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Derivative Activities
 12 Months Ended
Dec. 31, 2013
Derivative Activities

(11)

DERIVATIVE ACTIVITIES

We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We do not utilize complex derivatives as we typically utilize commodity swap or collar contracts to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. Their fair value, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally NYMEX, approximated a net unrealized pre-tax loss of $16.5 million at December 31, 2013. These contracts expire monthly through December 2016. The following table sets forth the derivative volumes by year as of December 31, 2013:

 

Period

 

Contract Type

 

Volume Hedged

 

Weighted

Average Hedge Price

 

Natural Gas

 

 

 

 

 

 

2014

 

Collars

 

447,500 Mmbtu/day

 

$3.84–$4.48

2015

 

Collars

 

145,000 Mmbtu/day

 

$4.07–$4.56

2014

 

Swaps

 

219,397 Mmbtu/day

 

$4.17

2015

 

Swaps

 

154,966 Mmbtu/day

 

$4.16

2016

 

Swaps

 

20,000 Mmbtu/day

 

$4.16

 

Crude Oil

 

 

 

 

 

 

2014

 

Collars

 

2,000 bbls/day

 

$85.55–$100.00

2014

 

Swaps

 

9,004 bbls/day

 

$94.43

2015

 

Swaps

 

4,000 bbls/day

 

$89.60

 

NGLs (C3 - Propane)

 

 

 

 

 

 

2014

 

Swaps

 

11,000 bbls/day

 

$1.01/gallon

 

NGLs (NC4 - Normal Butane)

 

 

 

 

 

 

2014

 

Swaps

 

3,000 bbls/day

 

$1.33/gallon

 

NGLs (C5 - Natural Gasoline)

 

 

 

 

 

 

2014

 

Swaps

 

1,000 bbls/day

 

$2.11/gallon

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. Through February 28, 2013, changes in the fair value of our derivatives that qualified for hedge accounting were recorded as a component of AOCI in the stockholders’ equity section of the accompanying consolidated balance sheets, which were later transferred to natural gas, NGLs and oil sales when the underlying physical transaction occurred and the hedging contract was settled. As of December 31, 2013, an unrealized pre-tax derivative gain of $10.2 million was recorded in AOCI. See additional discussion below regarding the discontinuance of hedge accounting. If the derivative does not qualify as a hedge or is not designated as a hedge, changes in fair value of these non-hedge derivatives are recognized in earnings in derivative fair value income or loss.

For those derivative instruments that qualified for hedge accounting, settled transaction gains and losses were determined monthly, and were included as increases or decreases to natural gas, NGLs and oil sales in the period the hedged production was sold. Through February 28, 2013, we had elected to designate our commodity instruments that qualified for hedge accounting as cash flow hedges. Natural gas, NGLs and oil sales include $116.5 million of gains in 2013 compared to $236.3 million in 2012 and $123.6 million in 2011 related to settled hedging transactions. Any ineffectiveness associated with these hedge derivatives are reflected in derivative fair value income or loss in the accompanying statements of operations. The ineffective portion is calculated as the difference between the changes in fair value of the derivative and the estimated change in future cash flows from the item hedged. Derivative fair value for the year ended December 31, 2013 includes ineffective losses of $2.9 million compared to gains of $1.1 million in 2012 and gains of $9.5 million in 2011.

Discontinuance of Hedge Accounting

Effective March 1, 2013, we elected to de-designate all commodity contracts that were previously designated as cash flow hedges and elected to discontinue hedge accounting prospectively. AOCI included $103.6 million ($63.2 million after tax) as of February 28, 2013. As a result of discontinuing hedge accounting, the marked-to-market values included in AOCI as of the de-designation date were frozen and are being reclassified into earnings in natural gas, NGLs and oil sales in future periods as the underlying hedged transactions occur. As of December 31, 2013, we expect to reclassify into earnings $10.2 million of unrealized net gains in 2014 from AOCI.

