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Derivative Instruments | 6 Months Ended
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Jun. 30, 2011
Derivative Instruments |
Derivative Instruments |
C. Derivative Instruments Natural Gas Hedging Instruments The Company’s primary market risk exposure is the volatility of future prices for natural gas and natural gas liquids, which can affect the operating results of the Company primarily through EQT Production and storage, marketing and other activities at EQT Midstream. The Company’s overall objective in its hedging program is to protect cash flows from undue exposure to the risk of changing commodity prices. The Company uses derivative commodity instruments that are placed with major financial institutions whose creditworthiness is continually monitored. Futures contracts obligate the Company to buy or sell a designated commodity at a future date for a specified price and quantity at a specified location. Swap agreements involve payments to or receipts from counterparties based on the differential between a fixed and variable price for the commodity. Collar agreements require the counterparty to pay the Company if the index price falls below the floor price and the Company to pay the counterparty if the index price rises above the cap price. Put option contracts provide protection from dropping prices and require the counterparty to pay the Company if the index price falls below the contract price. The Company also engages in a limited number of basis swaps to protect earnings from undue exposure to the risk of geographic disparities in commodity prices and interest rate swaps to hedge exposure to interest rate fluctuations on short or long-term debt. The Company recognizes all derivative instruments as either assets or liabilities at fair value on a gross basis. The accounting for the changes in fair value of the Company’s derivative instruments depends on the use of the derivative instruments. To the extent that a derivative instrument has been designated and qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive income, net of tax, and is subsequently reclassified into operating revenues in the same period or periods during which the forecasted transaction affects earnings. For a derivative instrument that has been designated and qualifies as a fair value hedge, the change in the fair value for the instrument is recognized as a portion of operating revenues in the Statements of Consolidated Income each period. In addition, the change in the fair value of the hedged item (natural gas inventory) is recognized as a portion of operating revenues in the Statements of Consolidated Income. The Company has elected to exclude the spot/forward differential from the assessment of effectiveness of the fair value hedges. Any hedging ineffectiveness and any change in fair value of derivative instruments that have not been designated as hedges, are recognized as a portion of operating revenues in the Statements of Consolidated Income each period. Exchange-traded instruments are generally settled with offsetting positions. Over the counter (OTC) arrangements require settlement in cash. Settlements of derivative commodity instruments are reported as a component of cash flows from operations in the accompanying Statements of Condensed Consolidated Cash Flows. A portion of the derivative commodity instruments used by the Company to hedge its exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sale of equity production and forecasted natural gas purchases and sales have been designated and qualify as cash flow hedges. A portion of the derivative commodity instruments used by the Company to hedge its exposure to adverse changes in the market price of natural gas stored in the ground have been designated and qualify as fair value hedges. The current hedge position extends through 2015. See “Commodity Risk Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q for further details of the Company’s hedged position. In addition, the Company enters into a limited amount of energy trading contracts to leverage its assets and limit its exposure to shifts in market prices. The Company also has a limited amount of other derivative instruments not designated as hedges. In 2008, the Company effectively settled certain derivative commodity swaps scheduled to mature during the period 2010 through 2013 by de-designating the swaps and entering into directly counteractive swaps. These transactions resulted in offsetting positions which are the majority of the derivative asset and liability balances not designated as hedging instruments. Substantially all derivatives recognized in the balance sheet and used in hedging relationships are commodity contracts. All derivative instrument assets and liabilities are reported in the Condensed Consolidated Balance Sheets as derivative instruments, at fair value. These derivative instruments are reported as either current assets or current liabilities due to their highly liquid nature. The Company can effectively net settle its derivative instruments at any time.
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  | 2011 |  | 2010 |  | 2011 |  | 2010
|  | (Thousands)
Derivatives designated as cash flow hedges |  |  |  |  |  |  |  |
Amount of gain (loss) recognized in other comprehensive income (OCI) (effective portion), net of tax |  | $ | 33,253 |  |  | $ | (16,293 | ) |  | $ | 37,452 |  |  | $ | 61,226 |
Amount of gain reclassified from accumulated OCI into income (effective portion), net of tax (a) |  | $ | 9,918 |  |  | $ | 14,111 |  |  | $ | 26,823 |  |  | $ | 28,218 |
Amount of gain (loss) recognized in income (ineffective portion) (b) |  | $ | 364 |  |  | $ | (2,414 | ) |  | $ | (261 | ) |  | $ | (613 | )
Derivatives designated as fair value hedges (c) |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain (loss) recognized in income for fair value commodity contracts |  | $ | 1,363 |  |  | $ | – |  |  | $ | (533 | ) |  | $ | – |
Fair value gain recognized in income for inventory designated as hedged item |  | $ | 60 |  |  | $ | – |  |  | $ | 1,693 |  |  | $ | – |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain (loss) recognized in income |  | $ | 856 |  |  | $ | 212 |  |  | $ | (823 | ) |  | $ | 89 |
(a) Includes $0 and $2.6 million for the three and six month periods ended June 30, 2010 of unrealized hedge gains reclassified into earnings to offset lower of cost or market adjustments on hedged items. The Company also had an immaterial amount of OCI reclassified to interest expense related to an interest rate swap on long-term debt. (b) No amounts have been excluded from effectiveness testing of cash flow hedges. (c) For the three months ended June 30, 2011, the net impact on operating revenues consisted of a $2.1 million gain due to the exclusion of the spot/forward differential from the assessment of effectiveness and a $0.7 million loss due to changes in basis. For six months ended June 30, 2011, the net impact on operating revenues consisted of a $1.5 million gain due to the exclusion of the spot/forward differential from the assessment of effectiveness and a $0.3 million loss due to changes in basis.
