Derivatives And Risk Management | 9 Months Ended |
Sep. 30, 2014 |
Derivatives And Risk Management [Abstract] | ' |
Derivatives And Risk Management | ' |
(6) DERIVATIVES AND RISK MANAGEMENT |
|
The Company is exposed to volatility in market prices and basis differentials for natural gas and crude oil which impacts the predictability of its cash flows related to the sale of natural gas and oil, and is exposed to volatility in interest rates. These risks are managed by the Company’s use of certain derivative financial instruments. At September 30, 2014 and December 31, 2013, the Company’s derivative financial instruments consisted of fixed price swaps, basis swaps, fixed price call options, and interest rate swaps. A description of the Company’s derivative financial instruments is provided below: |
|
| | | | | | | | | | | | | | |
Fixed price swaps | The Company receives a fixed price for the contract and pays a floating market price to the counterparty. | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Basis swaps | Arrangements that guarantee a price differential for natural gas from a specified delivery point. The Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Fixed price call options | The Company sells fixed price call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, the Company pays the counterparty such excess on sold fixed price call options. If the market price settles below the fixed price of the call option, no payment is due from either party. | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Interest rate swaps | Interest rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest rate changes. | | | | | | | | | | | | | |
|
GAAP requires that all derivatives be recognized in the balance sheet as either an asset or liability and be measured at fair value other than transactions for which normal purchase/normal sale is applied. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as either a cash flow or a fair value hedge. Accounting for qualifying hedges requires a derivative’s gains and losses to be recorded either in earnings or as a component of other comprehensive income. Gains and losses on derivatives that are not designated for hedge accounting treatment or that do not meet hedge accounting requirements are recorded in earnings as a component of gain (loss) on derivatives. Within the gain (loss) on derivatives component of the statement of operations are gains (losses) on derivatives excluding derivatives, settled and gains (losses) on derivatives, settled. The Company calculates gains (losses) on derivatives, settled, as the summation of gains and losses on positions which have settled within the period. |
|
The Company utilizes counterparties for its derivative instruments that it believes are creditworthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties. Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. However, the events in the financial markets in recent years demonstrate there can be no assurance that a counterparty will be able to meet its obligations to the Company. |
|
|
The balance sheet classification of the assets related to derivative financial instruments are summarized below at September 30, 2014 and December 31, 2013: |
|
| | | | | | | | | | | | | | |
| | Derivative Assets | | | | |
| | 30-Sep-14 | | 31-Dec-13 | | | | |
| | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | | | | |
| | | | | | | | | | | | | | |
| | (in millions) | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | |
Fixed price swaps | | Derivative assets | | $ | 52 | | Derivative assets | | $ | 21 | | | | |
Fixed price swaps | | Other long-term assets | | | 11 | | Other long-term assets | | | – | | | | |
Total derivatives designated as hedging instruments | | | | $ | 63 | | | | $ | 21 | | | | |
| | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | |
Basis swaps | | Derivative assets | | $ | 15 | | Derivative assets | | $ | 13 | | | | |
Fixed price swaps | | Derivative assets | | | 50 | | Derivative assets | | | 37 | | | | |
Basis swaps | | Other long-term assets | | | 3 | | Other long-term assets | | | – | | | | |
Fixed price swaps | | Other long-term assets | | | 12 | | Other long-term assets | | | – | | | | |
Interest rate swaps | | Other long-term assets | | | 3 | | Other long-term assets | | | 8 | | | | |
Total derivatives not designated as hedging instruments | | | | $ | 83 | | | | $ | 58 | | | | |
| | | | | | | | | | | | | | |
Total derivative assets | | | | $ | 146 | | | | $ | 79 | | | | |
