
 
$
65,678

As of September 30, 2017 and December 31, 2016, approximately $6.1 million and $2.0 million, respectively, is included in accrued liabilities in the Condensed Consolidated Balance Sheet, which represents the current portion of the Company's asset retirement obligation.
8. Commitments and Contingencies
Contractual Obligations
The Company has various contractual obligations in the normal course of its operations. There have been no material changes to the Company’s contractual obligations described under “Transportation and Gathering Agreements,” “Drilling Rig Commitments,” “Lease Commitments” and “Hydraulic Fracturing Services Commitments” as disclosed in Note 9 in the Notes to Consolidated Financial Statements in the Form 10-K.
Legal Matters
The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.
Contingency Reserves
When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters in which reserves have been established. The Company believes that any such amount above the amounts accrued would not be material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.

15


9. Employee Benefit Plans
Postretirement Benefits
The change in the Company's postretirement benefit obligation is as follows:
(In thousands)
 
Nine Months Ended September 30, 2017
 
Year Ended December 31, 2016
Change in Benefit Obligation
 
 
 
 
Benefit obligation at beginning of the period
 
$
37,482

 
$
36,626

Service cost
 
1,163

 
2,323

Interest cost
 
810

 
1,498

Actuarial (gain) loss
 
3,084

 
(2,846
)
Benefits paid
 
(817
)
 
(934
)
Curtailment (gain) loss
 
(4,185
)
 

Plan amendments
 
(8,643
)
 
815

Benefit obligation at end of the period
 
28,894

 
37,482

Change in Plan Assets
 
 
 
 
Fair value of plan assets at end of the period
 

 

Funded status at end of the period
 
$
(28,894
)
 
$
(37,482
)
In September 2017, in conjunction with its sale of properties located in West Virginia, Virginia and Ohio, the Company terminated approximately 100 employees. As a result, the employees’ participation in the postretirement plan terminated, which resulted in a remeasurement and curtailment of the postretirement benefit obligation at September 30, 2017.
The change in benefit obligation for the nine months ended September 30, 2017 also reflects a plan amendment for the Company's change from a Medicare Supplemental program to a Medicare Advantage program for participants age 65 and older. This coverage continues to be provided under a fully-insured arrangement.
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income (Loss)
 
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
Components of Net Periodic Postretirement Benefit Cost
 
 
 
 
Service cost
 
$
1,163

 
$
1,743

Interest cost
 
810

 
1,123

Amortization of prior service cost (credit)
 
(934
)
 
83

Net periodic postretirement cost
 
$
1,039

 
$
2,949

Recognized curtailment (gain) loss
 
(4,850
)
 

Total postretirement cost (benefit)
 
$
(3,811
)
 
$
2,949

Other Changes in Benefit Obligations Recognized in Other Comprehensive Income (Loss)
 
 
 
 
Net (gain) loss
 
$
2,266

 
$

Amortization of prior service cost
 
2,416

 
(83
)
Prior service credit
 
(8,643
)
 

Total recognized in other comprehensive income
 
$
(3,961
)
 
$
(83
)
 
 

 
 
Total recognized in net periodic benefit cost and other comprehensive income (loss)
 
$
(7,772
)
 
$
2,866


16


Assumptions
Assumptions used to determine projected postretirement benefit obligations and postretirement costs are as follows:
(In thousands)
 
September 30,
2017
 
December 31,
2016
Discount rate
 
4.00
%
 
4.30
%
Health care cost trend rate for medical benefits assumed for next year (pre-65)
 
7.75
%
 
7.50
%
Health care cost trend rate for medical benefits assumed for next year (post-65)
 
6.00
%
 
5.00
%
Ultimate trend rate (pre-65)
 
4.50
%
 
4.50
%
Ultimate trend rate (post-65)
 
4.50
%
 
4.50
%
Year that the rate reaches the ultimate trend rate (pre-65)
 
2030

 
2023

Year that the rate reaches the ultimate trend rate (post-65)
 
