Participants may contribute from 1% to 25% of eligible compensation, as defined in the Plan. Participants who have attained age 50 before the end of the Plan year are eligible to make catch-up contributions. Salary deferrals consist of pretax and/or Roth 401(k) contributions. Participants may also rollover amounts from other qualified defined benefit or defined contribution plans. The Company matches 100% of the first 3% of eligible compensation and 50% of the next 3% of eligible compensation that a participant contributes to the Plan. All contributions to the Plan are invested under the direction of the participant in 17 investment options including Company stock. Investments in the stock of Entergy Corporation originated from a previous plan merger and are no longer an active investment option. Contributions are subject to certain limitations.
Each participant’s account is credited with the participant’s contributions and allocations of the Company’s contribution and Plan earnings. Allocations are based on participant earnings or account balances, as defined in the Plan. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account balance.
Participants are immediately vested in their contributions and Company contributions plus actual earnings thereon.
| 5. | | Notes Receivable from Participants |
Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of a participant’s vested account balance. The loans are secured by the balance in the participant’s account and bear fixed interest at one percentage point above the prime lending rate at the inception of the loan. Principal and interest is generally paid through payroll deductions. Amounts repaid are reinvested in investment options based on the participant’s current investment elections. At December 31, 2014, interest rates ranged from 4.25% to 8.25%.
On termination of service due to death, disability, or retirement, a participant or a participant’s estate may receive the full value of his or her account in a lump-sum or over an installment period of not more than 10 years. For termination of service for other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution.
| 7. | | Transfers to and from Other Plans |
The Plan transfers certain net assets to other plans in connection with participants who have terminated employment and began participating in other employer plans. Such transfers are recorded in benefits paid to participants at the fair value of the assets on the date transferred. Similarly, the Plan allows new participants to rollover or transfer-in assets held in other qualified plans. Such transfers are recorded in rollover contributions at fair value.
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Plan’s financial statements are presented on the accrual basis of accounting.
Investment contracts held by a defined contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. The Plan invests in investment contracts through BNP Paribas Investment Partners Trust Company, a collective trust. The Statements of Net Assets Available for Benefits present the fair value of the investment in the collective trust as well as the adjustment of the investment in the collective trust from fair value to contract value relating to the investment contract. The Statements of Changes in Net Assets Available for Benefits are prepared on a contract value basis.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
| 3. | | Investment Valuation and Income Recognition |
The Plan’s investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See note D for discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan’s gains and losses on investments bought and sold as well as held during the year.
| 4. | | Administrative Expenses |
Loan origination fees paid by the Plan participants to the Plan’s record-keeper are reflected as administrative expenses. All other expenses incurred in connection with the Plan are paid by the Company. During 2014 and 2013, the Company paid $111,982 and $153,685, respectively, of expenses on behalf of the Plan. The Company does not seek to be reimbursed by the Plan for payment of such expenses. Brokerage commissions and transfer taxes incurred in connection with securities transactions are treated as part of the purchase cost or a reduction of sales proceeds.
Benefits are recorded when paid. Amounts allocated to accounts of participants who have elected to withdraw from the Plan, but have not yet received payments from the Plan, totaled $0 and $1,443,911 as of December 31, 2014 and 2013, respectively.
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
| 6. | | Notes Receivable from Participants |
Notes receivable from participants are measured at their unpaid balance plus any accrued but unpaid interest. Delinquent loans are reclassified as distributions based upon the terms of the Plan document. No allowance for credit losses has been recorded as of December 31, 2014 and 2013.
NOTE C – INVESTMENTS
The following investments represent 5% or more of the net assets available for benefits:
| | | | |
| | 2014 | | 2013 |
| | | | |
Deutsche Eqty 500 Index Fund (2) | $ | 23,084,225 | $ | 19,343,333 |
T. Rowe Price Retirement 2040 Advantage | | 14,095,170 | | 11,249,611 |
Prudential Jennison Mid Cap Growth A | | 12,726,716 | | 10,578,952 |
T. Rowe Price Retirement 2030 Advantage | | 11,877,236 | | 9,280,917 |
Southwestern Energy Company - Common Stock | | 11,544,885 | | 16,545,401 |
Amer Europacific Growth – R4 (3) | | 11,022,393 | | 10,535,330 |
T. Rowe Price Retirement 2020 Advantage | | 10,973,663 | | 8,756,507 |
FFTW Income Plus Fund (1) | | 9,103,392 | | 9,739,432 |
Wells Fargo Advantage Core Bond Fund (4) | | 9,057,689 | | 8,766,254 |
LSV Value Equity Fund (5) | | 8,958,427 | | 7,007,606 |
| (1) | | Contract value of $9,078,351 at December 31, 2014 and $9,722,296 at December 31, 2013. |
| (2) | | Transferred from DWS Stock Index Fund. The DWS Stock Index Fund was classified as a collective trust in 2013, while the Deutsche Eqty 500 Index Fund is classified as a mutual fund in 2014. |
| (3) | | Transferred from Amer Europacific Growth – R-3 International Fund |
| (4) | | Transferred from PIMCO Funds – Total Return Fund |
| (5) | | Transferred from Blackrock Equity Dividend Fund – Institutional |
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE C – INVESTMENTS – Continued
During 2014 and 2013, the Plan’s investments including investments bought, sold and held during the year appreciated (depreciated) in value as follows:
| | | | |
| | 2014 | | 2013 |
| | | | |
Mutual funds | $ | 1,443,929 | $ | 9,819,811 |
Collective trusts | | 88 | | 4,647,123 |
Common stocks | | (4,972,559) | | 2,548,079 |
| $ | (3,528,542) | $ | 17,015,013 |
NOTE D – FAIR VALUE MEASUREMENTS
The Plan defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three-tier fair value hierarchy is described as follows:
Level 1:Quoted market prices (unadjusted) in active markets for identical assets and liabilities.
