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Commitments and Contingencies
12 Months Ended
Dec. 31, 2013
Commitments and Contingencies [Abstract]  
Commitments and Contingencies

 

(9) COMMITMENTS AND CONTINGENCIES

 

Operating Commitments and Contingencies

 

The Company has commitments to third parties for demand transportation charges. As of December 31, 2013, future payments under non-cancelable firm transportation charges are approximately $362.8 million in 2014, $399.2 million in 2015, $413.2 million in 2016, $375.7 million in 2017, $363.3 million in 2018 and $1,594.7 million thereafter.

 

The Company has 11 leases for pressure pumping equipment for its E&P operations under leases that expire between December 1, 2017 and January 1, 2018.  The Company’s current aggregate annual payment under the leases is approximately $7.5 million. The lease payments for the pressure pumping equipment, as well as other operating expenses for the Company’s drilling operations, are capitalized to natural gas and oil properties and are partially offset by billings to third-party working interest owners for their share of fracture stage charges.

 

The Company leases compressors, aircraft, vehicles, office space and equipment under non-cancelable operating leases expiring through 2027.  As of December 31, 2013, future minimum payments under these non-cancelable leases accounted for as operating leases are approximately $65.2 million in 2014, $55.9 million in 2015, $44.6 million in 2016, $27.8 million in 2017, $10.8 million in 2018 and $24.9 million thereafter. The Company also has commitments for compression services related to its Midstream Services and E&P segments. As of December 31, 2013, future minimum payments under these non-cancelable agreements are approximately $38.6 million in 2014, $24.5 million in 2015, $17.2 million in 2016, $9.2 million in 2017, $3.7 million in 2018 and $0.7 million thereafter.

 

In response to the Company’s well performance, SES and SEPCO entered into new and amended natural gas transportation and gathering arrangements with third party pipelines during the second quarter of 2013 in support of the Company’s production in the Marcellus Shale. As of December 31, 2013, the Company’s obligations for demand and similar charges under the firm transportation agreements and gathering agreements totaled approximately $3.5 billion and the Company has guarantee obligations of up to $100.0 million of that amount.   

 

In 2013, we started construction on a corporate office complex located in Spring, Texas on 26 acres of commercial land that we purchased in 2012.  The Company financed the construction of this complex through a construction agreement and lease arrangement.  We are currently obligated for the construction costs incurred, which approximated $38 million at December 31, 2013.  Upon completion of construction, a lease term of approximately five years will commence.

 

In the first quarter of 2010, the Company was awarded exclusive licenses by the Province of New Brunswick in Canada to conduct an exploration program covering approximately 2.5 million acres in the province. The licenses require the Company to make certain capital investments in New Brunswick of approximately $47.0 million Canadian dollars in the aggregate over the license periods. In order to obtain the licenses, the Company provided promissory notes payable on demand to the Minister of Finance of the Province of New Brunswick with an aggregate principal amount of $44.5 million Canadian dollars. The promissory notes secure the Company's capital expenditure obligations under the licenses and are returnable to the Company to the extent the Company performs such obligations. If the Company fails to fully perform, the Minister of Finance may retain a portion of the applicable promissory notes in an amount equal to any deficiency. The Company commenced its Canada exploration program in 2010 and, as of December 31, 2013 has invested $39.2 million Canadian dollars, or $36.9 million USD, in New Brunswick towards the Company’s commitment. In December 2012, the Company received two one-year extensions to our exploration licenses which expire on March 2014 and March 2015, respectively. No liability has been recognized in connection with the promissory notes due to the Company’s investments in New Brunswick as of December 31, 2013 and its future investment plans.

Environmental Risk

 

The Company is subject to laws and regulations relating to the protection of the environment. Environmental and cleanup related costs of a non-capital nature are accrued when it is both probable that a liability has been incurred and when the amount can be reasonably estimated. Management believes any future remediation or other compliance related costs will not have a material effect on the financial position or results of operations of the Company.

 

 

Litigation

 

Tovah Energy

In February 2009, SEPCO was added as a defendant in a case then styled Tovah Energy, LLC and Toby Berry-Helfand v. David Michael Grimes, et, al., pending in the 273rd District Court in Shelby County, Texas.  By the time of trial in December 2010, Ms. Berry-Helfand  (the only remaining plaintiff) alleged that, in 2005, she provided SEPCO with proprietary data regarding two prospects in the James Lime formation pursuant to a confidentiality agreement and that SEPCO refused to return the proprietary data to the plaintiff, subsequently acquired leases based upon such proprietary data and profited therefrom.  Among other things, she alleged various statutory and common law claims, including, but not limited to, claims of misappropriation of trade secrets, violation of the Texas Theft Liability Act, breach of fiduciary duty and confidential relationships, various fraud based claims and breach of contract, including a claim of breach of a purported right of first refusal on all interests acquired by SEPCO between February 2005 and February 2006.  She also sought disgorgement of SEPCO’s profits.  A former associate of the plaintiff intervened in the matter claiming to have helped develop the prospect years earlier.

