6.2 Energy, Resources, and Industrials

6.2.1 Oil, Gas, Mining, and Chemicals

The SEC staff’s comments to registrants in the industry continue to focus on oil and gas and mining reserves and disclosures about drilling and mining activities and reserve data. Such registrants, like those in other industries, have also received comments on climate-related disclosures, as discussed in Section 3.1.5.

Comments to registrants in this industry have also focused on the use of non-GAAP measures, especially the use of gross margin as a non-GAAP measure and the inclusion of appropriate disclosures about the use of non-GAAP measures. For example, such registrants have received comments asking them to (1) revise and label gross margin that is not fully burdened as a non-GAAP measure and provide the disclosures required by Regulation S-K, Item 10(e), or (2) explain why gross margin is not a non-GAAP measure. In other comments to such registrants regarding their use of non-GAAP measures, the SEC staff has pointed out that “distributable cash flow” and “adjusted free cash flow” should be treated as non-GAAP liquidity measures instead of non-GAAP performance measures and has asked the registrants to revise their disclosures to reconcile these non-GAAP liquidity measures to net cash provided by or used in operating activities (i.e., the most directly comparable GAAP measure) in a manner consistent with Item 10(e)(1)(i). For additional information about non-GAAP measures, see Section 3.4.

6.2.1.1 Oil and Gas Reserves

6.2.1.1.1 Proved Undeveloped Reserves

Examples of SEC Comments

We note disclosure indicating there are [X barrels] of proved undeveloped oil reserves as of [the fiscal year-end] that have remained undeveloped for a period greater than five years. The reasons that you identify for the extended period for conversion in your discussion . . . (e.g. depressed crude oil and natural gas prices and a lack of capital available for drilling), do not appear to support the reserve characterization when the period required for conversion is longer than five years.
We note the disclosure . . . indicating that you expect all currently scheduled [proved undeveloped] locations to be drilled over the next five years beginning in [fiscal year 2]. Please expand your disclosure to clarify, if true, that the proved undeveloped reserves as of [the end of fiscal year 1] are part of a development plan adopted by management including approval by the Board, if approval is required, that results in converting your proved undeveloped reserves to developed status within five years of initial disclosure as proved reserves. Refer to Rule 4-10(a)(31)(ii) of Regulation S-X and the question 131.04 in the Compliance and Disclosure Interpretations (C&DIs) regarding Oil and Gas Rules.
If there are material amounts of proved undeveloped reserves that are not scheduled to be developed within five years of your initial disclosure of these reserves, please expand your disclosure to explain the reasons for the delay. Refer to Item 1203(d) of Regulation S-K and question 131.03 in the Compliance and Disclosure Interpretations (C&DIs).
[The rate of conversion you indicate] suggests that you may not be able to develop your proved undeveloped reserves within five years of initial disclosure.

Please provide us with your development schedule, indicating for each future annual period, the number of gross wells to be drilled, the associated net quantities of reserves, and estimated capital expenditures necessary to convert such reserves to developed reserves, to include all of the proved undeveloped reserves disclosed as of [the fiscal year-end], and describe any change made or expected to be made in the schedule that would deviate from the definition set forth in Rule 4-10(a)(31)(ii) of Regulation S-X.
You disclose that your [X thousand barrels of oil equivalent (MBOE)] in proved undeveloped reserves will be converted to developed status over the next five years. You also disclose that you converted [X MBOE] of proved undeveloped reserves to developed status during the [fiscal year]. At that rate of conversion, it appears that your proved undeveloped reserves will not be developed within five years. Expand your disclosure of investments and progress made during [the fiscal year] to include quantification of capital expenditures incurred, and any factors that impacted progress in converting proved undeveloped reserves to developed status. Refer to Item 1203(c) of Regulation S-K.
Please expand your explanation of the changes in proved undeveloped reserves due to revisions of previous estimates to include the unexplained net volume decrease of [X million barrels of oil equivalent (MMBoe)]. Include all contributing factors, both positive and negative, so the entire volume change is explained. Refer to the disclosure requirements in Item 1203(b) of Regulation S-K.
Please expand your disclosure of proved undeveloped reserves converted to proved developed to include the associated capital expenditures. Refer to the disclosure requirements in Item 1203(c) of Regulation S-K.
We note the reconciliation of the changes in proved undeveloped reserves includes a line item entry of [X] MMBoe for “Extensions and Discoveries” that combines additions of [Y] MMBoe in new reserves with an offset to remove [Z] MMBoe for reserves that were not developed or were no longer expected to be developed within five years of their initial bookings as a result of changes in development plans. We also note you include similar adjustments to the net quantities shown in the reconciliation of the changes in total proved reserves for “Extensions and Discoveries” . . . .