Level 2:Inputs, other than the quoted prices in active markets included within Level 1, that are observable for the asset or liability either directly or indirectly.
Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions about what market participants would use in pricing the asset or liability.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities being measured and their placement or changes in their placement within the fair value hierarchy. Transfers between levels are recognized on the actual date of the event resulting in the transfer.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2014 and 2013.
Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-ended funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value (“NAV”) and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE D – FAIR VALUE MEASUREMENTS – Continued
Collective trusts: Valued using the NAV provided by the administrator of the fund. The NAV is based on the fair value of the underlying assets owned by the fund, less its liabilities, and then divided by the number of shares owned. The NAV is a quoted price in a market that is not active. These funds transact at their NAV. There are no restrictions in place with respect to the daily redemption of the collective trust funds. There are no unfunded commitments at December 31, 2014.
Common stocks: Valued at the closing price reported on the active market on which the individual securities are traded.
The preceding methods described may produce fair value calculations that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
During the plan years ended December 31, 2014 and 2013, there were no transfers in or out of Levels 1 and 2.
The following are assets measured at fair value on a recurring basis at December 31, 2014 and 2013:
| | | | | | | | |
| | 2014 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Mutual funds | | | | | | | | |
Growth and income funds | $ | 46,268,477 | $ | - | $ | - | $ | 46,268,477 |
Growth funds | | 27,674,197 | | - | | - | | 27,674,197 |
Aggressive growth funds | | 17,349,888 | | - | | - | | 17,349,888 |
Fixed income funds | | 10,321,951 | | - | | - | | 10,321,951 |
Non-benefit-responsive investment fund – S&P 500 Indexed | | 23,084,225 | | - | | - | | 23,084,225 |
Total mutual funds | | 124,698,738 | | - | | - | | 124,698,738 |
Collective trusts | | | | | | | | |
Fixed income and fully benefit- responsive investment contract | | - | | 9,237,327 | | - | | 9,237,327 |
Total collective trusts | | - | | 9,237,327 | | - | | 9,237,327 |
Common stocks | | 11,682,998 | | - | | - | | 11,682,998 |
Total investments at fair value | $ | 136,381,736 | $ | 9,237,327 | $ | - | $ | 145,619,063 |
| | | | | | | | |
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE D – FAIR VALUE MEASUREMENTS – Continued
| | | | | | | | |
| | 2013 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Mutual funds | | | | | | | | |
Growth and income funds | $ | 35,842,460 | $ | - | $ | - | $ | 35,842,460 |
Growth funds | | 22,777,524 | | - | | - | | 22,777,524 |
Aggressive growth funds | | 16,201,169 | | - | | - | | 16,201,169 |
Fixed income funds | | 9,028,861 | | - | | - | | 9,028,861 |
Total mutual funds | | 83,850,014 | | - | | - | | 83,850,014 |
Collective trusts | | | | | | | | |
Non-benefit-responsive investment fund – S&P 500 Indexed | | - | | 19,343,333 | | - | | 19,343,333 |
Fixed income and fully benefit- responsive investment contract | | - | | 9,739,432 | | - | | 9,739,432 |
Total collective trusts | | - | | 29,082,765 | | - | | 29,082,765 |
Common stocks | | 16,642,561 | | - | | - | | 16,642,561 |
Total investments at fair value | $ | 100,492,575 | $ | 29,082,765 | $ | - | $ | 129,575,340 |
NOTE E – INVESTMENT CONTRACT WHICH INCLUDE INSURANCE AND
INVESTMENT CONTRACTS
The Plan offers the FFTW Income Plus Fund (“FFTW Fund”), through the BNP Paribas Investment Partners Pooled Trust Fund (“BNP Fund”), as an investment option to the Plan participants. The BNP Fund is a collective investment fund, which includes the FFTW Fund, and is maintained by the trustee BNP Paribas Investment Partners Trust Company. This fund primarily invests in guaranteed investment contracts (“GICs”), money market funds, money market instruments, repurchase agreements, private placements, bank investment contracts and synthetic GICs.
