DERIVATIVE ACTIVITIES

12 Months Ended

Dec. 31, 2012

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. 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 entered into purchased NGLs derivative swaps (“re-purchased swaps”) for C5 volumes. These re-purchased swaps were, in some cases, with the same counterparties as our sold swaps. We entered into these re-purchased swaps to lock in certain natural gasoline derivative gains. In second quarter 2012, we also entered into NGLs derivative swap contracts for the propane (or C3) component of NGLs. These C5 and C3 derivatives are intended to manage our exposure to NGLs commodity price fluctuations. At December 31, 2012, we had open swap contracts covering 77.9 Bcf of natural gas at prices averaging $3.64 per mcf, 3.3 million barrels of oil at prices averaging $95.70 per barrel, 2.4 million net barrels of NGLs (the C5 component of NGLs) at prices averaging $92.72 per barrel and 1.8 million barrels of NGLs (the C3 component of NGLs) at prices averaging $35.55 per barrel. At December 31, 2012, we had collars covering 242.7 Bcf of gas at weighted average floor and cap prices of $4.13 to $4.72 per mcf and 1.8 million barrels of oil at weighted average floor and cap prices of $88.58 to $100.00 per barrel. 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 gain of $144.3 million at December 31, 2012. These contracts expire monthly through December 2014. The following table sets forth the derivative volumes by year as of December 31, 2012.

Period	Contract Type	Volume Hedged	Weighted Average Hedge Price
Natural Gas
2013	Collars	280,000 Mmbtu/day	$4.59–$ 5.05
2014	Collars	385,000 Mmbtu/day	$3.80–$ 4.48
2013	Swaps	213,384 Mmbtu/day	$3.64
Crude Oil
2013	Collars	3,000 bbls/day	$90.60–$ 100.00
2014	Collars	2,000 bbls/day	$85.55–$ 100.00
2013	Swaps	5,081 bbls/day	$96.59
2014	Swaps	4,000 bbls/day	$94.56
NGLs (Natural Gasoline)
2013	Sold Swaps	8,000 bbls/day	$89.64
2013	Re-purchased Swaps	1,500 bbls/day	$76.30
NGLs (Propane)
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 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 December 31, 2012, an unrealized pre-tax derivative gain of $137.6 million was recorded in AOCI. This gain will be reclassified into earnings as a gain of $127.3 million in 2013 and a gain of $10.3 million in 2014 as the contracts are sold but 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.

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. Natural gas, NGLs and oil sales include $236.3 million of gains in 2012 compared to gains of $123.6 million in 2011 and gains of $64.8 million in 2010 related to settled hedging transactions. Any ineffectiveness associated with these hedge derivatives are reflected in derivative fair value income 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 income for the year ended December 31, 2012 includes ineffective gains (unrealized and realized) of $1.1 million compared to $9.5 million in 2011 and $2.0 million in 2010.

Basis Swap Contracts

At December 31, 2012, we had natural gas basis swap contracts that are not designated for hedge accounting which lock in the differential between NYMEX and those of our physical pricing points, which settle in first quarter 2013. The fair value of these contracts was $993,000 on December 31, 2012.

Derivative fair value income

The following table presents information about the components of derivative fair value income in the three-year period ended December 31, 2012 (in thousands):

	2012			2011			2010
Change in fair value of derivatives that do not qualify for hedge accounting (a)	$	5,958		$	15,762		$	(2,086	)
Realized gain (loss) on settlement–natural gas (a) (b)		131			14,743			35,988
Realized gain (loss) on settlement–oil (a) (b)		2,486			(9,574	)		—
Realized gain (loss) on settlement–NGLs (a) (b)		31,737			9,612			—
Realized gain on early settlement of oil derivatives		—			—			15,697
Hedge ineffectiveness–realized		4,346			7,361			(352	)
–unrealized		(3,221	)		2,183			2,387
Derivative fair value income	$	41,437		$	40,087		$	51,634

^(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 above called the 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 December 31, 2012 and 2011 is summarized below (in thousands). As of December 31, 2012, we are conducting derivative activities with fifteen 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.

	December 31,
	2012			2011
Derivative assets:
Natural gas–swaps	$	7,504		$	54,162
–collars		122,255			228,228
–basis swaps		993			—
Crude oil–swaps		9,650			(263	)
–collars		2,222			(16,607	)
–call options		—			(29,348	)
NGLs–C5 swaps		10,643			15,328
	$	153,267		$	251,500
Derivative liabilities:
Natural gas–collars	$	(3,463	)	$	—
NGLs–C5 swaps		2,275			(173	)
–C3 swaps		(6,746	)		—
	$	(7,934	)	$	(173	)

The table below provides data about the fair value of our derivative contracts. 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 (in thousands):

	December 31, 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)	$	22,236	$	(3,242	)	$	18,994		$	54,318	$	(419	)	$	53,899
Collars (a)		129,878		(9,721	)		120,157			228,228		(1,954	)		226,274
	$	152,114	$	(12,963	)	$	139,151		$	282,546	$	(2,373	)	$	280,173
Derivatives that do not qualify for hedge accounting :
Sold swaps (a)	$	7,316	$	(8,904	)	$	(1,588	)	$	17,949	$	(2,794	)	$	15,155
Re-purchased swaps (a)		5,920		—			5,920			—		—			—
Collars (a)		857		—			857			—		(14,653	)		(14,653	)
Call options (a)		—		—			—			—		(29,348	)		(29,348	)
Basis swaps (a)		993		—			993			—		—			—
	$	15,086	$	(8,904	)	$	6,182		$	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:

	Year Ended December 31,
	Change in Hedge Derivative Fair Value						Realized Gain Reclassified from OCI into Revenue (a)
	2012			2011			2012			2011
Swaps	$	46,371		$	51,997		$	78,779		$	—
Put options		(1,955	)		—			(1,955	)		—
Collars		74,766			223,408			159,481			123,594
Collars – discontinued operations		—			412			—			8,607
Income taxes		(47,466	)		(104,464	)		(91,871	)		(50,005	)
	$	71,716		$	171,353		$	144,434		$	82,196

^(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 for hedge accounting) and the ineffective portion of our hedge derivatives on our consolidated statements of operations is summarized below:

	Year Ended December 31,
	Gain (Loss) Recognized in Income (Non-hedge Derivatives)									Gain (Loss) Recognized in Income (Ineffective Portion)							Derivative Fair Value Income
	2012			2011			2010			2012			2011		2010		2012			2011			2010
Swaps	$	11,601		$	24,767		$	—		$	(657	)	$	767	$	—	$	10,944		$	25,534		$	—
Re-purchased swaps		9,313			—			—			—			—		—		9,313			—			—
Collars		5,126			5,266			65,996			1,782			8,777		2,035		6,908			14,043			68,031
Call options		13,178			553			(15,895	)		—			—		—		13,178			553			(15,895	)
Put options		(30	)		—			—			—			—		—		(30	)		—			—
Basis swaps		1,124			(43	)		(502	)		—			—		—		1,124			(43	)		(502	)
Total	$	40,312		$	30,543		$	49,599		$	1,125		$	9,544	$	2,035	$	41,437		$	40,087		$	51,634

The United States Congress 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.