Note 1 - Summary of Significant Accounting Policies

Description of Operations

SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil and condensate, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) in onshore North America.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SM Energy and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in SM Energy’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of March 31, 2018, and through the filing of this report. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying condensed consolidated financial statements.

Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies to the Company’s 2017 Form 10-K, and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 2017 Form 10-K.

Recently Issued Accounting Standards

Effective December 31, 2017, the Company early adopted, on a retrospective basis, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) and FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows and ASU 2016-18 is intended to clarify guidance on the classification and presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Please refer to Note 1 - Summary of Significant Accounting Policies in the Company’s 2017 Form 10-K for more information.

The accompanying condensed consolidated statements of cash flows (“accompanying statements of cash flows”) line items that were adjusted as a result of the adoption of ASU 2016-15 and ASU 2016-18 for the three months ended March 31, 2017, are summarized as follows:



	For the Three Months Ended March 31, 2017
	As Reported			As Adjusted
	(in thousands)
Cash flows from operating activities:
Non-cash loss on extinguishment of debt, net	$	22		N/A
Loss on extinguishment of debt	N/A			$	35
Net cash provided by operating activities	$	134,966		$	134,979

Cash flows from investing activities:
Other, net	$	2,486		N/A
Net cash provided by investing activities	$	517,313		$	514,827

Cash flows from financing activities:
Cash paid for extinguishment of debt	N/A			$	(13	)
Net cash used in financing activities	$	(2,504	)	$	(2,517	)

Net change in cash and cash equivalents	$	649,775		N/A
Net change in cash, cash equivalents, and restricted cash	N/A			$	647,289
Cash and cash equivalents at beginning of period	$	9,372		N/A
Cash, cash equivalents, and restricted cash at beginning of period	N/A			$	12,372
Cash and cash equivalents at end of period	$	659,147		N/A
Cash, cash equivalents, and restricted cash at end of period	N/A			$	659,661

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the accompanying balance sheets:



	As of March 31, 2018		As of December 31, 2017
	(in thousands)
Cash and cash equivalents	$	643,337	$	313,943
Restricted cash	—		—
Total cash, cash equivalents, and restricted cash	$	643,337	$	313,943

Effective January 1, 2018, the Company adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all related ASUs (“ASU 2014-09”). Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted ASU 2014-09 using the modified retrospective transition method, which was applied to all active contracts as of the effective date. The adoption of ASU 2014-09 did not result in a change to current or prior period results nor did it result in a material change to the Company’s business processes, systems, or controls. However, upon adopting ASU 2014-09, the Company expanded its disclosures to comply with the expanded disclosure requirements of ASU 2014-09. Please refer to Note 2 - Revenue from Contracts with Customers for additional discussion.

Effective January 1, 2018, the Company adopted FASB ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). ASU 2017-07 requires presentation of service cost in the same line item(s) as other compensation costs arising from services rendered by employees during the period and presentation of the remaining components of net benefit cost in a separate line item, outside of operating items, which the Company adopted with retrospective application. In addition, only the service component of the net benefit cost is eligible for capitalization, which the Company adopted with prospective application. Please refer to Note 1 - Summary of Significant Accounting Policies in the Company’s 2017 Form 10-K for more information.

The March 31, 2017, accompanying condensed consolidated statements of operations (“accompanying statements of operations”) line items that were adjusted as a result of the adoption of ASU 2017-07 are summarized as follows:



	For the Three Months Ended March 31, 2017
	As Reported		As Adjusted
	(in thousands)
Operating expenses:
Exploration	$	11,978	$	11,817
General and administrative	$	29,224	$	28,817
Total operating expenses	$	207,145	$	206,577

Income from operations	$	165,593	$	166,161

Other non-operating income (expense), net	$	335	$	(233	)

Effective January 1, 2018, the Company early adopted ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) by applying the changes in the period of adoption. ASU 2018-02 permits entities to reclassify tax effects stranded in accumulated other comprehensive income (loss) to retained earnings as a result of the enactment into law on December 22, 2017 of H.R.1, formally the Tax Cuts and Jobs Act (the “2017 Tax Act”). As a result of adopting ASU 2018-02, the Company reclassified $3.0 million of tax effects stranded in accumulated other comprehensive loss to retained earnings as of January 1, 2018. The Company’s policy for releasing income tax effects within accumulated other comprehensive loss is an incremental, unit-of-account approach.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires recognition of right-of-use assets and lease payment liabilities on the balance sheet by lessees for virtually all leases currently classified as operating leases. The Company has established a cross-functional project team and is leveraging external consultants to evaluate the impacts of ASU 2016-02 and other related guidance, which includes an analysis of non-cancelable leases, drilling rig contracts, certain midstream agreements, and other existing arrangements. Further, the Company is also evaluating policies, controls, and processes that will be necessary to support the additional accounting and disclosure requirements. The Company will adopt ASU 2016-02 and other related guidance on January 1, 2019, using the modified retrospective approach. Adoption of this guidance is expected to result in an increase in right-of-use assets and related liabilities on the Company’s consolidated balance sheets, however, the full impact to the Company’s financial statements and related disclosures is still being evaluated.

Other than as disclosed above or in the Company’s 2017 Form 10-K, there are no other ASUs applicable to the Company that would have a material effect on the Company’s consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of March 31, 2018, and through the filing of this report.