2023

 
2018

10. Capital Stock
Treasury Stock
In August 1998, the Board of Directors authorized a share repurchase program under which the Company may purchase shares of common stock in the open market or in negotiated transactions. The timing and amount of any stock purchases are determined at the discretion of management. The Company may use the repurchased shares to fund stock compensation programs currently in existence, or for other corporate purposes. All purchases executed to date have been through open market transactions. There is no expiration date associated with the authorization to repurchase common stock of the Company.
During the first nine months of 2017, the Company repurchased 3.0 million shares for a total cost of $68.3 million. Since the authorization date, the Company has repurchased 32.9 million shares of the 40.0 million total shares authorized for a total cost of approximately $456.6 million, of which 20.0 million shares have been retired. No treasury shares have been delivered or sold by the Company subsequent to the repurchase. As of September 30, 201712.9 million shares were held as treasury stock.
11. Stock-based Compensation
General
From time to time the Company grants certain stock-based compensation awards, including restricted stock awards, restricted stock units and performance share awards. Stock-based compensation expense associated with these awards was $7.8 million and $5.1 million in the third quarter of 2017 and 2016, respectively, and $26.2 million and $23.0 million during the first nine months of 2017 and 2016, respectively. Stock-based compensation expense is included in general and administrative expense in the Condensed Consolidated Statement of Operations.
As described in Note 1 to the Condensed Consolidated Financial Statements, effective January 1, 2017, the Company adopted ASU No. 2016-09, which requires that excess tax benefits and tax deficiencies on stock-based compensation be recorded in the income statement. During the first nine months of 2017, the Company recorded an increase to tax expense of $2.6 million in the Condensed Consolidated Statement of Operations as a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for awards that vested during the period.
Prior to the adoption of ASU No. 2016-09, windfall tax benefits were recorded in additional paid in capital in the Condensed Consolidated Balance Sheet and tax shortfalls reduced additional paid in capital to the extent they offset previously recorded windfall tax benefits. During the first nine months of 2016, the Company recorded a tax shortfall of $2.1 million, resulting in a reduction of the Company's windfall tax benefit that was recorded in additional paid in capital in the Condensed Consolidated Balance Sheet. The tax shortfall was a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for certain awards that vested during the period.
Refer to Note 13 of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.

17


Restricted Stock Units
During the first nine months of 2017, 57,028 restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date value of $22.94 per unit. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.
Performance Share Awards
The performance period for the awards granted during the first nine months of 2017 commenced on January 1, 2017 and ends on December 31, 2019. The Company used an annual forfeiture rate assumption ranging from 0% to 6% for purposes of recognizing stock-based compensation expense for its performance share awards.
Performance Share Awards Based on Internal Performance Metrics
The fair value of performance share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to 100% of the award in shares of common stock. Based on the Company’s probability assessment at September 30, 2017, it is considered probable that the criteria for all performance awards based on internal metrics awards will be met.
Employee Performance Share Awards. During the first nine months of 2017, 406,460 Employee Performance Share Awards were granted at a grant date value of $22.60 per share. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a three-year performance period.
Hybrid Performance Share Awards. During the first nine months of 2017, 272,920 Hybrid Performance Share Awards were granted at a grant date value of $22.60 per share. The 2017 awards vest 25% on each of the first and second anniversary dates and 50% on the third anniversary, provided that the Company has $100 million or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.
Performance Share Awards Based on Market Conditions
These awards have both an equity and liability component, with the right to receive up to the first 100% of the award in shares of common stock and the right to receive up to an additional 100% of the value of the award in excess of the equity component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.
TSR Performance Share Awards. During the first nine months of 2017, 409,380 TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a three-year performance period.
The following assumptions were used to determine the grant date fair value of the equity component (February 22, 2017) and the period-end fair value of the liability component of the TSR Performance Share Awards:
 
 
Grant Date
 
September 30, 2017
Fair value per performance share award
 
$
19.85

 
$12.28-$20.22
Assumptions:
 
 

 
 
     Stock price volatility
 
37.8
%
 
20.8% - 39.9%
     Risk free rate of return
 
1.4
%
 
1.1% - 1.5%
12. Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock appreciation rights were exercised and stock awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.