| | | | | | |
| | Derivative Liabilities | | | | |
| | 30-Sep-14 | | 31-Dec-13 | | | | |
| | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | | | | |
| | | | | | | | | | | | | | |
| | (in millions) | | | | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | |
Fixed price swaps | | Derivative liabilities | | $ | – | | Derivative liabilities | | $ | 4 | | | | |
Total derivatives designated as hedging instruments | | | | $ | – | | | | $ | 4 | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | |
Basis swaps | | Derivative liabilities | | $ | 20 | | Derivative liabilities | | $ | 2 | | | | |
Fixed price call options | | Derivative liabilities | | | 13 | | Derivative liabilities | | | – | | | | |
Interest rate swaps | | Derivative liabilities | | | 3 | | Derivative liabilities | | | 1 | | | | |
Basis swaps | | Other long-term liabilities | | | 3 | | Other long-term liabilities | | | – | | | | |
Fixed price call options | | Other long-term liabilities | | | 28 | | Other long-term liabilities | | | 30 | | | | |
Interest rate swaps | | Other long-term liabilities | | | 1 | | Other long-term liabilities | | | 3 | | | | |
Total derivatives not designated as hedging instruments | | | | $ | 68 | | | | $ | 36 | | | | |
| | | | | | | | | | | | | | |
Total derivative liabilities | | | | $ | 68 | | | | $ | 40 | | | | |
|
As of September 30, 2014, the Company had fixed price swap derivatives designated as hedges and not designated as hedges on the following volumes of natural gas production (in Bcf): |
|
| | | | | | | | | | | | | | |
Year | Fixed price swaps designated for hedge accounting | Fixed price swaps not designated for | Total | | | | | | | | | | | |
hedge accounting | | | | | | | | | | | |
2014 | 71 | 46 | 117 | | | | | | | | | | | |
2015 | 120 | 120 | 240 | | | | | | | | | | | |
|
|
Cash Flow Hedges |
|
The reporting of gains and losses on cash flow derivative hedging instruments depends on whether the gains or losses are effective at offsetting changes in the cash flows of the hedged item. The effective portion of the gains and losses on the derivative hedging instruments are recorded in other comprehensive income until recognized in earnings during the period that the hedged transaction takes place. The ineffective portion of the gains and losses from the derivative hedging instrument is recognized in earnings immediately. |
|
As of September 30, 2014, the Company recorded a net gain in accumulated other comprehensive income related to its hedging activities of $36 million net of a deferred income tax liability of $24 million. The amount recorded in accumulated other comprehensive income will be relieved over time and recognized in the statement of operations as the physical transactions being hedged occur. Assuming the market prices of natural gas futures as of September 30, 2014 remain unchanged, the Company would expect to transfer an aggregate after-tax net gain of $30 million from accumulated other comprehensive income to earnings during the next 12 months. Gains or losses from derivative instruments designated as cash flow hedges are reflected as adjustments to natural gas sales in the consolidated statements of operations. Volatility in net income, comprehensive income and accumulated other comprehensive income may occur in the future as a result of the Company’s derivative activities. |
|
The following tables summarize the before tax effect of all cash flow hedges on the unaudited condensed consolidated financial statements for the three and nine month periods ended September 30, 2014 and 2013: |
|
|
| | | | | | | | | | | | | | |
| | | | Gain (Loss) Recognized in |
Other Comprehensive Income |
| | | | (Effective Portion) |
| | | | For the three months ended | | For the nine months ended |
| | | | September 30, | | September 30, |
Derivative Instrument | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | (in millions) |
| | | | | | | | | | | | | | |
Fixed price swaps | | | | $ | 80 | | $ | 13 | | $ | -2 | | $ | 51 |
| | | | | | | | | | | | | | |
| | Classification of Gain (Loss) | | Gain (Loss) Reclassified from Accumulated |
| | Reclassified from | | Other Comprehensive Income |
| | Accumulated Other | | into Earnings (Effective Portion) |
| | Comprehensive Income | | For the three months ended | | For the nine months ended |
| | into Earnings | | September 30, | | September 30, |
Derivative Instrument | | (Effective Portion) | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | (in millions) |