With the election to de-designate hedging instruments, all of our derivative instruments continue to be recorded at fair value with all changes in fair value recognized immediately in earnings rather than in AOCI. These marked-to-market adjustments will produce a degree of earnings volatility that can be significant from period to period, but such adjustments will have no cash flow impact relative to changes in market prices. The impact to cash flow occurs upon settlement of the underlying contract.

Basis Swap Contracts

At December 31, 2013, we had natural gas basis swap contracts that are not designated for hedge accounting, which lock in the differential between NYMEX and certain of our physical pricing points in Appalachia. These contracts are for 320,280 Mmbtu/day and settle monthly through October 2014. The fair value of these contracts was a gain of $3.9 million on December 31, 2013.

Derivative assets and liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of December 31, 2013 and 2012 is summarized below. As of December 31, 2013, we are conducting derivative activities with thirteen financial institutions, of which all but two are secured lenders in our bank credit facility. We believe all of these institutions are acceptable credit risks. At times, such risks may be concentrated with certain counterparties. The credit worthiness of our counterparties is subject to periodic review. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements (in thousands).

 

 

 

December 31, 2013

 

 

 

Gross Amounts of
Recognized Assets

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
Assets Presented in the
Balance Sheet

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

–swaps

$

4,240

 

 

$

(1,218

)

 

$

3,022

 

 

–collars

 

16,057

 

 

 

(7,671

)

 

 

8,386

 

 

–basis swaps

 

7,686

 

 

 

(7,686

)

 

 

¾

 

Crude oil

–swaps

 

3,567

 

 

 

(1,321

)

 

 

2,246

 

NGLs

–C3 swaps

 

826

 

 

 

(826

)

 

 

¾

 

 

–C4 swaps

 

863

 

 

 

(863

)

 

 

¾

 

 

–C5 swaps

 

121

 

 

 

(121

)

 

 

¾

 

 

 

$

33,360

 

 

$

(19,706

)

 

$

13,654

 

 

 

 

December 31, 2013

 

 

 

Gross Amounts of
Recognized (Liabilities)

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
(Liabilities) Presented in the
Balance Sheet

 

Derivative (liabilities):  

 

 

 

 

 

 

 

 

 

 

 

Natural gas

–swaps

$

(4,790

)

 

$

1,218

 

 

$

(3,572

)

 

–collars

 

(13,345

)

 

 

7,671

 

 

 

(5,674

)

 

–basis swaps

 

(3,756

)

 

 

7,686

 

 

 

3,930

 

Crude oil

–swaps

 

(4,711

)

 

 

1,321

 

 

 

(3,390

)

 

–collars

 

(398

)

 

 

¾

 

 

 

(398

)

NGLs

–C3 swaps

 

(18,172

)

 

 

826

 

 

 

(17,346

)

 

–C4 swaps

 

(757

)

 

 

863

 

 

 

106

 

 

–C5 swaps

 

¾

 

 

 

121

 

 

 

121

 

 

 

$

(45,929

)

 

$

19,706

 

 

$

(26,223

)

 

 

 

December 31, 2012

 

 

 

Gross Amounts of
Recognized Assets

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
Assets Presented in the
Balance Sheet

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

–swaps

$

10,746

 

 

$

(3,242

)

 

$

7,504

 

 

–collars

 

128,410

 

 

 

(6,155

)

 

 

122,255

 

 

–basis swaps

 

993

 

 

 

—

 

 

 

993

 

Crude oil

–swaps

 

9,650

 

 

 

—

 

 

 

9,650

 

 

–collars

 

2,222

 

 

 

—

 

 

 

2,222

 

NGLs

–C5 swaps

 

13,055

 

 

 

(2,412

)

 

 

10,643

 

 

 

$

165,076

 

 

$

(11,809

)

 

$

153,267

 

 

 

 

December 31, 2012

 

 

 

Gross Amounts of
Recognized (Liabilities)

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
(Liabilities) Presented in the
Balance Sheet

 

Derivative (liabilities): 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

–swaps

$

(3,242

)

 

$

3,242

 

 

$

¾

 

 

–collars

 

(9,618

)