18


The following is a calculation of basic and diluted weighted-average shares outstanding:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Weighted-average shares - basic
 
462,498

 
465,149

 
464,194

 
454,060

Dilution effect of stock appreciation rights and stock awards at end of period
 
2,282

 

 
1,816

 

Weighted-average shares - diluted
 
464,780

 
465,149

 
466,010

 
454,060

The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect due to net loss
 

 
1,784

 

 
1,326

Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect calculated using the treasury stock method
 
2

 

 
6

 
1

Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect
 
2

 
1,784

 
6

 
1,327


19


13. Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
(In thousands)
 
September 30,
2017
 
December 31,
2016
Accounts receivable, net
 
 

 
 

Trade accounts
 
$
162,069

 
$
185,594

Joint interest accounts
 
1,208

 
1,359

Other accounts
 
425

 
5,335

 
 
163,702

 
192,288

Allowance for doubtful accounts
 
(2,012
)
 
(1,243
)
 
 
$
161,690

 
$
191,045

 
 
 
 
 
Inventories
 
 

 
 

Tubular goods and well equipment
 
$
12,130

 
$
11,005

Natural gas in storage
 
867

 
2,299

 
 
$
12,997

 
$
13,304

 
 
 
 
 
Other current assets
 
 

 
 

Prepaid balances and other
 
$
3,587

 
$
2,692

Derivative instruments
 
2,536

 

 
 
$
6,123

 
$
2,692

 
 
 
 
 
Other assets
 
 

 
 

Deferred compensation plan
 
$
14,336

 
$
12,587

Debt issuance costs
 
8,845

 
11,403

Derivative instruments
 
3,763

 
2,991

Other accounts
 
101

 
58

 
 
$
27,045

 
$
27,039

 
 
 
 
 
Accounts payable
 
 

 
 

Trade accounts
 
$
25,851

 
$
27,355

Natural gas purchases
 
3,457

 
2,231

Royalty and other owners
 
33,135

 
36,472

Accrued transportation
 
48,104

 
48,977

Accrued capital costs
 
33,440

 
34,647

Taxes other than income
 
12,938

 
13,827

Other accounts
 
3,864

 
4,902

 
 
$
160,789

 
$
168,411

 
 
 
 
 
Accrued liabilities
 
 

 
 

Employee benefits
 
$
17,065

 
$
14,153

Taxes other than income
 
4,018

 
3,829

Asset retirement obligations
 
6,073

 
2,000

Other accounts
 
158

 
1,510

 
 
$
27,314

 
$
21,492

 
 
 
 
 
Other liabilities
 
 

 
 

Deferred compensation plan
 
$
27,598

 
$
24,169

Other accounts
 
8,810

 
4,952

 
 