Fixed price swaps | | Gas sales | | $ | 18 | | $ | 93 | | $ | -48 | | $ | 218 |
| | | | | |
| | | | Gain (Loss) Recognized in |
Earnings |
| | | | (Ineffective Portion) |
| | Classification of Gain (Loss) | | For the three months ended | | For the nine months ended |
| | Recognized in Earnings | | September 30, | | September 30, |
Derivative Instrument | | (Ineffective Portion) | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | (in millions) |
Fixed price swaps | | Gas sales | | $ | 3 | | $ | -1 | | $ | 1 | | $ | -2 |
|
Other Derivative Contracts |
|
For other derivative contracts, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item are recognized in earnings immediately. |
|
Although the Company’s basis swaps meet the objective of managing commodity price exposure, these trades are typically not entered into concurrent with the Company’s derivative instruments that qualify as cash flow hedges and therefore do not generally qualify for hedge accounting. Basis swap derivative instruments that are not designated for hedge accounting are recorded on the balance sheet at their fair values under derivative assets, other long-term assets, other current liabilities, and other long-term liabilities, as applicable and all gains and losses related to these contracts are recognized immediately in the consolidated statement of operations as a component of gain (loss) on derivatives. |
|
As of September 30, 2014, the Company had basis swaps on natural gas production that were not designated for hedge accounting of 10 Bcf, 15 Bcf, and 4 Bcf in 2014, 2015, and 2016, respectively. |
|
As of September 30, 2014, the Company had fixed price call options on 200 Bcf and 120 Bcf of natural gas production in 2015 and 2016, respectively, not designated for hedge accounting and fixed price swaps of 46 Bcf and 120 Bcf of natural gas production in 2014 and 2015, respectively, not designated for hedge accounting. |
|
The Company is a party to interest rate swaps that were entered into in order to mitigate the Company’s exposure to volatility in interest rates related to construction of its new corporate office complex. The interest rate swaps build to a notional amount of $170 million and expire in June 2020. The Company did not designate the interest rate swaps for hedge accounting. Changes in the fair value of the interest rate swaps are included in gain (loss) on derivatives in the consolidated statements of operations. |
|
The following table summarizes the before tax effect of fixed price swaps, basis swaps, fixed price call options and interest rate swaps not designated for hedge accounting on the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2014 and 2013: |
|
| | | | | | | | | | | | | | |
| | | | Gain (Loss) on Derivatives |
| | | | Excluding Derivatives, Settled |
| | | | Recognized in Earnings |
| | | | For the three months ended | | For the nine months ended |
| | Consolidated Statement of Operations | | September 30, | | September 30, |
Derivative Instrument | | Classification of Gain (Loss) on Derivatives, Net of Settlement | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | |
| | | | (in millions) |
| | | | | | | | | | | | | | |
Basis swaps | | Gain (Loss) on Derivatives | | $ | -3 | | $ | -5 | | $ | -16 | | $ | 2 |
Fixed price call options | | Gain (Loss) on Derivatives | | $ | 11 | | $ | 8 | | $ | -11 | | $ | -27 |
Fixed price swaps | | Gain (Loss) on Derivatives | | $ | 45 | | $ | 8 | | $ | 24 | | $ | 96 |
Interest rate swaps | | Gain (Loss) on Derivatives | | $ | 1 | | $ | -1 | | $ | -4 | | $ | 1 |
| | | | | | | | | | | | | | |
| | | | Gain (Loss) |
| | | | on Derivatives, Settled (1) |
| | | | Recognized in Earnings |
| | Consolidated Statement of Operations | | For the three months ended | | For the nine months ended |
| | Classification of Gain (Loss) | | September 30, | | September 30, |
Derivative Instrument | | on Derivatives, Settled (1) | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | |
| | | | (in millions) |
| | | | | | | | | | | | | | |
Basis swaps | | Gain (Loss) on Derivatives | | $ | 9 | | $ | 2 | | $ | – | | $ | 3 |
Fixed price swaps | | Gain (Loss) on Derivatives | | $ | 15 | | $ | – | | | -21 | | | – |
Interest rate swaps | | Gain (Loss) on Derivatives | | $ | – | | $ | – | | $ | -1 | | $ | – |
|
| -1 | | The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions that have settled within the period reported. | | | | | | | | | | | |
|
|