 

 

6,155

 

 

 

(3,463

)

NGLs

–C3 swaps

 

(6,746

)

 

 

¾

 

 

 

(6,746)

 

 

–C5 swaps

 

(137

)

 

 

2,412

 

 

 

2,275

 

 

 

$

(19,743

)

 

$

11,809

 

 

$

(7,934

)

The effects of our cash flow hedges (or those derivatives that qualified for hedge accounting) on AOCI in the accompanying consolidated balance sheets is summarized below:

 

 

Year Ended December 31,

 

 

Change in Hedge
Derivative Fair Value

 

 

Realized Gain
Reclassified from OCI
Into Revenue (a)

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps

$

125

 

 

$

46,371

 

 

$

15,171

 

 

$

78,779

 

Put options

 

¾

 

 

 

(1,955

)

 

 

¾

 

 

 

(1,955

)

Collars

 

(7,015

)

 

 

74,766

 

 

 

105,272

 

 

 

159,481

 

Income taxes

 

2,687

 

 

 

(47,466

)

 

 

(46,973

)

 

 

(91,871

)

 

$

(4,203

)

 

$

71,716

 

 

$

73,470

 

 

$

144,434

 

(a) 

For realized gains upon contract settlement, the reduction in AOCI is offset by an increase in natural gas, NGLs and oil sales. For realized losses upon contract settlement, the increase in AOCI is offset by a decrease in natural gas, NGLs and oil sales.

The effects of our non-hedge derivatives (or those derivatives that do not qualify or are not designated for hedge accounting) and the ineffective portion of our hedge derivatives on our consolidated statements of operations are summarized below:

 

 

Year Ended December 31,

 

 

Gain (Loss) Recognized in
Income (Non-hedge Derivatives)

 

 

Gain (Loss) Recognized in
Income (Ineffective Portion)

 

 

Derivative Fair Value
(Loss) Income

 

 

2013

 

 

2012

 

 

2011

 

 

2013

 

 

2012

 

 

2011

 

 

2013

 

 

2012

 

 

2011

 

Swaps

$

(48,492

)

 

$

11,601

 

 

$

24,767

 

 

$

(2,034

)

 

$

(657

)

 

$

767

 

 

$

(50,526

)

 

$

10,944

 

 

$

25,534

 

Re-purchased swaps

 

1,323

 

 

 

9,313

 

 

 

—

 

 

 

¾

 

 

 

—

 

 

 

—

 

 

 

1,323

 

 

 

9,313

 

 

 

—

 

Collars

 

(15,166

)

 

 

5,126

 

 

 

5,266

 

 

 

(896

)

 

 

1,782

 

 

 

8,777

 

 

 

(16,062

)

 

 

6,908

 

 

 

14,043

 

Call options

 

¾

 

 

 

13,178

 

 

 

553

 

 

 

¾

 

 

 

—

 

 

 

—

 

 

 

¾

 

 

 

13,178

 

 

 

553

 

Put options

 

¾

 

 

 

(30

)

 

 

—

 

 

 

¾

 

 

 

—

 

 

 

—

 

 

 

¾

 

 

 

(30

)

 

 

—

 

Basis swaps

 

3,440

 

 

 

1,124

 

 

 

(43

)

 

 

¾

 

 

 

—

 

 

 

—

 

 

 

3,440

 

 

 

1,124

 

 

 

(43

)

Total

$

(58,895

)

 

$

40,312

 

 

$

30,543

 

 

$

(2,930

)

 

$

1,125

 

 

$

9,544

 

 

$

(61,825

)

 

$

41,437

 

 

$

40,087

 

The United States adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivative market and entities, such as Range, that participate in that market. The new regulation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, required the Commodities Futures Trading Commission (the “CFTC”) and the SEC to promulgate rules and regulations implementing the new legislation. In July 2012 certain definitions were adopted by the SEC and the CFTC and based on those definitions, we believe we will qualify for the end-user exception related to the clearing requirement for swaps but we will be required to adhere to new reporting requirements.