We believe that changes associated with reclassifying reserves due to changes in a previously adopted development plan should be categorized as revisions and included in the reconciliation under line item “Revisions of Prior Estimates.” Refer to the guidance in subparagraphs (a) and (d) of FASB ASC 932-235-50-5 and revise the classifications within your proved undeveloped and total proved reserves reconciliations and the associated narratives accordingly.

Under Regulation S-X, Rule 4-10(a)(22), a registrant should be reasonably certain when estimating proved reserves that the reserves can be recovered in future years under existing economic conditions. In accordance with Rule 4-10(a)(31)(ii), “[u]ndrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.”

At the 2014 AICPA Conference, the SEC staff referred registrants to Rule 4-10(a) and Question 131.04 of the C&DIs on the oil and gas rules for the definition of proved undeveloped oil and gas reserves and staff views on the interaction of that definition with a registrant’s development plan. The staff noted that a mere intent to develop reserves does not constitute adoption of a development plan, which would require a final investment decision. Further, a registrant’s scheduled drilling activity should reconcile to its investment plans that have been approved by management.

In accordance with Regulation S-K, Item 1203(d), a registrant may be asked to explain why the reserves have not been or will not be developed, why it believes that the reserves are still appropriate, and how it plans to develop the reserves within five years given the registrant’s historical conversion rate. The SEC staff may also ask registrants to support engineering assumptions, such as terminal decline rates used in proved reserve estimates and assumptions used in future cash flow analyses (e.g., estimated future well costs).

6.2.1.1.2 Significant Changes in Reserves and Standardized Measures

Examples of SEC Comments

To the extent that you continue to disclose dry gas locations as proved undeveloped reserves . . . , please quantify for us and expand your disclosure to provide the total number of locations and net proved reserve amounts pursuant to FASB ASC 932-235-50-10.
The projected unit development cost from the . . . subsidiaries standardized measure is $[X]/BOE (=$[X] million/[X] MMBOE). Your . . . incurred unit development cost appears to be $[X]/BOE (=$[X] million/[X] MMBOE . . . ). We see similar differences for [the prior two years]. Please explain the reason(s) for these variances between your projected and incurred unit development costs.
[Your disclosure] indicates your asset retirement obligations represent estimated future costs that must be incurred in accordance with applicable local, state and federal laws and the terms of your lease agreements. Furthermore, the definition of “Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserves” referencing FASB ASC 932-235-50-30, 50-31, and 55-6 under Amendments to the XBRL Taxonomy in the Accounting Standards Update, Extractive Activities — Oil and Gas (Topic 932) notes that “future cash flows related to the settlement of an asset retirement obligation are included in the disclosure.”

The requirement pursuant to FASB ASC 932 is also consistent with guidance provided by the Division of Corporation Finance in the letter dated February 2004 to registrants primarily engaged in the production of oil and gas regarding the preparation of their filings with the Commission. The letter indicates the staff believes that “an entity should include the future cash flows related to the settlement of an asset retirement obligation in its standardized measure disclosure.” The letter also indicates that “the requirement to disclose ‘net cash flows’ relating to an entity’s interest in oil and gas reserves [pursuant to FASB Statement No. 69, paragraph 30] requires an entity to include the cash outflows associated with the settlement of an asset retirement obligation” and that “the exclusion of the cash flows associated with a retirement obligation would be a departure from the required disclosure.”