The jury found in favor of the plaintiff and the intervenor with respect to all of the statutory and common law claims and awarded $11.4 million in compensatory damages but no special, punitive or other damages. Separately, the jury determined that SEPCO’s profits for purposes of disgorgement, if ordered as a remedy, were $381.5 million.  (Disgorgement of profits is an equitable remedy determined by the judge, and it is within the judge’s discretion to award none, some or all of unlawfully obtained profits.)   In August 2011, a judgment was entered pursuant to which the plaintiff and the intervenor were entitled to recover approximately $11.4 million in actual damages and approximately $23.9 million in disgorgement as well as prejudgment interest and attorneys’ fees, which currently are estimated to be up to $8.9 million, and all costs of court of the plaintiff and intervenor.

Both sides appealed and in July 2013, the Tyler Court of Appeals ordered that (1) the judgment awarding the plaintiff and the intervenor $23.9 million as disgorgement of illicit gains be reversed and judgment rendered that they take nothing, (2) the award of $11.4 million for actual damages, insofar as it is based on the jury’s findings of breach of fiduciary duty, fraud, breach of contract, and theft of trade secret is reversed and judgment rendered that the plaintiff and the intervenor take nothing under those theories of recovery, (3) the award of $11.4 million to the plaintiff and the intervenor as damages for misappropriation of trade secret is affirmed, (4) the case be remanded to the trial court for a determination and award of attorney’s fees for SEPCO as the prevailing party under the Texas Theft Liability Act, and (5) in all other respects, the judgment is affirmed.  All parties petitioned for rehearing.  The Tyler Court of Appeals denied rehearing in November 2013. 

 SEPCO filed a petition for review in the Supreme Court of Texas in February 2014.  The plaintiff and the intervenor have until March 2014 to file petitions for review.  Based on the Company’s understanding and judgment of the facts and merits of this case, including appellate matters, and after considering the advice of counsel, the Company has determined that, although reasonably possible, a materially adverse final outcome to this action is not probable.  As such, the Company has not accrued any amounts with respect to this action.  If the plaintiff and the intervenor were to prevail ultimately in the appellate process, the Company currently estimates, based on the judgments to date, that SEPCO’s potential liability would be up to $45.5 million, including interest and attorney’s fees. If the Supreme Court declines to hear the case or affirms all aspects of the court of appeals’ judgment, then SEPCO would owe the $11.4 million in damages, plus interest and attorneys fees, offset by any award of attorneys’ fees for its prevailing on the theft count. The Company’s assessment may change in the future due to occurrence of certain events, such as the result of the petition or petitions for review at the Supreme Court of Texas, and such a re-assessment could lead to the determination that the potential liability is probable and could be material to the Company’s results of operations, financial position or cash flows.

Bureau of Land Management

 

In March 2010, the Company’s subsidiary SEECO was served with a subpoena from a federal grand jury in Little Rock, Arkansas.  Based on the documents requested under the subpoena and subsequent discussions with representatives of the Bureau of Land Management and the U.S. Attorney, the Company believed the grand jury was investigating matters involving approximately 27 horizontal wells operated by SEECO in Arkansas, including whether appropriate leases or permits were obtained therefrom and whether royalties and other production attributable to federal lands were properly accounted for and paid.  In January 2014, the U.S. Attorney’s office informed SEECO’s outside counsel that no criminal charges will be brought.  Two wells were drilled, in part, through federal lands without having obtained leases at the time of drilling, and SEECO has paid full royalties as if those leases were in place from first production of the wells. The Government has made a formal demand for additional damages for trespass; however, because these actions were not deliberate and SEECO voluntarily reported this to the Bureau of Land Management at the time the error was discovered, the Company does not believe additional damages should be assessable or that such additional damages, if any, would be material. 

Other

 

The Company is subject to various litigation, claims and proceedings that have arisen in the ordinary course of business, such as for alleged breaches of contract, miscalculation of royalties and pollution, contamination or nuisance. Management believes that such litigation, claims and proceedings, individually or in aggregate and after taking into account insurance, are not likely to have a material adverse impact on our financial position, results of operations or cash flows.  Many of these matters are in early stages, so the allegations and the damage theories have not been fully developed, and all subject to inherent uncertainties; therefore, management’s view may change in the future. If an unfavorable final outcome were to occur, there exists the possibility of a material impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated.

 

Indemnifications

 

The Company provides certain indemnifications in relation to dispositions of assets.  These indemnifications typically relate to disputes, litigation or tax matters existing at the date of disposition. No liability has been recognized in connection with these indemnifications.