$
36,408

 
$
29,121


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ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following review of operations for the three and nine month periods ended September 30, 2017 and 2016 should be read in conjunction with our Condensed Consolidated Financial Statements and the Notes included in this Form 10-Q and with the Consolidated Financial Statements, Notes and Management’s Discussion and Analysis included in the Cabot Oil & Gas Corporation Annual Report on Form 10-K for the year ended December 31, 2016 (Form 10-K).
OVERVIEW
Financial and Operating Overview
Financial and operating results for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 are as follows:
Equivalent production increased 49.7 Bcfe, or 11%, from 463.0 Bcfe, or 1,689.6 Mmcfe per day, in 2016 to 512.7 Bcfe, or 1,877.9 Mmcfe per day, in 2017.
Natural gas production increased 49.4 Bcf, or 11%, from 441.8 Bcf in 2016 to 491.2 Bcf in 2017, as a result of drilling and completion activities in Pennsylvania.
Crude oil/condensate/NGL production increased 0.1 Mmbbls, or 2%, from 3.5 Mmbbls in 2016 to 3.6 Mmbbls in 2017, as result of an increase in drilling and completion activity in south Texas partially offset by a natural decline in production.
Average realized natural gas price was $2.35 per Mcf, 45% higher than the $1.62 per Mcf realized in the comparable period of the prior year.
Average realized crude oil price was $45.70 per Bbl, 27% higher than the $35.85 per Bbl realized in the comparable period of the prior year.
Total capital expenditures were $582.8 million compared to $262.1 million in the comparable period of the prior year.
Drilled 71 gross wells (62.5 net) with a success rate of 98.6% compared to 28 gross wells (28.0 net) with a success rate of 100% for the comparable period of the prior year.
Completed 81 gross wells (70.2 net) in 2017 compared to 51 gross wells (51.0 net) in 2016.
Average rig count during 2017 was approximately 2.0 rigs in the Marcellus Shale, approximately 1.0 rig in the Eagle Ford Shale and approximately 0.2 rigs in other areas, compared to an average rig count in the Marcellus Shale of approximately 1.1 rigs and approximately 0.3 rigs in the Eagle Ford Shale in 2016.
Received proceeds of $32.7 million primarily related to the divestiture of certain oil and gas properties and related pipeline assets in West Virginia, Virginia and Ohio.
Repurchased 3.0 million shares of our common stock for a total cost of $68.3 million.
Market Conditions and Commodity Prices
Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by pipeline capacity constraints, inventory storage levels, basis differentials, weather conditions and other factors. In addition, our realized prices are further impacted by our hedging activities. Location differentials have improved in certain regions, such as in the Appalachian region, resulting in further increases in natural gas prices. As a result, we cannot accurately predict future commodity prices and, therefore, cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital program, production volumes or revenues. We expect natural gas and crude oil prices to remain volatile. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. For information about the impact of realized commodity prices on our natural gas and crude oil and condensate revenues, refer to “Results of Operations” below.
We account for our derivative instruments on a mark-to-market basis with changes in fair value recognized in operating revenues in the Condensed Consolidated Statement of Operations. As a result of these mark-to-market adjustments, we will

21


likely experience volatility in our earnings due to commodity price volatility. Refer to “Impact of Derivative Instruments on Operating Revenues” below and Note 5 to the Condensed Consolidated Financial Statements for more information.
Commodity prices have remained volatile but have improved during 2017 compared to the fourth quarter of 2016. In the event that commodity prices significantly decline, management would test the recoverability of the carrying value of its oil and gas properties and, if necessary, record an impairment charge.
We believe that we are well-positioned to manage the challenges presented in a depressed commodity pricing environment, and that we can endure the continued volatility in current and future commodity prices by:
Continuing to exercise discipline in our capital program with the expectation of funding our capital expenditures with cash on hand, operating cash flows, and if required, borrowings under our revolving credit facility.
Continuing to optimize our drilling, completion and operational efficiencies, resulting in lower operating costs per unit of production.
Continuing to manage our balance sheet, which provides sufficient availability under our revolving credit facility and existing cash balances to meet our capital requirements and maintain compliance with our debt covenants.
Continuing to manage price risk by strategically hedging our natural gas and crude oil production.
Outlook
Based on the expectation for higher operating cash flow due to an improvement in the commodity price outlook, we increased our 2017 budgeted capital expenditures compared to 2016. Our full year 2017 capital spending program includes approximately $775.0 million in capital expenditures related to our drilling and completion program, leasehold acquisitions and contributions of approximately $70.0 million to our equity method investments. All such expenditures are expected to be funded by existing cash, operating cash flow and if required, borrowings under our revolving credit facility.
In 2016, we drilled 40 gross wells (38.0 net) and completed 76 gross wells (76.0 net), of which 62 gross wells (62.0 net) were drilled but uncompleted in prior years. In 2017, we plan to drill 100 gross wells (95.0 net) and complete 95 gross wells (90.0 net), of which 51 gross wells (45.0 net) were drilled but uncompleted in prior years. In 2017, we plan to operate an average of approximately 3.0 rigs, an increase from an average of approximately 1.4 rigs in 2016. We will continue to assess the natural gas and crude oil price environment along with our liquidity position and may increase or decrease our capital expenditures accordingly.
Financial Condition
Capital Resources and Liquidity
Our primary sources of cash for the nine months ended September 30, 2017 were from the sale of natural gas and crude oil production and proceeds from the sale of assets. These cash flows were primarily used to fund our capital expenditures (including contributions to our equity method investments), interest payments on debt, repurchase of shares of our common stock and payment of dividends. See below for additional discussion and analysis of cash flow.
The borrowing base under the terms of our revolving credit facility is redetermined annually in April. In addition, either we or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. Effective April 11, 2017, the borrowing base and available commitments were reaffirmed at $3.2 billion and $1.7 billion, respectively. There were no borrowings outstanding under our revolving credit facility as of September 30, 2017.
We strive to manage our debt at a level below the available credit line in order to maintain borrowing capacity. Our revolving credit facility includes a covenant limiting our total debt. We believe that, with the existing cash on hand, operating cash flow and availability under our revolving credit facility, we have the capacity to fund our spending plans.
At September 30, 2017, we were in compliance with all restrictive financial covenants for both the revolving credit facility and senior notes. As of September 30, 2017, based on our asset coverage and leverage ratios, there were no interest rate adjustments required for our senior notes. See our Form 10-K for further discussion of our restrictive financial covenants.