Based on the costs provided in your response, it appears that your omission of the estimated asset retirement obligations results in an understatement of your future development costs by approximately [X]%, [Y]% and [Z]%, an overstatement of your future net cash flows of approximately [A]%, [B]% and [C]%, and an overstatement of your standardized measure by approximately [P]%, [Q]% and [R]% for [fiscal years 3, 2, and 1], respectively.

Please provide us with an illustration of the disclosure revisions relating to your presentation of the standardized measure and the changes therein to assure compliance with the regulatory requirements pursuant to FASB ASC 932.
Please expand your disclosure to reconcile the overall change in the line item by separately identifying and quantifying the net amount attributable to each factor, including offsetting factors, so that the change in net reserves between periods is fully explained. In particular, disclosure relating to revisions in previous estimates should identify such underlying factors as changes caused by commodity prices, costs, ownership interests, well performance, improved recovery or changes resulting from the removal of proved undeveloped locations due to changes in a previously adopted development plan. Refer to FASB ASC 932-235-50-5.
Please expand the discussion accompanying the presentation of the standardized measure to clarify, if true, that all estimated future costs to settle your asset retirement obligations have been included in your calculation of the standardized measure for each period presented.

The SEC staff has commented on registrants’ disclosures about (1) changes in proved reserves and standardized measures and (2) their compliance with ASC 932-235-50. Accordingly, the SEC staff may ask registrants to:

Describe the technical factors (e.g., the activities, findings, and circumstances) that led to significant changes in proved reserves.
Address negatively revised estimates attributable to performance separately from negatively revised estimates attributable to price reductions.
Explain significant changes in extensions and discoveries.
Disclose prices used in the calculation of standardized measures.
Discuss how certain tax attributes were used to determine the future income tax expenses.

Further, the SEC staff may (1) ask registrants whether abandoned assets have been included in the standardized measure and, if so, to provide information about them and (2) refer registrants to a sample letter expressing views of the Division on the required disclosures.

6.2.1.1.3 Reserve Reports

Examples of SEC Comments

The reserve report, filed as Exhibit 99.1, does not appear to include the disclosure required by Item 1202(a)(8)(viii) of Regulation S-K, includes references to certain attachments presenting a copy of the applicable SEC oil and gas reserves definitions for “Proved” reserves [that] are not attached to the report as stated . . . , and includes disclosure relating to the inclusion of the cost to abandon the proved properties . . . that appears to be inconsistent with comparable disclosure on . . . Form 10-K. Please obtain and file a revised reserves report to address each of these points.
The reserve report does not include certain disclosures required by Item 1202(a)(8) of Regulation S-K. Please obtain a revised report to address the following information in order to satisfy your filing obligations. . . .
- The purpose for which the report was prepared (e.g. for inclusion as an exhibit in a filing made with the U.S. Securities and Exchange Commission (SEC) (Item 1202(a)(8)(i)).
- The date on which the report was completed (Item 1202(a)(8)(ii)).
- The proportion of the registrant’s total reserves covered by the report (Item 1202(a)(8)(iii)) and the percentage of the registrant’s total reserves reviewed in connection with the preparation of the report (Item 1202(a)(8)(iv)).
- A statement that the assumptions, data, methods, and procedures are appropriate for the purpose served by the report (Item 1202(a)(8)(iv)).
- The average realized prices by product for the reserves included in the report as part of the discussion of primary economic assumptions (Item 1202(a)(8)(v)).
- A statement that the third party has used all methods and procedures as it considered necessary under the circumstance[s] to prepare the report (Item 1202(a)(8)(viii)).
[Your] disclosure refers to regulations and standards under Item 102 of Regulation S-K and the Financial Accounting Standards Board (FASB) Statement No. 69 which have been updated pursuant to the Modernization of Oil and Gas Reporting; Final Rule. Please revise the disclosure to resolve these inconsistencies or tell us why a revision is not needed.
Please obtain and file a revised reserves report that includes an explanation clarifying the types of costs represented under the line item entry “Other Deductions” shown in the tabular presentation of the results of the evaluation. This information should be included in the report as part of the primary economic assumptions pursuant to Item 1202(a)(8)(v) of Regulation S-K.
We note that the amounts reported as undiscounted future development costs . . . do not agree with the corresponding figures in the reserve reports at Exhibits [X] and [Y], having the [end of fiscal year 1] and [end of fiscal year 2] reserve estimates and related information.