Investments in GICs guarantee a stated rate of interest for a fixed maturity. In a synthetic GIC structure, the underlying investments are owned by a separate entity. A synthetic GIC is comprised of two components: an underlying asset and a wrapper contract. Wrapper contracts generally change the investment characteristics of underlying securities to those of guaranteed investment contracts. Each wrapper contract obligates the wrap provider to maintain the “contract value” of the underlying investments. The contract value is generally equal to the principal amounts invested in the underlying investments, plus interest accrued at a crediting rate established under the contract, less any adjustments for withdrawals (as specified in the wrap agreement).
In general, if the contract value of the wrap agreement exceeds the market value of the underlying investments (including accrued interest), the wrap provider becomes obligated to pay that difference to the fund in the event that shareholder redemptions result in partial or total contract liquidation. The circumstances under which payments are made and the timing of payments between the fund and the wrap provider may vary based on the terms of the wrapper contract.
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE E – INVESTMENT CONTRACTS WHICH INCLUDE INSURANCE AND
INVESTMENT CONTRACTS – Continued
In certain circumstances, the amount withdrawn from the wrapper contract would be payable at fair value rather than at contract value. These events include termination of participating plans or a material adverse change to the provisions of participating plans. At this time, the Plan believes that the occurrence of such events that would be of sufficient magnitude to limit the ability of the fund to transact at contract value is not probable.
The net asset value of the fund is determined on a daily basis. Units can be issued and redeemed on any business day at that day’s unit value. All earnings, expenses, and gains and losses of the fund are reflected in the calculation of the daily unit value. Although it is intended to permit daily withdrawals, some of the assets of the fund, especially investment contracts, may require an adjustment in the value of the investment if a withdrawal is made. In any event, the withdrawal may be deferred over such period of time, not to exceed one year, as may be deemed necessary for fair and orderly management of the fund.
The interest crediting rate is calculated based upon many factors, including current economic and market conditions, the general interest rate environment, the amount and timing of participant contributions, transfers and withdrawals, and the duration of the fixed-income investments that underlie the wrapper contracts. The average market yield and crediting interest rates of the BNP Fund were 0.85% and 0.95%, respectively for the year ended December 31, 2014. The average market yield and crediting interest rates for the BNP Fund were 0.71% and 0.98%, respectively, for the year ended December 31, 2013.
NOTE F – TAX STATUS
The Internal Revenue Service issued a favorable determination letter dated December 10, 2011, stating that the Plan was designed in accordance with the applicable requirements of the IRC. The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan’s legal counsel believe that the Plan is currently designed and being operated in compliance with the applicable requirements of the IRC. Therefore, no provision for income taxes has been included in the Plan’s financial statements.
Accounting principles generally accepted in the United States of America require Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2014 and 2013, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to income tax examinations for years prior to 2011.
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE G – PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA.
NOTE H – RISKS AND UNCERTAINTIES
The Plan provides for various investment options in any combination of mutual funds, common stocks and collective trusts. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
NOTE I – RELATED PARTY AND PARTY-IN-INTEREST TRANSACTIONS
Plan investments include shares of Southwestern Energy Company common stock. These transactions represent investments in the Company and, therefore, qualify as party-in-interest transactions. At December 31, 2014 and 2013, the Plan held 423,045 and 420,681 shares of common stock of the Company, respectively, with fair value of $11,544,885 and $16,545,401, respectively, and a cost basis of $11,562,033 and $10,401,982, respectively. The Plan also invests in DWS Stock Index Fund that was issued by DWS Trust Company in 2014. DWS Trust Company was a trustee as defined by the Plan during 2014 and, therefore, these transactions qualify as party-in-interest transactions. There were no fees paid by the Plan for the investment management services for the years ended December 31, 2014 and 2013. The Plan participants paid loan origination fees to Automatic Data Processing, Inc., the Plan’s record-keeper and an entity related to DWS Trust Company, amounting to $25,855 and $26,925, during 2014 and 2013, respectively, which qualify as party-in-interest transactions. Bank of America Merrill Lynch is a trustee as defined by the Plan, and is also a bank in our revolving credit facility and a provider of banking and benefit-related services for Southwestern Energy.
Southwestern Energy Company
401(k) Savings Plan
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2014 and 2013
NOTE J – RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500 as of December 31:
| | 2014 | | 2013 |
| | | | |
Net assets available for benefits per the financial statements | $ | 150,169,754 | $ | 133,415,647 |
Adjustment from contract value to fair value for fully benefit-responsive investment contracts | | 25,041 | | 17,136 |
Net assets available for benefits per the Form 5500 | $ | 150,194,795 | $ | 133,432,783 |
| | | | |
The following is a reconciliation of total additions per the financial statements to total income to the Form 5500 as of December 31:
| | |
| | 2014 |
| | |
Total additions per the financial statements | $ | 28,368,314 |
Reversal of prior year adjustment from contract value to fair value for fully benefit-responsive investment contracts | | (17,136) |
Adjustment from contract value to fair value for fully benefit-responsive investment contracts | | 25,041 |
Total income per the Form 5500 | $ | 28,376,219 |