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Cash Flows
Our cash flows from operating, investing and financing activities are as follows:
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2017
 
2016
Cash flows provided by operating activities
 
$
719,047

 
$
257,705

Cash flows used in investing activities
 
(577,484
)
 
(220,141
)
Cash flows provided by (used in) financing activities
 
(129,849
)
 
463,115

Net increase in cash and cash equivalents
 
$
11,714

 
$
500,679

Operating Activities. Operating cash flow fluctuations are substantially driven by commodity prices, changes in our production volumes and operating expenses. Prices for natural gas and crude oil have historically been volatile, primarily as a result of supply and demand for natural gas and crude oil, pipeline infrastructure constraints, basis differentials, inventory storage levels and seasonal influences. In addition, fluctuations in cash flow may result in an increase or decrease in our capital expenditures. We are unable to predict future commodity prices and, as a result, cannot provide any assurance about future levels of net cash provided by operating activities.
Our working capital is substantially influenced by the variables discussed above and fluctuates based on the timing and amount of borrowings and repayments under our revolving credit facility, repayments of debt, the timing of cash collections and payments on our trade accounts receivable and payable, respectively, sales and repurchases of our securities and changes in the fair value of our commodity derivative activity. From time to time, our working capital will reflect a deficit, while at other times it will reflect a surplus. This fluctuation is not unusual. At September 30, 2017 and December 31, 2016, we had a working capital surplus of $279.8 million and $458.1 million, respectively.
Net cash provided by operating activities in the first nine months of 2017 increased by $461.3 million compared to the first nine months of 2016. This increase was primarily due to higher operating revenues, partially offset by higher cash operating expenses. The increase in operating revenues was primarily due to an increase in realized natural gas and crude oil prices and higher equivalent production. Average realized natural gas and crude oil prices increased by 45% and 27%, respectively, for the first nine months of 2017 compared to the first nine months of 2016. Equivalent production increased by 11% for the first nine months of 2017 compared to the first nine months of 2016 driven by higher natural gas production in the Marcellus Shale.
See “Results of Operations” for additional information relative to commodity price, production and operating expense fluctuations.
Investing Activities. Cash flows used in investing activities increased by $357.3 million for the first nine months of 2017 compared to the first nine months of 2016. The increase was due to $341.8 million higher capital expenditures and $16.4 million lower proceeds from the sale of assets, partially offset by $0.8 million lower capital contributions associated with our equity method investments.
Financing Activities. Cash flows provided by financing activities decreased by $593.0 million for the first nine months of 2017 compared to the first nine months of 2016. This decrease was primarily due to $995.3 million lower net proceeds from the issuance of common stock in 2016, $68.3 million of repurchases of our common stock in 2017 and $28.8 million of higher dividend payments related to an increase in the dividend rate and the issuance of common stock in 2016. These decreases were partially offset by $497.0 million of lower net repayments of debt due to the repayment of the outstanding balance on our revolving credit facility and certain of our senior notes with the proceeds from the issuance of common stock in 2016.

23


Capitalization
Information about our capitalization is as follows: