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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, collar, call or put option 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. In 2011, we sold NGLs derivative swap contracts (“sold swaps”) for the natural gasoline (or C5) component of natural gas liquids and in 2012, we also entered into purchased derivative swaps (“purchased swaps”) for C5 volumes. These purchased swaps were, in some cases, with the same counterparties as our sold swaps. We entered into these purchased swaps to lock in certain natural gasoline derivative gains. In second quarter 2012, we also entered into NGL derivative swap contracts for the propane (or C3) component of NGLs. At September 30, 2012, we had open swap contracts covering 89.6 Bcf of natural gas at prices averaging $3.62 per mcf, 3.3 million barrels of oil at prices averaging $95.70 per barrel, 3.0 million net barrels of NGLs (the C5 component of NGLs) at prices averaging $95.80 per barrel and 2.4 million barrels of NGLs (the C3 component of NGLs) at prices averaging $36.27 per barrel. At September 30, 2012, we had collars covering 232.0 Bcf of natural gas at weighted average floor and cap prices of $4.23 to $4.83 per mcf and 2.0 million barrels of oil at weighted average floor and cap prices of $86.88 to $98.17 per barrel. At September 30, 2012, we also had sold call options for 0.4 million barrels of oil at a weighted average price of $85.00 per barrel and purchased put options for 0.2 million barrels of oil at a weighted average price of $80.00 per barrel. The fair value of these contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”), approximated a net unrealized pre-tax gain of $139.3 million at September 30, 2012. These contracts expire monthly through December 2014. The following table sets forth our derivative volumes by year as of September 30, 2012.


Period	Contract Type	Volume Hedged	Weighted Average Hedge Price

Natural Gas
2012	Collars	279,641 Mmbtu/day	$ 4.76–$ 5.22
2013	Collars	240,000 Mmbtu/day	$ 4.73–$ 5.20
2014	Collars	325,000 Mmbtu/day	$ 3.75–$ 4.47
2012	Swaps	270,000 Mmbtu/day	$3.77
2013	Swaps	177,521 Mmbtu/day	$3.57

Crude Oil
2012	Collars	2,000 bbls/day	$ 70.00–$ 80.00
2013	Collars	3,000 bbls/day	$ 90.60–$ 100.00
2014	Collars	2,000 bbls/day	$ 85.55–$ 100.00
2012	Call Options	4,700 bbls/day	$85.00
2012	Put Options	2,500 bbls/day	$80.00
2013	Swaps	5,081 bbls/day	$96.59
2014	Swaps	4,000 bbls/day	$94.56

NGLs (Natural Gasoline)
2012	Sold Swaps	12,000 bbls/day	$96.28
2013	Sold Swaps	8,000 bbls/day	$89.64
2012	Purchased Swaps	5,500 bbls/day	$82.37
2013	Purchased Swaps	1,500 bbls/day	$76.30

NGLs (Propane)
2012	Swaps	6,000 bbls/day	$38.67
2013	Swaps	5,000 bbls/day	$35.55

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. Fair value is determined based on the difference between the fixed contract price and the underlying market price at the determination date. Changes in the fair value of our derivatives that qualify for hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) in the stockholders’ equity section of the accompanying consolidated balance sheets, which is later transferred to natural gas, NGLs and oil sales when the underlying physical transaction occurs and the hedging contract is settled. As of September 30, 2012, an unrealized pre-tax derivative gain of $110.3 million was recorded in AOCI. This gain will be reclassified into earnings as a gain of $43.4 million in fourth quarter 2012, a gain of $71.8 million in 2013 and a loss of $4.9 million in 2014 as the contracts settle. The actual reclassification to earnings will be based on market prices at the contract settlement date. 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 (loss).

For those derivative instruments that qualify for hedge accounting, settled transaction gains and losses are determined monthly, and are included as increases or decreases to natural gas, NGLs and oil sales in the period the hedged production is sold. Through September 2012, we have elected to designate our commodity derivative instruments that qualify for hedge accounting as cash flow hedges. Natural gas, NGLs and oil sales include $61.5 million of gains in third quarter 2012 compared to gains of $26.8 million in the same period of 2011 related to settled hedging transactions. Natural gas, NGLs and oil sales include $197.7 million of gains in the first nine months 2012 compared to $80.7 million in the same period of 2011. Any ineffectiveness associated with these hedge derivatives are reflected in derivative fair value income (loss) in the accompanying statements of operations. The ineffective portion is generally 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 income (loss) for the three months ended September 30, 2012 includes ineffective losses (unrealized and realized) of $3.7 million compared to a loss of $1.9 million in the three months ended September 30, 2011. Derivative fair value income (loss) for the nine months ended September 30, 2012 includes ineffective losses (unrealized and realized) of $1.6 million compared to gains of $7.1 million in the same period of 2011.

Derivative fair value (loss) income

The following table presents information about the components of derivative fair value (loss) income for the three months and the nine months ended September 30, 2012 and 2011 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

Change in fair value of derivatives that do not qualify for hedge accounting ^(a)	$	(53,646	)	$	58,990		$	30,075		$	67,093
Realized gain (loss) on settlement – natural gas ^(a) ^(b)		—			5,334			—			8,424
Realized gain (loss) on settlement – oil ^(a) (b)		1,955			285			(1,899	)		(7,727	)
Realized gain (loss) on settlement – NGLs ^(a) (b)		14,682			3,087			20,442			3,087
Hedge ineffectiveness – realized		988			2,036			3,451			4,558
– unrealized		(4,707	)		(3,971	)		(5,061	)		2,531

Derivative fair value (loss) income	$	(40,728	)	$	65,761		$	47,008		$	77,966

^(a)	Derivatives that do not qualify for hedge accounting.

^(b)	These amounts represent the realized gains and losses on settled derivatives that do not qualify for hedge accounting, which before settlement are included in the category in this same table referred to as change in fair value of derivatives that do not qualify for hedge accounting.

Derivative assets and liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of September 30, 2012 and December 31, 2011 is summarized below (in thousands). As of September 30, 2012, we are conducting derivative activities with sixteen 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.


	September 30, 2012			December 31, 2011

Derivative assets:
Natural gas – swaps	$	(2,922	)	$	54,162
– collars		116,531			228,228
Crude oil – swaps		9,848			(263	)
– collars		(1,441	)		(16,607	)
– call options		(3,733	)		(29,348	)
– put options		46			—
NGLs – C5 swaps		33,864			15,328
– C3 swaps		296			—

	$	152,489		$	251,500

Derivative liabilities:
Natural gas – swaps	$	(2,764	)	$	—
– collars		(5,603	)		—
Crude oil – collars		141			—
– put options		31			—
NGLs – C5 swaps		2,378			(173	)
– C3 swaps		(7,416	)		—

	$	(13,233	)	$	(173	)

The table below provides data about the fair value of our derivative contracts (in thousands). Derivative assets and liabilities shown below are presented as gross assets and liabilities, without regard to master netting arrangements, which are considered in the presentation of derivative assets and liabilities in the accompanying consolidated balance sheets.


	September 30, 2012								December 31, 2011
	Assets		(Liabilities)						Assets		(Liabilities)
	Carrying Value		Carrying Value			Net Carrying Value			Carrying Value		Carrying Value			Net Carrying Value

Derivatives that qualify for cash flow hedge accounting :
Swaps ^(a)	$	24,344	$	(20,184	)	$	4,160		$	54,318	$	(419	)	$	53,899
Collars ^(a)		130,842		(18,816	)		112,026			228,228		(1,954	)		226,274
Put options ^(a)		77		—			77			—		—			—

	$	155,263	$	(39,000	)	$	116,263		$	282,546	$	(2,373	)	$	280,173


Derivatives that do not qualify for hedge accounting :
Sold swaps ^(a)	$	31,933	$	(7,594	)	$	24,339		$	17,949	$	(2,794	)	$	15,155
Purchased swaps ^(a)		5,571		(788	)		4,783			—		—			—
Collars ^(a)		—		(2,396	)		(2,396	)		—		(14,653	)		(14,653	)
Call options ^(a)		—		(3,733	)		(3,733	)		—		(29,348	)		(29,348	)

	$	37,504	$	(14,511	)	$	22,993		$	17,949	$	(46,795	)	$	(28,846	)

^(a)	Included in unrealized derivative gain or loss in the accompanying consolidated balance sheets.

The effects of our cash flow hedges (or those derivatives that qualify for hedge accounting) on accumulated other comprehensive income in the accompanying consolidated balance sheets is summarized below (in thousands):


	Three Months Ended September 30,												Nine Months Ended September 30,
	Change in Hedge Derivative Fair Value						Realized Gain (Loss) Reclassified from OCI into Revenue (a)						Change in Hedge Derivative Fair Value						Realized Gain (Loss) Reclassified from OCI into Revenue (a)
	2012			2011			2012			2011			2012			2011			2012			2011

Swaps	$	(33,311	)	$	15,739		$	18,204		$	—		$	22,525		$	17,854		$	69,851		$	—
Put options		(994	)		—			(682	)		—			(1,908	)		—			(998	)		—
Collars		(51,344	)		75,449			43,945			26,758			32,704			97,873			128,823			80,660
Collars – discontinued operations		—			—			—			—			—			412			—			8,607
Income taxes		33,403			(34,195	)		(23,972	)		(10,034	)		(21,780	)		(41,609	)		(76,805	)		(33,476	)

	$	(52,246	)	$	56,993		$	37,495		$	16,724		$	31,541		$	74,530		$	120,871		$	55,791

^(a)	For realized gains upon derivative contract settlement, the reduction in AOCI is offset by an increase in natural gas, NGLs and oil sales. For realized losses upon derivative 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 for hedge accounting) and the ineffective portion of our hedge derivatives on our consolidated statements of operations is summarized below (in thousands):


	Three Months Ended September 30,
	Gain (Loss) Recognized in Income (Non-hedge Derivatives)					Gain (Loss) Recognized in Income (Ineffective Portion)						Derivative Fair Value Income (Loss)
	2012			2011		2012			2011			2012			2011

Swaps	$	(45,998	)	$	26,219	$	(1,556	)	$	—		$	(47,554	)	$	26,219
Purchased swaps		12,822			—		—			—			12,822			—
Collars		(1,714	)		15,828		(2,163	)		(1,935	)		(3,877	)		13,893
Call options		(2,119	)		25,649		—			—			(2,119	)		25,649

Total	$	(37,009	)	$	67,696	$	(3,719	)	$	(1,935	)	$	(40,728	)	$	65,761


	Nine Months Ended September 30,
	Gain (Loss) Recognized in Income (Non-hedge Derivatives)					Gain (Loss) Recognized in Income (Ineffective Portion)					Derivative Fair Value Income (Loss)
	2012		2011			2012			2011		2012		2011

Swaps	$	30,330	$	39,968		$	(890	)	$	—	$	29,440	$	39,968
Purchased swaps		4,078		—			—			—		4,078		—
Collars		3,381		14,693			(720	)		7,089		2,661		21,782
Call options		10,829		16,259			—			—		10,829		16,259
Basis swaps		—		(43	)		—			—		—		(43	)

Total	$	48,618	$	70,877		$	(1,610	)	$	7,089	$	47,008	$	77,966

The United States Congress adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives 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.