We also note that disclosures within the Miscellaneous sections of the third party reserve reports indicate that their measures of discounted future net cash flows reflect the net cost of plugging and salvage values only for “commercial wells.”

As the standardized measures of discounted future net cash flows should reflect all future costs to settle asset retirement obligations that either currently exist or that will arise in the course of developing and producing your proved reserves, it appears that you will need to obtain and file revised reserve reports from the engineering firm having computations of discounted future net cash flows that conform with the applicable guidance.

Please also submit any revisions to the annual report that may be necessary to resolve the inconsistencies outlined above, if the corresponding measures reported by the company are also incomplete, in this or any similar respect.

Under Regulation S-K, Item 1202(a)(8), a registrant must file a third-party report as an exhibit to its periodic report or registration statement when it “represents that a third party prepared, or conducted a reserves audit of, the registrant’s reserves estimates, or any estimated valuation thereof, or conducted a process review.” Accordingly, certain disclosures are required under Item 1202(a)(8). The SEC staff issues comments when these required disclosures are omitted. Often, the staff’s comments are related to the requirement in Item 1202(a)(8)(iv) to disclose the “assumptions, data, methods, and procedures used, including the percentage of the registrant’s total reserves reviewed in connection with the preparation of the report, and a statement that such assumptions, data, methods, and procedures are appropriate for the purpose served by the report.”

6.2.1.2 Drilling Activities, Wells, Acreage, and Delivery Commitments

Examples of SEC Comments

We note [X]% of your net undeveloped acreage will expire [over the next three years] and an additional [Y]% expires . . . thereafter.

Please tell us the extent to which proved undeveloped reserves have been assigned to locations currently scheduled to be drilled after lease expiration. If there are material quantities of net proved undeveloped reserves related to such locations, expand your disclosure to explain the steps necessary to extend acreage expiration dates.

Refer to Rule 4-10(a)(26) of Regulation S-X.
Please expand your disclosure of developed and undeveloped acreage to additionally include the figures relating to acreage in which you hold royalty and overriding royalty interests. Refer to Items 1208(a) and 1208(b) of Regulation S-K.
We note that undeveloped acreage represents a significant proportion of your total acreage. Please expand your disclosure to discuss the expiration dates of material amounts of your undeveloped acreage. Refer to Item 1208(b) of Regulation S-K.
Please expand your disclosures pertaining to acreage to include the annual expiration dates for material amounts of expiring gross and net undeveloped acreage by geographical area to comply with Items 1201(d) and 1208(b) of Regulation S-K.
Please expand your disclosure to present net production by final product sold for each field/basin that contains 15% or more of your total proved reserves.

Refer to the disclosure requirements in Item 1204(a) of Regulation S-K and the definition of a field in Rule 4-10(a)(15) of Regulation S-X.