|  | June 30, 2011 |  | December 31, 2010
|  | (Thousands)
Asset derivatives |  |  |  |
Derivatives designated as hedging instruments |  | $ | 138,004 |  |  | $ | 141,834 |
Derivatives not designated as hedging instruments |  | 73,982 |  |  | 83,505 |
Total asset derivatives |  | $ | 211,986 |  |  | $ | 225,339 |
Liability derivatives |  |  |  |  |  |
Derivatives designated as hedging instruments |  | $ | 3,104 |  |  | $ | 12,097 |
Derivatives not designated as hedging instruments |  | 94,427 |  |  | 94,624 |
Total liability derivatives |  | $ | 97,531 |  |  | $ | 106,721 |
The net fair value of derivative instruments decreased during the first six months of 2011 primarily as a result of settlements, partially offset by the positive net fair value of derivatives executed in the first six months of 2011 and a decrease in natural gas prices. The absolute quantities of the Company’s derivative commodity instruments that have been designated and qualify as cash flow hedges totaled 240 Bcf and 181 Bcf as of June 30, 2011 and December 31, 2010, respectively, and are primarily related to natural gas swaps and collars. The open positions at June 30, 2011 had maturities extending through December 2015. The absolute quantities of the Company’s derivative commodity instruments that have been designated and qualify as fair value hedges totaled 6 Bcf as of June 30, 2011. No derivative commodity instruments were designated as fair value hedges as of December 31, 2010. The Company had net deferred gains of $75.9 million and $65.2 million in accumulated other comprehensive income, net of tax, as of June 30, 2011 and December 31, 2010, respectively, associated with the effective portion of the change in fair value of its derivative instruments designated as cash flow hedges. Assuming no change in price or new transactions, the Company estimates that approximately $34.8 million of net unrealized gains on its derivative commodity instruments reflected in accumulated other comprehensive income, net of tax, as of June 30, 2011 will be recognized in earnings during the next twelve months due to the settlement of hedged transactions. The Company is exposed to credit loss in the event of nonperformance by counterparties to derivative contracts. This credit exposure is limited to derivative contracts with a positive fair value. The Company believes that New York Mercantile Exchange (NYMEX) traded future contracts have minimal credit risk because the Commodity Futures Trading Commission regulations are in place to protect exchange participants, including the Company, from potential financial instability of the exchange members. The Company’s swap, collar and option derivative instruments are primarily with financial institutions and thus are subject to events that would impact those companies individually as well as that industry as a whole. The Company utilizes various processes and analyses to monitor and evaluate its credit risk exposures. This includes closely monitoring current market conditions, counterparty credit spreads and credit default swap rates. Credit exposure is controlled through credit approvals and limits. To manage the level of credit risk, the Company deals with financial counterparties that are of investment grade or better, enters into netting agreements whenever possible and may obtain collateral or other security. When the net fair value of any of the Company’s swap agreements represents a liability to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the counterparty requires the Company to remit funds to the counterparty as a margin deposit for the derivative liability which is in excess of the threshold amount. The Company records these deposits as a current asset. When the net fair value of any of the Company’s swap agreements represents an asset to the Company which is in excess of the agreed-upon threshold between the Company and the financial institution acting as counterparty, the Company requires the counterparty to remit funds as margin deposit in an amount equal to the portion of the derivative asset which is in excess of the threshold amount. The Company records a current liability for such amounts received. The Company had no such deposits in its Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, respectively. When the Company enters into exchange-traded natural gas contracts, exchanges may require the Company to remit funds to the corresponding broker as good-faith deposits to guard against the risks associated with changing market conditions. Participants must make such deposits based on an established initial margin requirement as well as the net liability position, if any, of the fair value of the associated contracts. The Company records such deposits as current assets. In the case where the fair value of such contracts is in a net asset position, the broker may remit funds to the Company, in which case the Company records a current liability for such amounts received. The initial margin requirements are established by the exchanges based on prices, volatility and the time to expiration of the related contract and are subject to change at the exchanges’ discretion. The Company recorded a current asset of $1.6 million as of June 30, 2011 and a current liability of $0.5 million as of December 31, 2010 for such deposits in its Condensed Consolidated Balance Sheets. Certain of the Company’s derivative instrument contracts provide that if one or more of the Company’s credit ratings are lowered below investment grade, additional collateral must be deposited with the counterparty. The additional collateral can be up to 100% of the derivative liability. As of June 30, 2011, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position was $4.6 million, for which the Company had no collateral posted on June 30, 2011. If the Company’s credit rating had been downgraded below investment grade on June 30, 2011, the Company would have been required to post additional collateral of $4.6 million in respect of the liability position. Investment grade refers to the quality of the Company’s credit as assessed by one or more credit rating agencies. The Company’s unsecured medium-term debt was rated BBB by Standard & Poor’s Rating Services (S&P), Baa1 by Moody’s Investor Services (Moody’s) and BBB by Fitch Ratings Service (Fitch) at June 30, 2011. In order to be considered investment grade, the Company must be rated BBB- or higher by S&P and Fitch and Baa3 or higher by Moody’s. Anything below these ratings is considered non-investment grade.

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- Definition This element can be used to disclose the entity's entire derivative instruments and hedging activities disclosure as a single block of text. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 45 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 + Details
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