The SEC staff has continued to focus on registrants’ disclosures about production information, drilling activities, wells and acreage data, and delivery commitments under Regulation S-K, Items 1204 through 1208. Additional disclosures that may be requested include (but are not limited to) the following:

Production by geographic area and for each country and field that contains 15 percent or more of the registrant’s total proved reserves.
Drilling activities for each of the last three years by geographic area.
Steps to be taken to meet significant delivery commitments.
The number of wells that the registrant has operated in each of the last three years, including the total gross and net number of any productive wells drilled and completed or dry exploratory wells, expressed separately for oil and gas by geographic area.
Information related to undeveloped acreage regarding minimum remaining terms of leases and concessions for material acreage concentrations, including significant undeveloped acreage that will be expiring over the next three years.

Regulation S-K, Item 1204, requires registrants with material oil and gas operations to provide disclosures as follows:

(a) For each of the last three fiscal years disclose production, by final product sold, of oil, gas, and other products. Disclosure shall be made by geographical area and for each country and field that contains 15% or more of the registrant’s total proved reserves expressed on an oil-equivalent-barrels basis unless prohibited by the country in which the reserves are located.

(b) For each of the last three fiscal years disclose, by geographical area:

(1) The average sales price (including transfers) per unit of oil, gas and other products produced; and

(2) The average production cost, not including ad valorem and severance taxes, per unit of production.

6.2.1.3 Mining Activities

Examples of SEC Comments

We . . . note that your exploration expenses during your most recently completed fiscal year represented about 38% of total expenses.

Based on the [foregoing], it appears that your mining operations are material to your business, considering the guidance in Item 1301(c) of Regulation S-K, and that you would therefore need to comply with Subpart 1300 of Regulation S-K, applicable pursuant to Item 2 of Form 10-K and Instruction 3 to Item 102 of Regulation S-K.
We note your disclosures . . . stating that your mineral project “is currently in the exploration and evaluation phase” which appears to be consistent with disclosures . . . explaining that you expect to continue to incur losses in the foreseeable future, expressing uncertainty as to whether you will ever begin production, and clarifying that you do not consider [Project X] to be commercially viable based on the prevailing commodity prices.

However, these disclosures are not consistent with numerous disclosures elsewhere in your filing indicating the property is in the development stage and having reported proven and probable mineral reserves for the property.

Please clarify the nature of support for any disclosures of proven and probable reserves that you believe should be retained, including the investment and market assumptions made in formulating a view on economic viability and compiling your preliminary feasibility study, and submit the revisions that you propose to clarify the status of the property and to resolve the inconsistencies referenced above.
Please provide us and disclose in future filings your accounting policy related to mining operations or clarify why additional disclosure is not necessary. For example, identify and describe (i) the different stages of your mining operations, (ii) the types of costs incurred in each stage, and (iii) the accounting for the costs incurred in each stage.
Please tell us whether any of the mineral properties and rights relate to mines in the exploration and evaluation phase or development and construction phase, and provide us a brief analysis related to separately disclosing the amounts for these components in future filings, if applicable.
We note various disclosures in your annual report and subsequent interim reports characterizing the company as a “pre-development stage” company.

Please revise such disclosures to more clearly describe the company as an exploration stage company, and your property as an exploration stage property, consistent with the definitions and requirements in Item 1300 and Item 1304(c)(1) of Regulation S-K.
Your property description should identify the location of the mineral property, using an easily recognizable coordinate system that is accurate to within one mile, to comply with Item 1304(b)(1)(i) of Regulation S-K.
We note that you have disclosures . . . in which you compare your property to a large producing mine.

Please revise your disclosures throughout the filing as necessary to remove references to other mineral properties in which you do not have an economic interest, and to instead focus your disclosures on your interests in mineral properties.
Provide disclosure regarding the internal controls used in your exploration and mineral resource and reserve estimation efforts to comply with Item 1305 of Regulation S-K.
We note that your mineral resources are presented inclusive of mineral reserves. In a technical report summary mineral resources may be presented inclusive on mineral reserves, however they should also be presented exclusive of mineral reserves as required by Item 601(b)(96)(iii)(B)(11)(ii) of Regulation S-K. Please revise accordingly.
Please . . . file a revised Technical Report Summary that includes all of the following information:
- A detailed description of the commodity price and cut-off grade used, or minimum quality specifications where applicable, as referenced in Item 601(b)(96)(iii)(B)(12)(iii);
- The commodity price projections indicated by Item 601(b)(96)(iii)(B)(16)(i);
- The information pertaining to environmental compliance, permitting, and local individuals or groups outlined in Item 601(b)(96)(iii)(B)(17);
- The capital and operating costs, having major components set out in tabular form, along with the associated level of accuracy as required by Item 601(b)(96)(iii)(18)(i);
- The tax assumptions with the net present value presented on an after tax basis pursuant to Item 601(b)(96)(iii)(B)(19)(i).

In 2018, the SEC adopted new and amended disclosure requirements related to mining activities and reserves. In accordance with these requirements, which are codified in Regulation S-K, Items 601(b)(96) and 1300 through 1305, a registrant engaged in material mining activities must provide certain disclosures on the basis of the report of a mining expert, who is referred to as a “qualified person.” The qualified person must provide a technical report summary that is filed as an exhibit to support the registrant’s mineral reserve data.

The SEC staff has issued comments to ensure that registrants engaged in material mining activities comply with the updated disclosure requirements. Such comments have highlighted instances in which the technical report summary (1) was not provided or (2) did not provide all required information.

6.2.2 Power, Utilities, and Renewables

The primary topic of focus in SEC staff comments recently issued to registrants in the power, utilities, and renewables (PU&R) industry continues to be non-GAAP measures.

Like registrants in other industries, registrants in the PU&R industry continue to receive comments on the presentation of non-GAAP measures. Specifically, comments issued to registrants in this industry have focused on the use of gross and net margin as a non-GAAP measure and the inclusion of appropriate disclosures about the use of non-GAAP measures. Although some registrants in the PU&R industry have argued that operating income is the most directly comparable GAAP measure when reconciling non-GAAP measures such as gross and net margin, the SEC staff has recently issued comments affirming its view that a registrant’s GAAP gross margin represents the most directly comparable GAAP measure that should be identified and used in reconciliations to comply with the requirements of Regulation S-K, Item 10(e)(1)(i)(B), regardless of whether the registrant reports gross margin in its financial statements. For additional information about non-GAAP measures, see Section 3.4.

6.2.2.1 Non-GAAP Measures

Example of an SEC Comment

We note that your measures of the electric and natural gas margins appear to exclude certain amounts that would be attributable to cost of revenues and reflected in measures of gross margin in accordance with GAAP, such as operating and maintenance expenses and depreciation and amortization. Therefore, it appears that your margin measures should be clearly identified as non-GAAP measures and that you would need to adhere to the disclosure requirements in Item 10(e) of Regulation S-K. For example, electric gross margin and natural gas gross margin, each reflecting all costs and expenses applicable to revenues, would be identified as the most directly comparable GAAP measures in providing the disclosures required by Item 10(e)(1)(i)(A) and (B) of Regulation S-K; reconciliations to your non-GAAP measures should begin with these GAAP measures.

In your revised disclosure, please also include analyses of the changes in these most directly comparable GAAP measures. Please refer to Question[s] 100.05 and 102.10(a) and (b) of the Division’s Non-GAAP Financial Measures Compliance and Disclosure Interpretations.

In comments to registrants in the PU&R industry, the SEC staff continues to focus on the failure to properly reconcile a non-GAAP measure to the most directly comparable GAAP measure. When issuing comments to these registrants on non-GAAP measures, the staff also continues to request (1) enhanced disclosure related to the purpose and use of such measures, (2) compliance with reconciliation requirements, and (3) clear labeling.

For additional considerations related to non-GAAP measures, see Section 3.4.